The Federal Reserve opted to stick with its plan to slowly wind down its stimulus program, a move that added anxiety to investors already rattled by turmoil in emerging markets.
After gathering with Fed Chairman Ben Bernanke for the last time, policy makers voted to trim their bond-buying program by $10-billion (U.S.) to $65-billion, despite volatile global financial markets and a recent hiring indicator that was much weaker than expected.
It's what Wall Street expected, although doubts had lingered. As the central bankers met, stock prices in New York fell to the lowest levels since November amidst a sudden unease about state of some emerging markets, including Turkey and Argentina.
Earlier this month, the Labor Department's survey of joblessness in December raised questions about the strength of the U.S. recovery. The report showed employers added only 74,000 positions last month, a dispiriting result because it followed increases of 200,000 or more in three of the previous four months.
The decision to stay the course suggests at a new confidence on the part of the Fed in its outlook that the recovery finally is gaining real momentum. Mr. Bernanke secured unanimous support from the voting members of the Federal Open Market Committee for the first time since June 2011.
More than a departing gift for the chairman, the vote is an indication that the Fed is extremely comfortable with the course it has set.
The vote also shows that path won't be altered by one disappointing economic indicator and a few days of choppy trading in international financial markets.
"The bar to stop tapering is high, particularly if the broader economy continues to boast decent growth," Michael Gregory, head of U.S. economics at BMO Nesbitt Burns, advised clients in a note on the Fed decision.
The Fed in December predicted the U.S. economy would expand by as much as 3.2 per cent this year and by as much 3.4 per cent in 2015, putting it on track for the strongest period of economic growth since 2005.
Policy makers acknowledged Wednesday that labour-market indicators are "mixed," but that overall, hiring showed "further improvement" since the committee last met six weeks ago. The committee observed that business and household spending "advanced more quickly" in recent months, and that government spending cuts in Washington have become less severe. Officials maintained their view that inflation will pick up from current levels that are well below the Fed's target of 2 per cent.
Mr. Bernanke will end his eight-year tenure as chairman this month a historic figure. A respected scholar of the Great Depression, Mr. Bernanke vowed not to repeat what he saw as the mistakes of the past, choosing to err on the side of doing too much rather than too little.
With its benchmark lending rate at zero and the economy still sinking, Mr. Bernanke persuaded the policy committee to embrace quantitative easing, or QE, a strategy that keeps interest rates low by creating tens of billions of dollars to purchase financial assets. Mr. Bernanke deployed QE three times, most recently in September, 2012. So far under QE3, the Fed has created $1.35-trillion dollars to purchase financial assets.
The Fed's policies helped push U.S. stock markets to record levels in 2013.
Equities, however, have hit a rough patch lately. Investors are nervous about signs of strain in some emerging-market countries that had become popular destinations for capital because they offered higher returns than could be had in the U.S. while the Fed was aggressively seeking to contain bond yields.
Now that the Fed is changing course, investors are redoing their cost-benefit analyses. Many are deciding their money is safer in the U.S., where the economy is showing signs of life. The central banks of India, Turkey and South Africa have raised interest rates this week in attempt to keep capital from fleeing their countries.
Mr. Bernanke last month put the Fed on a course to trim its monthly bond purchases a little at each policy meeting this year until the last extraordinary dollar is spent. The path is conditional on the Fed's outlook coming true, and persistent strain in global financial markets could persuade policy makers to pause, economists at National Bank Financial in Montreal said in an analysis of the Fed decision.