Shares rally as Fed eases stimulus

Global shares rallied today after US policymakers took the first steps towards scaling back the country's vast economic stimulus drive.

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Federal Reserve chairman Ben Bernanke

Global shares rallied today after US policymakers took the first steps towards scaling back the country's vast economic stimulus drive.

The modest reduction of 10 billion US dollars (£6.1 billion) in monthly asset purchases came as a relief to markets after weeks of uncertainty over the likely timing and scale of any tapering move.

The US Federal Reserve also reassured markets that interest rates were likely to stay close to zero for some time, helping to trigger a near 2% rise for the Dow Jones Industrial Average on Wall Street last night. The Fed has held rates at near zero since late 2008.

Investors took the central bank's announcement as a sign that the US economy is strong enough to support further stock market gains.

The FTSE 100 Index rose 1% as London shares joined in the relief rally following several days of mixed trading.

Spreadex trader Max Cohen said: "Policymakers have cited considerable strength in the US economy as a key reason behind the scaling down process, with a sustained recovery now in sight."

America has pumped trillions of dollars into its economy in an effort to stimulate growth and recover from the deepest downturn since the Great Depression in the 1930s.

The Federal Reserve's balance sheet has swollen to around 3.7 trillion US dollars (£2.2 trillion) from 869 billion US dollars (£530 billion) in August 2007.

Tapering represents the first shift in the direction of policy since the Federal Reserve last raised interest rates in 2006.

Starting in January, the Fed will reduce its bond-buying programme to 75 billion dollars (£46 billion) a month from 85 billion dollars (£52 billion).

Ben Bernanke, in his final press conference as Federal Reserve chairman, said the bank was likely to make similar moderate cuts over the course of next year before ending the programme by the end of 2014, as long as the country's economy continues to improve.

By purchasing bonds and depressing yields, the Fed has kept interest rates low and encouraged borrowing and lending.

It has prompted investors to shift money into stocks as the Fed's purchases make bond prices artificially more expensive in comparison.