* Fed says it will trim bond buying by $10 bln per month
* Central bank hints key interest rate to stay lower for longer
* Fed to buy $35 bln in mortgage-backed bonds, $40 bln in U.S. bonds - a month
By Steven Norton
NEW YORK, Dec 18 U.S. Treasuries prices slipped after the Federal Reserve announced it would start dialing back its monthly bond-buying program by $10 billion and signaled that it may keep its key interest rate extremely low even longer than previously promised.
The moderate losses reversed the bond market's slim gains during a brief interlude after the Fed's statement. The bond market reacted negatively to outgoing Fed Chairman Ben Bernanke's statement that the Fed might continue to reduce purchases steadily, implying the approximate end of the quantitative easing, or QE, program by the end of 2014.
The Fed said it will buy $75 billion of bonds per month, split between $35 billion in mortgage-backed securities and $40 billion in U.S. Treasuries. The central bank repeated that it will hold rates near zero as long as the jobless rate is above 6.5 percent and inflation remains low. The Fed also said it probably will keep the federal funds rate at zero to 0.25 percent well past the time that the U.S. unemployment rate falls below 6.5 percent, especially if projected inflation is below 2 percent.
"Now we know how the Fed plans on exiting. We've gotten a template. The 10-year yield is telling you 'it's happened.' Let's move on. Let life continue," said Quincy Krosby, market strategist at Prudential Financial, in Newark, New Jersey.
Bonds fell immediately following the announcement in a knee-jerk reaction, but quickly pared losses and managed some modest gains. The advance faded fast, though.
On the open market, the benchmark 10-year U.S. Treasury note fell 12/32 in price, its yield rising to 2.887 percent. The 30-year bond dropped 21/32 in price, yielding 3.909 percent.
Many analysts expected the central bank to announce plans to trim its stimulus program in the first quarter of next year. But encouraging economic data and jobs growth, along with a new budget deal in Congress, had persuaded some economists that the stage was set for a taper announcement this month.
"Cutting the amount by $10 billion is a good signal that QE won't be a forever thing," said Wayne Kaufman, chief market analyst at Rockwell Securities in New York. "I think they are relieved the Fed is starting. No one wanted this 800-pound gorilla in the market."