Fed says to cut back on its economic stimulus beginning in Jan.

The U.S. economy is healthy enough to begin weaning it off the steady flow of stimulus the Federal Reserve has been supplying since the Great Recession, the central bank said Wednesday.

In a move that few expected, the Fed said it would be cutting its historic $85 billion a month program to boost the economy by about $10 billion per month beginning in January.

"Information received since the Federal Open Market Committee met in October indicates that economic activity is expanding at a moderate pace," the Fed said in a statement released at the end of a two-day meeting to set policy.

The Fed also said the labor market has improved further, household spending and business investment advanced and inflation expectations are stable.

The upbeat tone of the statement boosted stocks. The Dow Jones industrial average jumped 150 points shortly after the news.

"They finally pulled a Band-aid off that they've been tugging at for a long time. The initial reaction is that tightening will be bad for stocks, but upon further reflection investors realize that to some extent tightening represents a view that the economy is stronger and can survive higher rates," Rick Meckler, president of hedge fund Libertyview Capital Management told Reuters.

To cushion the impact on financial markets, the Fed strengthened its commitment to record-low short-term rates. It says it plans to hold its key short-term rate near zero "well past" the time when unemployment falls below 6.5 percent.

In his last new conference as Fed chief, Bernanke said the Fed would trim the stimulus program more at future meetings, depending on economic conditions. Vice chair Janet Yellen is the presumed successor when Bernanke steps down in January.

Bernanke warned, however, that the economy remains in need of the Fed's aid.

"Today's policy actions reflect the committee's assessment that the economy is continuing to make progress but that it also has much farther to travel before conditions can be judged normal," he said. "Notably despite significant fiscal headwinds, the economy has been expanding at a moderate pace and we expect that growth will pick up somewhat in the coming quarters helped by highly accommodative monetary policy and waning fiscal drag."

The Fed's action comes after encouraging reports that show the economy is accelerating.

Hiring has been robust for four straight months. Unemployment is at a five-year low of 7 percent. Factory output is up. Consumers are spending more at retailers. Auto sales haven't been better since the recession ended 4½ years ago.

What's more, the stock market is near all-time highs. Inflation remains below the Fed's target rate. And the House has passed a budget plan that seems likely to avert another government shutdown next year. The Senate is expected to follow suit.

One factor of concern for some members is inflation, which remains historically low. The Fed's optimal rate is 2 percent. For the 12 months ending in October, consumer inflation as measured by the Fed's preferred index is just 0.7 percent, well below its target.

But the Fed sees inflation slowly moving toward its target, according to its most recent economic projections that were released Wednesday. The Fed projects inflation would range between 1.4 percent and 1.6 percent next year and could reach the Fed's target in 2015 at the earliest.

Fed officials still project economic growth of roughly 3 percent next year. But they are slightly more optimistic about unemployment, predicting it could fall as low as 6.3 percent in 2014, down from a low of 6.4 percent forecasted in September.

Nine of the voting members of the FOMC supported the decision to start tapering. Only Boston Fed President Eric Rosengren dissented, noting the elevated unemployment rate and inflation below the 2-percent target.

After nearly eight years, Ben Bernanke is stepping down as Fed chairman early next year. His designated successor, Vice Chair Janet Yellen, faces Senate confirmation this week. Yellen is known to lean dovish in her stance—favoring easy policy like Bernanke—which would likely bode well with markets.

The Associated Press and CNBC's JeeYeon Park contributed to this report.

Soaring new home sales: Not what they seem

It was the sharpest jump in more than three decades, but housing watchers are already poking holes in the new home sales numbers. After delays due to the government shutdown, data for both September and October were released together, in addition to a large downward revision for August. Follow the numbers, and the gains are not quite what the headline seems.

Contracts signed to buy newly built homes jumped 25.4 percent in October month to month, after falling 6.6 percent in September from August. The seasonally adjusted annual rate went from an originally reported 421,000 units in August, which was revised down to 379,000 units, and to 354,000 units in September. The number for September was a 10 percent drop from September of 2012. It then rose to 444,000 units in October. There is a nearly 20 percent margin of error on all these numbers.

"The October 'preliminary' report released this morning, along with the terrible August and September data, is the outlier and will be revised lower next month in line with the new trend lower that began in July," noted housing analyst Mark Hanson.

August sales estimates were revised down by 15 percent on an unadjusted basis and September sales dropped from there.

"Both the September and October new home sales data were released together and averaged 399,000 annualized versus the estimate of 424,000 and compares with the average year-to-date of 422,000," said Peter Boockvar, chief market analyst of economic advisory firm The Lindsey Group. "The weakness seen in July through September was clearly in response to the rise in rates and the almost 25-basis-point decrease in mortgage rates in October seemed to have brought out buyers that were previously on the fence."

Builders say it wasn't just the falling rates, but the end of the government shutdown.

"I think it built up some pent up demand," said Alan Laing, CEO of Pennsylvania-based Orleans Homes. "We saw immediately after the resolution, traffic and sales got better in the second half of October."

The short drop in mortgage rates may not, in fact, have had as much of an impact on sales as some think. Lower prices may have. The median price of a new home sold in October was $245,200, a drop of 1 percent from a year ago. While that may not seem like a lot, it is the lowest monthly median since November of 2012. Prices have been going up dramatically on an annual basis for both the builders and for existing home sales.

The mortgage rate card can actually be played both ways. Steven Alloy, president of Virginia-based Stanley Martin Homes, said rising rates will drive more home sales, not less.

"If you are somebody considering buying a house, one of your great fears is that rates go up, so if they start to move, people will start to believe that they will keep moving, and as soon as they believe they are going keep moving they are going to come out in droves," he said.

Mortgage rates have jumped dramatically in just the last week on positive economic data. The average rate on the 30-year fixed conforming loan hit 4.51 percent last week, according to the Mortgage Bankers Association, but are already higher today. Should the monthly jobs report released on Friday be better than expected, interest rates will surge ever higher.

—By CNBC's Diana Olick.