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U.S. Opinions: Washington

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Excited about tapering

From an editorial in Thursday’s Washington Post:

It’s not always wise to judge economic events by Wall Street’s reaction. But there was a rational basis for the markets’ ecstatic response to Federal Reserve Chairman Ben S. Bernanke’s announcement Wednesday of a “taper” in central-bank asset purchases.

Part of the Fed’s unconventional response to the Great Recession has been a massive expansion of its balance sheet. The Fed’s decision to decelerate bond-buying is a sign of confidence that the economy is starting to stand on its own two feet. And markets are correct to agree, especially in light of November’s better-than-expected job-creation report.

Equally important, the incipient taper signals the central bank’s belief that political risks to the economy are diminishing. The Fed embarked on its latest round of bond-buying a little more than a year ago, at a time when partisan disagreements on Capitol Hill were about to send the United States over a recessionary “fiscal cliff.”

Mr. Bernanke tried to head that off via an easing of monetary policy. Now, by contrast, Republicans and Democrats have struck a budget deal that probably eliminates the threat of a government shutdown for two years and even boosts spending modestly in the short run. Mr. Bernanke alluded to this “positive” development Wednesday.

The U.S. economy is still too weak for most Americans’ comfort, for reasons – as Mr. Bernanke candidly concedes – that economists don’t fully understand. The Fed’s purchases remain controversial, with even an internal Fed study suggesting that they have not necessarily yielded much additional growth.

To Bernanke’s probable successor, Janet Yellen, he bequeaths an economy tentatively on the mend and a Fed in appropriately tentative retreat from its extraordinary interventions.

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