From an editorial in Thursdays Washington Post:
Its not always wise to judge economic events by Wall Streets reaction. But there was a rational basis for the markets ecstatic response to Federal Reserve Chairman Ben S. Bernankes announcement Wednesday of a taper in central-bank asset purchases.
Part of the Feds unconventional response to the Great Recession has been a massive expansion of its balance sheet. The Feds 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 Novembers better-than-expected job-creation report.
Equally important, the incipient taper signals the central banks 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 dont fully understand. The Feds purchases remain controversial, with even an internal Fed study suggesting that they have not necessarily yielded much additional growth.
To Bernankes 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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