Welcome tapering


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

Part of the Fed’s response to the Great Recession has been a massive expansion of its balance sheet, including the addition of about $85 billion a month in government or government-backed securities. The Fed’s decision to decelerate bond-buying, starting with a $10 billion reduction in January, is a sign of confidence that the economy is starting to stand on its own two feet.

Markets are correct to agree, especially in light of November’s better-than-expected job-creation report. The incipient taper signals the central bank’s belief that political risks to the economy are diminishing.

The Fed embarked on its latest bond-buying a year ago, when partisan disagreements on Capitol Hill were about to send the United States over a “fiscal cliff.” Mr. Bernanke tried to head that off by easing monetary policy.

Now, Republicans and Democrats have struck a budget deal that probably eliminates the threat of a government shutdown for two years, and boosts spending modestly in the short run. Mr. Bernanke alluded to this “positive” development, adding it “will be good for confidence” — affirming a claim of the deal’s authors, Rep. Paul Ryan (R.,Wis.) and Sen. Patty Murray (D., Wash.). That such intangibles could influence Mr. Bernanke shows that central banking is as much an art as it is a science.

The U.S. economy is still too weak for most Americans’ comfort, for reasons — as Mr. Bernanke 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.

Mr. Bernanke counters that monetary policy has been hampered by fiscal policy and structural changes, including a possible diminution in the economy’s long-term growth potential. With inflation negligible and the job market weak, he had both the responsibility and the opportunity to innovate.

As he emphasized, the taper does not mean the Fed is “tightening” its overall policy, but is shifting the emphasis to interest rates. They will stay near zero percent “well after” the jobless rate, now at 7 percent, falls by another half percentage point.

The policy announcement was probably the last big event of Mr. Bernanke’s eventful tenure. By his own admission, the Fed chairman was late to recognize the crisis that was already pending when he took office in 2006.

Still, he responded to it creatively, helping to limit the short-term damage. To his probable successor, Janet Yellen, he bequeaths an economy tentatively on the mend and a Fed in appropriately tentative retreat from its extraordinary interventions. He will be a hard act, but a good example, to follow.