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The Fed’s Spring Awakening

The Fed’s Spring Awakening

Federal Reserve Chairman Ben Bernanke made a little news today. No, he didn’t shed any light as to whether he will be serving another term once his current term expires next January. (We can safely assume he won’t.) And no, he didn’t announce a significant, imminent change in the policy under which the central bank buys $85 billion of securities in a month. In its statement, the Federal Open Market Committee, the Fed’s policy-making body, basically said there would be no change to the quantitative easing policy, designed to keep interest rates low and support the economy.

Bernanke essentially said that he and his colleagues are now believers in the Recovery Spring theory—the heretical idea that the U.S. economy is powering ahead at a pretty good clip. In fact, the economy has been doing well enough for long enough that Bernanke said he could envision a time when the Fed wouldn’t have to support the economy by buying billions in long-term securities each month. Without giving concrete commitments, Bernanke said that if the economy continues to perform as the Federal Reserve expects, the taper—a reduction in the rate of asset purchases—could start later this year. Eschewing specific triggers, he nonetheless outlined some targets. When unemployment falls below 7 percent, the Fed would consider reducing the pace of asset purchases and ending them. When unemployment falls below 6.5 percent, the Fed might start considering rates.

In fact, the overall picture from inside the Fed is one that readers of this column may recognize—a relatively optimistic take on America’s short- and long-term prospects. Bernanke and his colleagues have been looking at the same data we’ve been looking at: the steady rise in jobs, consumption, and retail sales; the continuing recovery in housing; and even the coming end of state and local austerity.

There’s still the problem of the federal government, though, with its needless sequester. “The main headwinds to growth are, as you know, federal fiscal policy,” said Bernanke during today’s press conference. But given the headwind created by budget cuts and tax increases, he said, the fact that the economy is moving ahead is indicative that things are basically sound.

In fact, this spring, the Fed—like some other smart folks—has become more sanguine about America’s prospects. Check out the Fed’s projections for economic conditions for the next couple of years. Compared with the March forecasts, the June forecasts assume a slightly higher rate of growth, and slightly lower rates of unemployment and inflation. Recovery Spring!

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