No way out

Federal Reserve Has No Strategy to Unwind Easy Monetary Policy - WSJ.com

We're beginning to wonder if the Ben Bernanke Federal Reserve isn't populated with French existentialists. A la Jean-Paul Sartre, they have a "no exit" strategy when it comes to unwinding their extraordinarily easy monetary policy. At least they gave no signs of restraint in yesterday's statement after their August Open Market Committee meeting, keeping short-term interest rates close to zero and again promising to maintain current policy for an "extended period."

The Fed is keeping the money pumping even though it also conceded that "economic activity is leveling out," which is an acknowledgment that the recession is all but over. This policy is justified, the FOMC statement said, because the economy still has "substantial resource slack" that will keep cost pressures under countrol "for some time." Unsaid by the Fed, but understood by everyone, is that Mr. Bernanke isn't about to tighten money while he's still auditioning for re-appointment to a second four-year term as Chairman. Fed chiefs who tighten money tend to be unpopular with Wall Street and the political class, though not with the middle class.

The one hint of discipline was the Fed's suggestion that it won't expand its program to buy $300 billion in Treasury debt. The Fed will stretch out its purchases for an additional month into October, but this is probably to reduce the chance of market disruptions when it stops its purchases. The good news here is that the Fed seems to be admitting that this decision to directly monetize the national debt by buying long-end Treasurys was a mistake. It failed to keep rates down and may even have helped increase them as holders of U.S. debt wondered about the Fed's independence from the politicians at Treasury and on Capitol Hill.

Overall, though, the Fed's policy is to keep pressing the money accelerator to the floor. We agree it's hardly time to put the brakes on. But the Fed would be wiser to at least begin slowing to, say, 160 miles per hour from its present Indy car speed of 200 mph. It's a lot safer to slow down gradually than have to screech to a halt to avoid another asset bubble.

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