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, including the recent addition of about $85 billion per 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. 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, adding that it "will be good for confidence" affirming a central claim of the deal's authors, Rep. Paul Ryan, R-Wis., and Sen. Patty Murray, D-Wash.