It’s not an exit strategy, but the Fed is dancing around the edges of the idea by laying the rhetorical groundwork—ever so gently—for the day when the central bank stops whistling a tune of liquidity for all. Yes, the Fed funds target rate remains at the bargain basement rate of zero to 0.25%, today’s FOMC statement revealed. In that respect, nothing’s changed. The market was anticipating no less. But the central bank was also careful to dissuade, discourage and otherwise deter the crowd from assuming that stimulus on steroids is one more government entitlement.
“In light of ongoing improvements in the functioning of financial markets,” the Fed advised this afternoon, “the Committee and the Board of Governors anticipate that most of the Federal Reserve’s special liquidity facilities will expire on February 1, 2010…” It’s a start.
Actually, it’s a continuum. Ben Bernanke, chairman of the Fed and part-time op-ed columnist, wrote in The Wall Street Journal this past July that, yes, there is an exit strategy lurking somewhere in the future. What’s more, the Fed has the means and the will to pull the trigger at some point on the Great Liquidity. Or as the chairman wrote in the summer, “the Federal Reserve has many effective tools to tighten monetary policy when the economic outlook requires us to do so.”
The Fed has been telling us all along that its various forms of quantitative easing will be a fleeting presence. But the emphasis has turned decidedly rigid today, if only partially, by reminding us that there’s a hard date ahead for the inglorious moment when the party ends, or begins to end. The numerous taps weren’t all turned on at once and so they won’t all close together. But close they will.
Back in June, the FOMC statement stressed that it was “extending” its monetary lifelines through “early 2010.” In a subtle but notable shift, we’re now told of an end. Extension is now being replaced by termination dates.
It’s not clear if all the various monetary denouements will be telegraphed so clearly by way of advance warning wrapped in calendrical precision. But whether the news of future finales come like a thief in the night or with full clarity days or weeks ahead of the act, a reckoning awaits.

If you absolutely, positively need an optimistic outlook on the economy, Alan Blinder’s your man.

Today’s update on consumer prices looks less threatening than yesterday’s news on producer prices for November. Whereas wholesale inflation last month was up for both headline and core readings (i.e., less food and energy), this morning’s CPI is a mixed bag. Headline CPI rose 0.4% in November (the highest since June), but core CPI was flat, on a seasonally adjusted basis. This gentle statistical profile all but assures that the Fed won’t raise interest rates at this afternoon’s FOMC announce, assuming they needed another reason to remain dovish.
“Inflation is not a problem and we do not expect it to become one anytime soon,” Brian Bethune, chief financial economist at IHS Global Insight told Bloomberg News before the CPI update. He also noted that “deflation risks have greatly diminished.” In short, we can continue to celebrate…with one eye open.
But, heck, even if this morning’s CPI report was awful, Fed Chairman Ben Bernanke couldn’t raise interest rates on a day when he was named Time magazine’s Man—make that Person of the Year, a.k.a. as “the most powerful nerd on the planet.”