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Fiscal Sanity—For Now?

12:00 AM, May 4, 2013 • By IRWIN M. STELZER
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High house prices combined with rising share prices create a wealth effect, boosting the consumer confidence index in April. Consumers seem to be reacting to the increase in payroll taxes by cutting savings rather than spending, at least so far.

The key role of the Fed focuses attention on just who will head that institution next year. Bernanke is passing the word that he has had enough. He will not attend the central bank summer conclave in Jackson Hole, Wyoming, the first time in 25 years that a Fed chairman has absented himself. And he told the press, “I don’t think I am the only person in the world who can manage the exit” from current policy. So come February 1, 2014 it is likely that there will be a new man at the helm, or woman.

If the Fed decides at some point in coming years to begin to unwind its positions, sell off its holdings of bonds and mortgages, that exit will have to be managed with considerable skill lest interest rates soar, the burden of federal and private debt becomes unbearable, the housing market collapses. Unless, of course, a Fed decision to pull back on its purchases of bonds and mortgages is taken as a signal that the recovery is robust and self-sustaining, that all is now well in this best of all possible economies.

It is most likely that the management of any exit will fall to Janet Yellen, Fed vice chair and formally president and CEO of the Federal Reserve Bank of San Francisco. Ms. Yellen’s critics fear that she will be insufficiently sensitive to the long-run inflationary effects of current policy, will wait too long to exit, and might even follow through on the Fed’s new announcement that it might increase bond and mortgage purchases. But even her critics agree with her more numerous admirers that she is extraordinarily well qualified to succeed Bernanke should he decide that a return to Princeton on January 31, 2014 is in his best interest or the president that it would be in the nation’s.

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