For the fifth time in less than five years, the Fed has jumped the gun in starting to scale back its support of economic recovery.
To be clear, this small reduction in the pace of purchases of long-term bonds is not likely to derail the recovery. Indeed, I expect somewhat faster economic growth in 2014 than 2013 because spending cuts and tax increases at all levels of government will be much smaller next year.
Even so—with inflation notably below target and unemployment not expected to return to normal for three more years—it is too soon to back off from doing the utmost to sustain economic growth. The cost will be measured in the personal hardship of tens and maybe hundreds of thousands of unemployed workers who must wait several more months than otherwise to find a job. For a few of the unemployed, the Fed's timidity is going to mean a permanent loss of future employment.
In his news conference Wednesday, Chairman Ben Bernanke pointedly said monetary policy is not a panacea. I don't know anyone who would dispute that. The Fed has little control over economic inequality or the economy's long-run growth rate or the maximum sustainable level of employment. But the job of monetary policy is to keep spending growing fast enough to employ as many workers as possible while maintaining a low and stable rate of inflation. As Bernanke clearly admitted, the Fed is falling short on both parts of its mandate.
Although Congress shares some of the blame—Bernanke referred to recent budgetary policy as "unusually tight ... for a recovery period"—the primary responsibility for maintaining spending growth lies with the Fed. When you have fallen short of your objectives for five years in a row, you have an obligation to aim even higher.
Those who want the Fed to reduce its bond-buying are concerned about an unwelcome rise in inflation. Concerns about excessive inflation have been proven wrong repeatedly over the past five years. There is no chance of excessive inflation over at least the next two years.
At some point in the future, inflation pressures might return. It will be up to the Fed to fight them. But the Fed knows very well how to fight inflation. Worries about a potential future policy error are no reason to commit a current policy error.