So far, so good

The Federal Reserve must be greatly relieved that equity markets have reacted positively to this week's decision to start to "taper" its quantitative easing (QE) program.  The rise in stock prices suggests that the market's remorseless advance to record highs this year has been mostly in response to improving prospects for the US economy, rather than just a reaction to Ben Bernanke's monthly helicopter drops.

It's certainly more difficult now to deny that the US economy is moving onto a firmer footing.  Today it was announced that GDP growth in Q3 had been revised upward to an annual rate of 4.1%.  This is the strongest performance since 2011, and is particularly remarkable considering that the latter part of Q3 was dominated by mounting fears of a US debt default and government shutdown.  Although growth for the full year will be far below 2012's pace, the economy has a solid base for growth in 2014, which suggests that the FOMC, which must have been aware of the imminent upward revision to the GDP data, was right to start the taper.  

All good then? Well, maybe, but one key sentence in Chairman Bernanke's post-FOMC statement may produce a little queasiness in anyone who remembers the first decade of the new millennium:  "The Committee also clarified its guidance on interest rates, emphasizing that the current near-zero range for the federal funds rate target likely will remain appropriate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal."

If there's one lesson that should have been learned from the performance of the Greenspan Fed, it's that cheap money leads to reckless investment decisions, and eventually to a financial crisis.  There's nothing anywhere in the post-FOMC statement to suggest that the Fed even acknowledges that risk. We really don't need to go down that road again, do we?