Blurry view on Fed policy

Federal Reserve chairman Ben Bernanke seemed a little nervous at his news conference on Wednesday. His recent comments about the future course of monetary policy had rattled investors and driven bond yields up, tightening financial conditions in a way the Fed did not want.

Formally unperturbed, Bernanke said he was leaving policy unchanged - but in trying, yet again, to elucidate the Fed's thinking, he tacitly admitted that something had gone wrong.

Fortunately, the policy itself is basically good - but that is despite, not because of, the ever-evolving formulas used to explain it.

Growth in the United States is still sluggish, unemployment is still high and inflation is running well below the Fed's target and falling. That suffices to justify interest rates at zero until further notice, together with additional large-scale asset purchases - which is what the Fed intends.

There are dangers in this policy. Quantitative easing is an experiment and involves risks. Bernanke summed these up drily in a recent speech: there is the risk that long-term interest rates will remain low (leading investors to recklessly "reach for yield") or they will not (imposing losses on investors when rates rise and bond prices fall).

The point is, in current circumstances, every course involves risk. Tightening monetary policy prematurely, as Bernanke has often explained, courts the greatest danger - that of bringing a hesitant recovery to a stop. On a balance of risks, aggressive monetary stimulus still makes sense.

Yet the past few weeks showed that the Fed has a serious credibility problem. The central bank's formal statement this week failed to acknowledge this but Bernanke's news conference showed that the Fed is concerned.