WASHINGTON -- The Federal Reserve served notice this week that it will begin this year to scale back its costly economic stimulus program that has been propping up the chronically weak Obama economy.
Fed Chairman Ben Bernanke's announcement was the economic equivalent of an ice-cold shower for President Obama's administration -- essentially saying that the time is coming when the Fed will pull the plug on the economy's only life-support system.
The stock market plunged Wednesday, with the Dow Jones industrial average tumbling more than 200 points. Interest rates rose, with 10-year Treasury bills jumping by nearly 8 percent, which will make government borrowing far more costly in the months and years to come.
The fixed 30-year mortgage rate rose to nearly 4 percent, hitting prospective home buyers and slamming the brakes on home sales that could further slow already tepid growth.
It may be a coincidence, but Bernanke's heads-up that the Fed will soon be tapering down its $85 billion-a-month bond-buying stimulus comes just a few days after Obama hinted the Fed chairman's job was nearing its expiration date. The president told Charlie Rose of CBS News that Bernanke had been in his job "longer than he wanted or was supposed to."
Bernanke didn't quite say this, but the hidden message in his announcement may have been: OK, Mr. President, you're on your own after this.
Of course, Bernanke sprinkled his remarks with plenty of caveats about the timing of the Fed's plans to withdraw from its stimulus initiative. If the economy worsened, the Fed could slow its scaling-back plans, or if it improved, they could accelerate them.
"Our policy is in no way predetermined and will depend on the incoming data and the (economic) outlook," he said.
Nevertheless, in a surprisingly optimistic appraisal of the sluggish economy Wednesday, Bernanke said he expected the jobless rate, now at 7.6 percent, to fall in the months to come and for the nation's economic growth rate to pick up over the next several quarters. He made clear the Fed would halt its bond-buying when unemployment reaches 7 percent.
It's not clear just where Bernanke sees economic growth coming from, or why he sees the job market taking off after months of meager full-time job-creation.
"The economy must add more than 365,000 jobs each month for three years to lower unemployment to 6 percent. That would require growth in the range of 4 to 5 percent and is not likely with current policies," says University of Maryland business economist Peter Morici.