Baby steps back toward normal

As expected, the Federal Reserve left its target interest rate unchanged yesterday. However, they did take one tiny, positive step back towards "normal" monetary policy.

One of the more controversial policies to come out of the financial crisis was the Fed's program to buy long-term government bonds directly from the Treasury. In other words, debt is issued by the left hand of government, paid for by the right hand, and then the money spent as "stimulus." If that sounds a bit crazy to you, you're in good company.

At any rate, the Fed announced today that it is going to slow these purchases in coming weeks, and let the program cease completely by the end of October. While that may not seem like much, it's appropriate to view the end of each of these extraordinary measures as a positive development.

Another way to view this is as a very small step towards tightening monetary policy; admittedly from a starting point that is incredibly loose. That change in direction is a good thing, as it is the exceptionally loose monetary policy that many people are concerned will eventually stoke high inflation.

Overall, it's a positive thing that the Fed sees enough improvement in the economy to feel that they can slowly back away from the brink. The article lists several of the positive indicators that have convinced many economists that the recession is ending, if not already ended.

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Mark Biller is Sound Mind Investing's Executive Editor. Visit www.soundmindinvesting.com to learn more.