It is a subtle change in tone but nonetheless significant. The Federal Reserve, while continuing to hint at future quantitative easing (QE), seems at last to feel a need to address the longer-term inflationary risks of such policies. Accordingly, Fed Chairman Ben Bernanke unveiled a new approach to quantitative easing, what he calls "sterilized QE." He claims it would both support markets (and the economy) and at the same time guard against any longer-term inflationary consequences. Though there is good reason for skepticism about the technique he has outlined, this recent change in tone does offer encouragement. 

Several recent developments could have prompted the Fed's seemingly sudden interest in longer-term inflationary issues. The recent report on rising labor costs could be one. According to the Labor Department, hourly output per worker slowed in the fourth quarter to less than a 1% annualized rate of advance even as compensation gains accelerated to about a 4% annual rate. The resulting 3%-plus rise in the labor cost of a unit of output may not in itself raise fundamental inflation fears, but it could be taken as an early harbinger nonetheless. 

More fundamentally, the Fed has received the signals that it long ago indicated would trigger a reappraisal of its policy. As far back as late 2009, Bernanke indicated that the Fed would reconsider its extremely easy monetary stance when it saw a substantive improvement in the jobs market and an increase in bank lending. Both have occurred. Payrolls have picked up, growing on average close to 250,000 a month of late, a far from robust picture but much improved over a year ago. Meanwhile, bank lending to businesses has also picked up along the lines sought by the Fed. Commercial and industrial loans have grown at more than 12% annual rate during the last six to nine months.