In the previous post, I wrote about the circumstances in which the Fed should tighten or at least dangle that threat.  I didn’t give this much of a chance of happening, but maybe we heard the first shot across the bough this week.  Although the FOMC statement stayed away from addressing how and when they might reduce some liquidity facilities, the very next morning they announced the schedule for winding down two such facilities.  The Fed said it was not policy-related.  The facilities were meant to be temporary and were no longer needed.  But the Fed said they would be creating a new permanent facility.

But on Friday, something far more interesting came out.  Fed Governor Warsh published an op-ed in The Wall Street Journal regarding some sort of eventual tightening.  At first I dismissed it as just the usual Fed posturing, but on reflection perhaps it was more pointed.  This is what he said: “In this environment, market participants and policy makers alike should steer clear of ironclad policy prescriptions. Nonetheless, I would hazard the view that prudent risk management indicates that policy likely will need to begin normalization before it is obvious that it is necessary, possibly with greater force than is customary, and taking proper account of the policies being instituted by other authorities.”

“Whatever it takes” is said by some to be the maxim that marked the battle of the last year. But, it cannot be an asymmetric mantra, trotted out only during times of deep economic and financial distress, and discarded when the cycle turns. If “whatever it takes” was appropriate to arrest the panic, the refrain might turn out to be equally necessary at a stage during the recovery to ensure the Federal Reserve’s institutional credibility.”

This sounds a lot like the Fed wants the message out there that they will have the courage to act sooner rather than later.  Just as important, the message is that they won’t make the Greenspan mistake of tightening at a “measured pact.”

Will they in fact do anything if faced with an asset inflation bubble?  Who knows.  But at least they did see the need to get some sort of warning out there on record.  Clearly Fed officials are devoted readers of my blog.