Bernanke has one eye on inflation, and one eye on the exit

As Ben Bernanke makes what could be his final report to Congress this week, his focus, ironically enough, is on exit strategy. The Federal Reserve Chairman's recent piece in The Wall Street Journal, like today's report, notes that the economy has not yet turned around, but the Fed is already anticipating the steps that it will need to take to ensure that recovery is healthy and measured.

Conventional wisdom holds that deep recessions lead to steep recoveries. However, looking ahead to the next two years, it seems unlikely that this will be the case. Unemployment is expected to increase in 2010, and GDP growth next year will probably be weak. Clearly, the Fed still needs to encourage recovery strongly.