WASHINGTON — Federal Reserve Chairman Ben Bernanke may have to risk becoming the proverbial “fool in the shower” to keep the U.S. economy out of recession.
Renewed turbulence in financial markets puts Bernanke, 53, under pressure to open the monetary spigots wider to pump up the economy. Traders in federal-funds futures are betting it’s a certainty the Fed will cut its benchmark interest rate from 4.5 percent today and see a better-than-even chance the rate will be 3.75 percent or below by April.
“The Fed has to assure the markets that it’s ready to ride to the rescue and cut rates by as much as necessary,” says Lyle Gramley, a former Fed governor who is a senior economic adviser in Washington for the Stanford Group Co., a wealth-management firm.
The danger of such a strategy is that Bernanke may become like the bather, in an analogy attributed to the late Nobel Prize-winning economist Milton Friedman, who gets scalded after turning the hot water all the way up in a chilly shower. The monetary-policy equivalent would be faster inflation or another asset bubble in the wake of aggressive Fed action to tackle the slowdown in the economy.
Bernanke opened the door to a rate cut when he signaled in a speech Nov. 29 that the market turmoil had led to tighter credit conditions that might slow economic growth.
“The odds of something more than a 25-basis-point cut in the funds rate are pretty good,” says Louis Crandall, a former New York Fed official.
