Tag Archives: Ben Bernanke

Bernanke Feared a Second Great Depression – WSJ.com

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The great depression was the last US gold standard depression.

A gold standard is fixed exchange rate policy characterized by a continuous constraint on the supply side of the currency.

Interest rates are endogenous, and even the treasury must first borrow before it can deficit spend, and in doing so compete with other borrowers for funds from potential lenders who have the option to convert their currency into gold. Therefore interest rates always represent indifference rates between holding securities and holding the gold.

With non convertible currency the central bank is left to set interest rates as holders of the currency no longer have the option to convert the currency into gold. Without conversion rights, there are no supply side constraints on credit expansion, and government can therefore offer the credible deposit insurance necessary to sustain the functioning of the payments system.
Bernanke failed to recognize this and therefore saw systemic risks that weren’t there, and also failed to act in line with the tools available to the Fed that would not have been available under the previous gold standard. The most obvious is unsecured lending to member banks, as I have been proposing for a number of years.

With today’s non convertible currency and floating exchange rate policy the fiscal ‘automatic stabilizers’ functioned as they always have during previous recessions, and as the deficit got above 5% of GDP at year end it was enough to reverse the downward spiral and turn things around.

This could not have happened under a gold standard. Before the deficit got anywhere near that large it would have driven up interest rates at an accelerating pace and the gold while the national gold reserves were being rapidly depleted.

We’ve seen this happen most recently with Argentina in 2001 and Russia in 1998 where similar fixed exchange rate regimes had similar outcomes.

We’ve also seen failures of logic regarding how the FDIC handled banking system stresses. The FDIC can simply ‘take over’ any bank it deems insolvent, and then decide whether to continue operations, sell off the assets, replace management, etc. This can be done and has been done in an orderly manner without ‘business interruption.’

The alternative in this cycle- having the treasury ‘add capital’- in my opinion was a major error for a variety of reasons.

When a bank loses capital, there is then less private capital left to lose before the FDIC starts taking losses. When the treasury buys capital in the banks, the amount of private capital remains the same. All that changes is that should subsequent losses exceed the remaining private capital, the treasury rather than the FDIC takes the loss. For all practical purposes both are government agencies, so for all practical purposes this changes nothing regarding risk to government. The FDIC could have just as easily accomplished the same thing by allowing the banks in question to continue to operate but under the same terms and conditions set by the treasury (not that those would have been my terms and conditions).

Instead, substantial political capital was burned and numerous accounting issues and interagency issues confused and distorted including ‘adding to the federal deficit’ when there was nothing that altered aggregate demand.

We have paid a high price for financial leaders being completely out of paradigm and in this way over their heads.

Bernanke Feared a Second Great Depression

By Sudeep Reddy

July 27 (WSJ) — Federal Reserve Chairman Ben Bernanke on Sunday said he engineered the central bank’s controversial actions over the past year because “I was not going to be the Federal Reserve chairman who presided over the second Great Depression.”

Speaking directly to Americans in a forum to be shown on public television this week, Mr. Bernanke pushed back against Kansas City area residents who suggested he and other government officials were too eager to help big financial institutions before small businesses and common Americans.

“Why don’t we just let the behemoths lay down and then make room for the small businesses?” asked Janelle Sjue, who identified herself as a Kansas City mother.

“It wasn’t to help the big firms that we intervened,” Mr. Bernanke said, diving into a discourse on the damage to the overall economy that can result when financial firms that are “too big to fail” collapse.

“When the elephant falls down, all the grass gets crushed as well,” Mr. Bernanke said. He described himself as “disgusted” with the circumstances that led him to rescue a couple of large firms, and called for new laws that would allow financial firms other than banks to fail without going into bankruptcy.

Mr. Bernanke appeared stoic at times as he sought to explain his actions during the financial crisis at the town-hall-style meeting with 190 people at the Federal Reserve Bank of Kansas City hosted by the NewsHour’s Jim Lehrer. But he also joked with the crowd, saying “economic forecasting makes weather forecasting look like physics.” He quipped that he could face malpractice charges if he offered investment advice — although he then recommended that a questioner practice diversification and avoid trying to time the stock market.

The hourlong session was the latest unusual forum where the Fed chairman has explained his actions in recent months, including bailouts and massive lending. Mr. Bernanke appeared before the National Press Club in February, agreed to an interview with CBS’s “60 Minutes” in March and took questions on camera from Morehouse College students in April.

Sunday’s setting offered the former Princeton economics professor a chance to speak outside of congressional testimony and speeches to economists, as his tenure leading the central bank faces increasing scrutiny. With just six months left in his term as chairman, Mr. Bernanke will learn in the coming months whether President Barack Obama will reappoint him to another four-year term or replace him.

Mr. Bernanke repeatedly used the frustrations voiced by people in the room to show his limited options during the crisis and reiterate the need for a regulatory overhaul.

David Huston, who called himself a third-generation small-business owner, said he was “very frustrated” to see “billions and billions of dollars” sent to large financial firms and called the government approach “too big to fail, too small to save.”

“Small businesses represent the lifeblood of small cities, large cities and our American economy,” he said, and they are “getting shortchanged by the Federal Reserve, the Treasury Department and Congress.”

Mr. Bernanke responded that “nothing made me more frustrated, more angry, than having to intervene” when firms were “taking wild bets that had forced these companies close to bankruptcy.”

More than 20 people asked questions of the Fed chairman, on topics ranging from bailouts to mortgage-regulation practices to the Fed’s independence, a topic that drew the most forceful tone from the Fed chairman. Mr. Bernanke suggested that a movement by lawmakers to open the Fed’s monetary-policy operations to audits by the Government Accountability Office is misunderstood by the public.

Congress already can look at the Fed’s books and loans that could be at risk for taxpayers, he said. Under the proposed law, the GAO would also be able to subpoena information from Fed officials and make judgments about interest-rate decisions based on requests from Congress.

“I don’t think that’s consistent with independence,” he said. “I don’t think people want Congress making monetary policy.”

After appearing before lawmakers three times last week, Mr. Bernanke broke little new ground in explaining the state of the economy. He said the Fed’s expected economic growth rate of 1% in the second half of the year would fall short of what is needed to bring down unemployment, which he sees peaking sometime next year.

“The Federal Reserve has been putting the pedal to the metal,” he says. “We hope that’s going to get us going next year sometime.”


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Continuing Claims->UE Rate->FF Rate

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Karim writes:

The chart attached shows the last 3 cycles in continuing claims, the unemployment rate and the FF rate.

Continuing claims is a coincident to leading indicator of the unemployment rate. Its interesting that in the last two cycles, continuing claims made what appears to be a double top before the unemployment rate peaked. In those cycles, the lag between the peak in the unemployment rate and the first Fed rate hike was 12mths (June 2003-June 2004) and 19mths (July 1992-Feb 2004).

While this cycle is notably different than the others in many respects (size and speed of economic deterioration as well as policy response), look for the Fed to make some reference (implicit or explicit) to the unemployment rate coming down in a sustainable fashion before tightening policy. Based on history, even if this month was the peak in the unemployment rate, the first hike seems unlikely until mid-2010. Based on likely further deterioration in the ue rate, first hike unlikely before 2011.


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Bernanke/ISM

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Karim writes:

Doesn’t break a lot of new ground. Forecasts appears consistent with prior statements and still casts financial markets in a fragile light despite recent run-up in equities. Makes no mention of upping asset purchases and issues longer-term fiscal warning:

*The most recent information on the labor market–the number of new and continuing claims for unemployment insurance through late May–suggests that sizable job losses and further increases in unemployment are likely over the next few months.

Agreed. And unemployment continues to increase until GDP growth outpaces productivity gains.

*Recent data also suggest that the pace of economic contraction may be slowing.

*Nonetheless, a number of factors are likely to continue to weigh on consumer spending, among them the weak labor market, the declines in equity and housing wealth that households have experienced over the past two years, and still-tight credit conditions.

*We continue to expect overall economic activity to bottom out, and then to turn up later this year.

Agreed. Deficit spending is not large enough to support aggregate demand and savings desires at levels that equate to modest GDP growth

*Even after a recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while, implying that the current slack in resource utilization will increase further.

Agreed. And weak overseas economies both limit export growth and bode for increased imports.

And higher crude and product prices raise nominal imports and dampen us domestic demand.

Also, state and local govt are also just now engaging in cutbacks and tax increases.

*Financial markets and financial institutions remain under stress, and low asset prices and tight credit conditions continue to restrain economic activity.

Yes, this allows lower taxes and/or higher government spending to support aggregate demand. Unfortunately, the noises from the administration are moving in the other direction, with President Obama’s latest statement that the US has ‘run out of money.’

*Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth.

I do not agree. In my book fiscal responsibility means supporting demand at desired levels of output and employment.

Financial sustainability is not an issue with non convertible currency and floating exchange rate policy, as it was when on the pre 1934 gold standard..


Non-Mfg ISM up from 43.7 to 44 but details weaker.

  • New orders down from 47 to 44.4
  • Backlogs down 44 to 40
  • Export and import orders both down


This indicates the slowing in the rate of decline is slowing, supporting the forecasts of nominal GDP hovering near 0 and unemployment continuing to rise.

  • Employment up from 37 to 39
  • Prices paid up from 40 to 46.9


There could be a rethinking of the output gap and an upward adjustment of the ‘neutral rate of unemployment if CPI continues to rise.


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Bernanke remarks

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As another associate quipped after reading Bernanke’s statements:

‘We are all deficit terrorists now!’

From Mike Norman who’s getting very good at this:

Mike Norman Economics

New entries on my blog today (Wednesday, May 3, 2009).

Bernanke hasn’t a clue!!

Bernanke warns on deficits as Treasury rates rise

Add Ben to the list of people who don’t understand our monetary system!

Bernanke warns on deficits as Treasury rates rise: Part II

Someone ought to tell Bernanke that the Fed sets rates. PERIOD!! END OF STORY!!!

Bernanke: start work now to curb US budget deficit

Curb the budget, reduce private sector savings. The relationship’s an identity, Ben!

I hope you enjoyed this market rally over the past three months because if the Administration follows Bernanke’s advice–and it’s likely that they will-kiss the rally goodbye and say, “Hello,” to new lows in the market sometime later this year or next year. Depends on when and how fast they “curb the deficit.”

-Mike Norman


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Will the cure be worse than the disease?

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Will the cure be worse than the disease?

Right, the financial press will chop the Fed to ribbons if inflation continues higher, as I expect it will.

But Bernanke is setting the stage for an even bigger recession down the road. Just as the ultra-low rates of the early 2000s created many of the problems we’re experiencing today, pumping money into the system would probably stoke inflation, forcing the Fed to hike rates sharply in the near future. “It’s better to take a small recession and kill inflation immediately instead of facing high inflation and a really big recession later,” says Carnegie Mellon economist Allan Meltzer.

That’s the orthodox mainstream view. They are already starting to turn on Bernanke and his reinvention of monetary policy.

Meltzer, who is finishing the second volume of his history of the Federal Reserve, warns that Bernanke is risking a disastrous replay of the 1970s, when high oil prices fueled double-digit inflation. Every time the Fed started to tighten and unemployment jumped, chairmen G. William Miller and Arthur Burns lost their nerve. They lowered rates to boost job growth, and inflation inevitably revived, causing a vicious price spiral. The Fed let the disease rage for so long that it took draconian action by chairman Paul Volcker in the early 1980s to finally defeat inflation. The price was a deep recession, with unemployment hitting 11% in 1982. “The mentality is the same as in the 1970s,” says Meltzer. “‘As soon as we get rid of the risk of recession, we’ll do something about inflation.’ But that comes too late.”

Yes, that’s the mainstream story (not mine, of course) and likely to get a lot louder, and if inflation picks up, it could cost Bernanke his job.

Indeed, while the economy is sending mixed messages about growth, the signs of increasing inflation are flashing bright red. For 2007 the consumer price index rose 4.1%, the biggest annual increase in 17 years. Gold, historically a reliable harbinger of inflation, set an all-time high of more than $900 an ounce. The dollar is languishing at a record low against the euro and a weighted basket of international currencies. “Flooding the market with liquidity is a disaster for the purchasing power of the dollar,” says David Gitlitz, chief economist for Trend Macrolytics.

And the Fed knows this. And they know they are ‘way out of bounds’ of mainstream theory with current policy, including encouraging a fiscal package.

The Fed’s supporters tend to downplay those dangers. They contend that the inflation surge is being driven largely by energy costs. Since oil isn’t likely to rise from its near-$100 level, inflation is likely to tail off in 2008. “That argument is wrong,” says Brian Wesbury, chief economist with First Trust Portfolios, an asset-management firm. “As people spend less to drive to the golf course, they will spend the extra money on golf clubs or other products. The Fed wants to reflate the economy, so the money that went into higher oil prices will drive up the prices of other goods.”

That’s the mainstream story, and it’s lose/lose for the Fed.

Fed supporters also point out that the yield on ten-year Treasury bonds stands at just 3.8%, a figure that implies that investors expect inflation to be around 2% in future years. So if inflation is really expected to rage, why aren’t interest rates far higher? The explanation is twofold. First, government bonds are hardly a foolproof forecaster. For example, five years ago Treasury yields were predicting 2% inflation over the next five years, and the actual figure was 3%, or 50% higher.

Another point the mainstream will make: Fed foolishly relied on its forecasting models and ignored the obvious signs of inflation.

Second, investors are so skittish about most stocks and corporate bonds that they’re paying a huge premium for safe investments, chiefly U.S. Treasuries. “It’s all about a flight to safety,” says Meltzer. Stand by for a major rise in yields as the reality of looming inflation sinks in.

So what is the right course for the Fed? Bernanke should hold the Fed funds rate exactly where it is now, at 4.25%. Standing pat might well push the economy into a recession. But the Fed’s newfound vigilance on inflation would boost the dollar, effectively lowering the prices of oil and other imports. America would suffer a short downturn and restore price stability, paving the way to a strong recovery in 2010 or 2011.

Sadly, the Fed has already chosen sides. It’s likely to lower rates every time growth slows or joblessness rises. As a result, it will never tame inflation until it becomes a clawing, bellowing threat. Then we’ll have to suffer a real recession, the kind we suffered in the aftermath of a time we should study and shouldn’t forget – the 1970s.

Says it all.

Hard to say why the Fed hasn’t played it that way, but they haven’t and will pay the price if inflation keeps rising.

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Fed communications

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If conveying information is considered important for market function, why not just say it clearly and directly in a targeted announcement?

Kohn Says Fed Is Trying to Signal When Views Shift `Materially’

2008-01-05 11:15 (New York)
By Scott Lanman and Steve Matthews

(Bloomberg) Federal Reserve Vice Chairman Donald Kohn said the central bank has increased its communication on policy views to the public in the wake of the financial-market “turmoil” that began in August.

Fed officials have tried to signal when the central bank’s reading on the economic outlook shifted “materially” in between regular meetings, Kohn said in a speech in New Orleans. “We have tried to provide more information than usual to reduce uncertainty and clarify our intentions.”

Kohn spoke before a week in which Chairman Ben S. Bernanke and six other Fed policy makers are scheduled to deliver remarks. The speeches come amid increasing signs of danger to the U.S. economic expansion, including a jump in the unemployment rate to a two-year high and a contraction in manufacturing. Traders anticipate the Fed will cut interest rates again Jan. 30.

Still, investors “should understand” that officials “do not coordinate schedules and messages, and that members’ views are likely to be especially diverse” when circumstances are rapidly changing, Kohn said.

Kohn held out Bernanke’s last speech on Nov. 29 as a signal of a change in the Fed’s views. The chairman said at the time that volatility in credit markets had “importantly affected” the economic outlook and declined to repeat the Federal Open Market Committee’s October statement that inflation and growth risks were about equal. The Fed then cut rates on Dec. 11.

`Let People Know’

“We have attempted to let people know when our views of the macroeconomic situation had changed materially between FOMC meetings,” said Kohn said in prepared remarks at the National Association for Business Economics panel discussion, part of the Allied Social Science Associations annual meeting.

The vice chairman didn’t comment on the outlook for monetary policy or the economy in the text of his remarks.

Bank of Japan Deputy Governor Kazumasa Iwata and European Central Bank Vice President Lucas Papademos were also scheduled to speak in the same session.

Traders yesterday shifted to bets on 50 basis points of interest-rate cuts by the Fed this month from 25 basis points after U.S. hiring slowed more than forecast in December and unemployment rose to 5 percent. The Fed lowered its main rate a quarter percentage point to 4.25 percent at its last meeting on Dec. 11. A basis point is 0.01 percentage point.

Fed Speakers

Bernanke speaks Jan. 10 in Washington. Other Fed officials giving talks include Boston Fed President Eric Rosengren and Kansas City Fed President Thomas Hoenig, the last two policy makers to cast dissenting FOMC votes. Charles Plosser, head of the Philadelphia Fed, votes as an FOMC member for the first time this month; he will discuss his economic outlook Jan. 8.

The FOMC is scheduled to meet Jan. 29-30 in Washington.

Separately, Kohn said today that the FOMC’s new forecasts for inflation three years out do not represent an “explicit numerical definition of price stability,” something the committee decided against, but rather the inflation rate that is “acceptable and consistent with fulfilling our congressional mandates.”

Kohn, who said in 2003 that he was “skeptical” about a price target, chaired a subcommittee of officials that coordinated work on the Fed’s communication review that began in 2006. He suggested in September that his doubts about the idea had eased.

Inflation Expectations

“I expect that our new projections will provide some of the benefits of an explicit target in better anchoring inflation expectations while not giving up any flexibility to react to developments that threaten high employment,” Kohn said today.

He also echoed remarks by Bernanke that the Fed will continue to look for “additional steps” to improve communication.

Fed officials decided last year not to report members’ assumptions of the “appropriate” path of interest rates because of concern that investors would “infer more of a commitment to following the implied path than would be appropriate for good policy,” the vice chairman said.

Kohn, speaking yesterday at the same conference, said diverse views on the 19-member FOMC lead to better monetary policy decisions. “The authority of the chairman rests on his ability to persuade the other members of the committee that the choices they are making under his leadership will accomplish their objectives,” he said.

–Editor: Chris Anstey, Christopher Wellisz
To contact the reporter on this story:
Scott Lanman in Washington at +1-202-624-1934 or
slanman@bloomberg.net;
Steve Matthews in New Orleans at +1-404-507-1310 or
smatthews@bloomberg.net.

To contact the editor responsible for this story:
Chris Anstey at +1-202-624-1972 or canstey@bloomberg.net

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Bernanke, King Risk Inflation to Extend Growth Party

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Mainstream economists will be increasingly stating that the real GDP ‘speed limit’ is falling or even negative. That is, the non
inflationary growth potential has dropped, and any attempt to support real growth at higher than that ‘non inflationary natural rate’ will only accelerate an already more than problematic inflation rate.

That puts the Fed in the position of either not accommodating the negative supply shocks of food/crude/imported prices or driving up inflation and making things much worse not too far in the future.

And they all believe that once you let the inflation cat out of the bag – expectations elevate- it’s to late and the long struggle to bring it down begins.

So yes, the economy is weak, but they will be thinking that’s the best it can do as demand is still sufficient to support accelerating inflation.

Bernanke, King Risk Inflation to Extend Growth Party

2008-01-03 04:17 (New York)
By Simon Kennedy
(Bloomberg)

Ben S. Bernanke, Mervyn King and fellow central bankers may go on filling up the world economy’s punch bowl in 2008, even at the risk of an inflationary hangover.

Signs that the party is ending for global growth are keeping monetary policy leaning in the same direction at major central banks, with those in the U.K. and Canada likely to join Bernanke’s Federal Reserve in cutting interest rates again. The same conditions may lead the European Central Bank and the Bank of Japan, which shelved plans for raising rates, to remain on hold for months.

“I expect 2008 to mark the beginning of another global liquidity cycle,” says Joachim Fels, Morgan Stanley’s London-based co-chief economist. “More signs of slowdown or even recession are likely to swing the balance towards more aggressive monetary easing in the advanced economies.”

Going against former Fed Chairman William McChesney Martin’s famous central-banker job description — “to take away the punch bowl just when the party gets going” — isn’t an easy call for Bernanke, Bank of England Governor King and other policy makers. Global inflation is the fastest in a decade, say economists at JPMorgan Chase & Co., and easier money policy may accelerate it further.

“Slowing growth and rising inflation will test central bankers to the full,” in 2008, says Nick Kounis, an economist at Fortis Bank NV in Amsterdam.

Hoarding Cash

After growing since 2003 at the fastest rate in three decades, the world economy is being threatened by a surge in credit costs as banks hoard cash and write off losses tied to investments in U.S. mortgages. The Organization for Economic Cooperation and Development in Paris estimates global growth in 2008 will be the weakest since 2003.

In the U.S., the slowdown may turn into recession this year, say economists at Morgan Stanley and Merrill Lynch & Co.

Fed officials signaled yesterday they are now as concerned about a faltering U.S. economy as they are about stability in financial markets. The central bankers anticipated growth that was “somewhat more sluggish” than their previous estimate, according to minutes of the Dec. 11 Federal Open Market Committee.

A contraction in the U.S. would drag down economies worldwide, say Goldman Sachs Group Inc. economists, who have dropped their previous view that the rest of the world can “decouple” from America’s economic ups and downs.

‘Recoupling’

Jim O’Neill, chief economist at Goldman Sachs in London, says that “2008 is the year of recoupling.”

The gloomy outlook may be apparent as central bankers including Bernanke, 54, and ECB President Jean-Claude Trichet, 65, gather Jan. 6-7 for meetings at the Bank for International Settlements in Basel, Switzerland.

“Downside risks to growth will trump their inflation concerns,” says Larry Hatheway, chief economist at UBS AG in London and a former Fed researcher.

After three reductions in the U.S. federal funds rate last year, the Fed begins 2008 with the benchmark at 4.25 percent, the lowest since Bernanke became chairman in 2006.

Easier monetary policy isn’t the only tool central bankers are using to relieve strains in markets. The Fed and counterparts in Europe and Canada last month began auctioning cash to money markets in their biggest coordinated action since just after the 2001 terrorist attacks.

Complementary Medicine

Such operations don’t change “the fact that the central banks still need to cut rates,” says David Brown, chief European economist at Bear Stearns International in London. “It is complementary medicine to improve the situation.”

Economists expect more medicine this year, and investors are demanding it. UBS, Deutsche Bank AG and Dresdner Kleinwort, the most accurate forecasters of U.S. interest rates in 2007, say the benchmark will fall below 4 percent this year. Futures trading suggests a better-than-even chance that will happen before April and investors increased bets yesterday the Fed will cut its key rate by a half-point this month.

The central banks’ choice to help growth will be proven right if economic weakness helps bring inflation down anyway. Global price increases will fade to 2.1 percent this year, the lowest since records began in the early 1970s, as growth slows, according to the OECD.

That outcome is far from guaranteed. In leaning toward easier monetary policy, central banks are accepting the risk that lower rates now may mean higher prices later.

Consumer Prices

U.S. consumer prices in November jumped the most in more than two years, while those in the euro area rose at the fastest pace since May 2001. The Fed’s Open Market Committee said Dec. 11 that “inflation risks remain,” and it will “monitor inflation developments carefully.”

King’s Bank of England, like the Fed, may put aside inflation concerns for now. Its Monetary Policy Committee voted unanimously to cut its benchmark by a quarter-point to 5.5 percent on Dec. 6, an unexpected shift after King, 59, had said two weeks earlier that the price outlook was “less benign.”

Alan Castle, chief U.K. economist at Lehman Brothers Holdings Inc. in London, forecasts that the BOE will cut rates twice more by June, or even go to a half-point reduction as early as February.

Inflation Challenge

At the Bank of Canada, a Bloomberg survey of economists forecasts that Governor David Dodge, 64, in his final decision Jan. 22, will lower the benchmark by another quarter-point after having lopped it to 4.25 percent on Dec. 4. The inflation challenge for Dodge and his successor Mark Carney, 42, is less acute because a surge in the Canadian dollar has restrained prices.

Even the Bank of Japan, whose 0.5 percent benchmark rate is the lowest in the industrial world, may need to cut for the first time since 2001, say economists at Mizuho Securities and Mitsubishi UFJ in Tokyo. While most economists expect the BOJ to remain on hold through the first half of 2008, the bank in December cut its assessment of Japan’s economy for the first time in three years.

The ECB has less room to pare borrowing costs as its own economists predict inflation will accelerate next year and stay above their goal of just below 2 percent. Trichet said last month that some of his colleagues already wanted to impose higher borrowing costs as rising inflation proves more “protracted” than they expected.

European Growth

While that may keep the ECB from lowering its main rate from 4 percent, it won’t lift the rate either, says Jose Luis Alzola, an economist at Citigroup Inc. in London. By the last half of 2008, a “modest rate cut is increasingly probable as growth disappoints,” he adds.

If Bernanke and his counterparts do succeed in dodging recession, they may wind up removing the punch bowl by year’s end, following Martin’s maxim about what central banks have to do as soon as the party “gets going.”

“All central banks are likely to face a sterner global inflation environment,” says Dominic White, an economist at ABN Amro Holding NV in London. By the end of the year, some, including the Fed, ECB and BOJ, “could be forced to tighten policy aggressively as growth recovers,” he says.

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