LONDON () -- Maybe we , but on Friday the Chairman of the Board of Governors of the U.S. Federal Reserve Ben Bernanke made especially plain his readiness to grant further relief to U.S. financial markets and to the wider U.S. economy. Of course, the Fed has already stepped in calm the fray with the of a few weeks ago, but that utilised a mechanism the man in the street has probably never heard of.
It therefore lacked the attention grabbing, wallet fattening impact of a cut in the federal funds rate - which the man in the street most definitely has heard of as the headline interest rate. Is that what is coming next?
The Fed's next policy meeting is due on September 18, and a rate cut now seems widely expected to be the outcome. The expectation of a rate cut is almost as good as a rate cut, as the Fed well knows, which explains why its intentions are being so clearly telegraphed.
In remarks on Friday, Bernanke tried to make the distinction between bailing out investors on the one hand, and protecting the wider economy on the other: "It is not the responsibility of the Federal Reserve...to protect lenders and investors from the consequences of their financial decisions."
But he also stated the essential truth - that what happens in the markets "can have broad economic effects felt by many outside the markets." He then promised that the Fed would "act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in the markets," which seems about as close as we can reasonably expect to an assurance that the Fed is ready to cut rates.
Also on Friday, President George W. Bush announced a package intended to help homeowners refinance unserviceable mortgages through the Federal Housing Administration. Bush isn't calling this move a bail out, but that's what it is.
While quite a major, and relatively uncommon, intervention on the part of the federal government rather than the Federal Reserve, it is fair to say that if government can soften the blow of a crisis such as this, then perhaps it should.
Moreover, Bush will be mindful of next year's election, and the economy sliding into recession later this year under a Republican administration that has received more than its share of opprobrium already is exactly what a Republican presidential candidate does not need.
The markets, understandably, reacted positively to the words of Bush and Bernanke. Bush's package of measures should help alleviate the effects on financial institutions of their exposure to dud sub-prime mortgages and will thus to some extent protect the overall credit environment, while a rate cut not only helps out nearly all mortgage payers, but provides encouragement to the economy across the board.
The economic effects of the recent market turmoil will not become apparent immediately, or even before the end of the year, as such forces, good or bad, take time to feed through the economy and then into the statistics. So with a rate cut seemingly in the offing for September 18 and Bernanke's pronouncements now the Fed is looking to head off trouble.
The question is will the Fed play it safe and cut rates or will it play perform an about face and suddenly decide to play the stern disciplinarian, hoping that the fillip provided by the current signals will be enough?
Many people wouldn't completely rule out the latter, but George W. Bush has already set an example for the former, and the buzz everywhere seems to be that the Fed will follow his lead.
This seems especially likely in the light of reported comments from Federal Reserve Governor Frederic Mishkin that a substantial fall in U.S. home prices, an obvious potential consequence of the sub-prime shake out, merits an aggressive monetary policy response.
