Ben Bernanke, the Chairman of the US Federal Reserve, grabbed the limelight back from his predecessor, Alan Greenspan, yesterday with an unexpectedly aggressive interest-rate cut to protect America’s economy from the risk of recession.

The US central bank’s decision to cut its two main rates by half a percentage point certainly eclipsed interest in Mr Greenspan’s much-trailed memoirs, published on Monday. However, Mr Bernanke seemed to be signalling that, for all the discussion that the former chairman’s autobiography has prompted about past policy mistakes and how they may have fuelled today’s financial problems, the present chairman, like his predecessor, is going to err on the side of too much action rather than not enough.

Fed officials, in fact, have spent much of the past month examining the central bank’s response to the financial crises of the past. The one on which they have focused most attention is the turmoil of the late summer of 1998.

Nine years ago, the global economy was in a similar state of panic. The Russian debt default and the collapse of Long Term Capital Management in America led to some of the same sort of financial disruption seen recently in response to the sub-prime mortgage mess.

Back then, the Fed did not initially respond aggressively with cuts in interest rates. In September, the Fed’s Open Market Committee trimmed its key policy rate, the Fed Funds rate, by just a quarter-point. The public and market reaction was derisive; stock prices fell and the panic threatened to turn into a rout. Two weeks later, the Fed was forced to call an emergency meeting and cut rates again, by another 25 basis points, to calm the waters.

This experience — under Mr Greenspan’s chairmanship — was salutary for the Fed. The last thing that Mr Bernanke would have wanted to see was a wave of disappointment in reaction to his decision yesterday, the biggest moment of his short career so far as world’s most powerful monetary policymaker — a “truly buttock-clenching moment”, as one former central banker describes it. Sure enough, the initial reaction to the central bank’s move yesterday was quite different from nine years ago. Equity prices gave the Chairman the thumbs-up, with the biggest positive response to a Fed interest-rate move in more than six years.

All this will surely fuel the criticism that the US central bank has irresponsibly bailed out banks and financial institutions that have done foolish things, especially in the sub-prime mortgage market. It will also provoke criticism that the Fed has taken an unnecessary risk with inflation. Just six weeks ago, at its last open market committee meeting, the central bank said that it was still concerned that inflation was a bigger risk to the US economy than recession — hinting that the next rate move might be up, rather than down.

This inflation worry may have been reflected in the bond market’s reaction to yesterday’s decision. Yields on short-date Treasurys fell sharply, while yields on longer bonds — ten and thirty years — were unchanged or higher. This represents a classic steepening of the yield curve that may presage concerns about inflation risks — fuelled by concern that the Fed has dropped the inflation ball.

Mr Bernanke and his colleagues have a quick response to that. In the statement they issued with the rate move yesterday, they noted that inflation concerns have not entirely disappeared. They said: “Readings on core inflation have improved modestly this year. However, the committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.”

This was interpreted by some in the markets as a signal that the Fed may be hoping that it will not need to cut rates again.

This would be highly unusual. “One and done” is an oft-used market expression that is rarely applicable to central bank interest-rate moves. In the past, whenever the Fed has changed tack in its policy — from higher rates to lower, or vice versa — it has moved several times in the same direction.

But again, the experience of 1998 may be instructive. Then the Fed cut rates just three times, by a quarter-point at a time. Within eight months, as recession fears gave way to concern that the economy was overheating, the Fed was raising interest rates again.

Mr Bernanke is perhaps hoping that an aggressive first move like yesterday’s will be enough to staunch the haemorrhaging of confidence in the US economy.

However, that is as yet only a hope. The clearer reality at this stage is that the housing market in the US — the key factor behind growth prospects — is continuing to deteriorate. The probability is that Mr Bernanke and his colleagues will be cutting again before the year is out.

As for the talk that in doing so, the Fed is bailing out a bunch of irresponsible bankers and storing up problems for the future, that is a risk Mr Bernanke is well-prepared to take if he can avoid a full-blown recession.

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