Bernanke put

There is a widespread belief that the US central bank can always rescue the economy by decreasing interest rates. Since the current chairman is Ben Bernanke this is known as the 'Bernanke Put'

Following the dotcom crisis after which the then Federal Reserve chairman, Alan Greenspan, slashed the US Federal Funds rate in order to stimulate economic growth and stave off a recession, there has been a widespread belief that the US central bank can always rescue the economy by decreasing interest rates.

Since the current chairman is Ben Bernanke this is now known as the 'Bernanke Put' (named after 'put options' - derivatives that make money in falling markets). The theory is that if the central bank interest rate falls, other commercial banks should be able to lend more cheaply which in turn encourages their customers, namely companies and consumers, to borrow and spend thus rekindling growth.

The problem is that low interest rates also tend to stimulate price inflation and may encourage previously greedy borrowers to take on even more debt (the so-called 'moral hazard') so the central bank's 'put', if exercised, can be a very mixed blessing.

Most Popular

Nationwide to give £100 cash boost to customers
Personal finance

Nationwide to give £100 cash boost to customers

Nationwide Building Society is giving customers £100 as it reinvests profits. Dubbed the Nationwide Fairer Share scheme, we look at who is eligible.
22 May 2023
The best one-year fixed savings accounts - May 2023
Savings

The best one-year fixed savings accounts - May 2023

You can now earn 5% on 1 year fixed savings accounts - the best rate seen in 14 years. We have all the latest rates available now.
26 May 2023
Energy price cap slashed by 17% ‒ millions to see lower energy bills
Energy

Energy price cap slashed by 17% ‒ millions to see lower energy bills

Typical households on default energy tariffs will see their energy bills drop by £426 a year following today's energy price cap drop.
25 May 2023