On Tuesday September 18, US central bank policy makers surprised financial market players by cutting the federal funds rate target by 0.5% to 4.75%.
The key motivating factor behind the hefty cut in the federal funds rate target was an economic model that Fed Chairman Ben Bernanke developed while in academia.
Bernanke is of the view that changes in financial and credit conditions are important in the propagation of the business cycle through a mechanism that he dubbed the “financial accelerator.”
In his view, it is by means of the “financial accelerator” that a sudden short-lived disruption in financial markets can set in motion a prolonged disruptive and amplified effect on the real economy.
The question that must be asked is what gives rise to the emergence of such conditions? Disruptions in financial markets do not emerge out of the blue.
We suggest that the major cause that sets these disruptions in motion is likely to be the central bank itself. FULL ARTICLE