President George W. Bush announces the nomination of Ben Bernanke as Chairman of the Federal Reserve, replacing Alan Greenspan upon his retirement in January 2006. The announcement came Monday, Oct. 24, 2005, in the Oval Office.

The interest rate-setting Federal Open Market Committee (FOMC) of the US Federal Reserve is expected to cut its benchmark Federal funds rate today for the first time in four years against a background of US recession fears and demands from Wall Street for an aggressive stance. The key question is how big a policy Chairman Ben S. Bernanke is ready to buy.

Analysts expect the FOMC to reduce the Federal funds rate by 25 basis points to 5.00% in its first move since June 2006 and first cut since June 2003.

A half-point cut might fan inflation and be seen as giving in to pressure from Wall Street firms that made bad bets, especially in the market for securities backed by subprime mortgages.

The decision is scheduled for about 2:15 pm EST in Washington - 7:15 pm in Dublin.

Policymakers will also have to decide what action to take on the less well-known discount rate, at which banks borrow directly from the Fed.

Normally, banks pay a "penalty" to borrow from the Fed's so-called discount window of one percentage point over the target for the federal-funds rate, at which banks lend to one another.

Banks rarely borrow at the discount window and last August 17th, in an effort to ease the subprime related credit crunch, the Fed cut the discount rate to 5.75%, a penalty of half a percentage point above the 5.25% federal-funds target. It also extended the term of such loans to as long as 30 days from one day. However, Wall Street says that the Fed has yet to make the discount window attractive. The actual penalty, they say is larger than the normal half point because the Fed has allowed the federal-funds rate to fall to 5%, a quarter point below its target.

Greenspan predicts return to high inflation

In interviews in recent days tied to the publication of his memoirs, The Age of Turbulence: Adventures in a New World, the former Federal Reserve Chairman Alan Greenspan has forecast a return to high inflation because of the end of the so-called "China effect" and the lack of the equivalent today of the IT revolution's impact on productivity growth in the 1990's.

Greenspan says that the trade-off between unemployment and inflation has shifted.

The former Fed chairman says companies would not be returning vast amounts of cash to their shareholders if they saw good opportunities for productivity-enhancing investment. "Innovation opportunities are, for the time being, somewhat saturated, whereas they were extraordinary in the 1990s," he told the Financial Times.

He also says that disinflationary effect of globalisation will soon start to ebb. "The rate of change of prices - or the degree of disinflation - is related to the rate of change of globalisation," he argues.

Greenspan says that the integration of a billion workers from the once centrally-planned economies of China and the former Soviet bloc into the global market system had a profoundly disinflationary effect on prices worldwide. But once all these workers are connected to the world economy, he says, "the rate of change goes to zero."

"In the intermediate period, the disinflationary pressures I was fortunate to operate under are gradually disappearing," he said in the interview.

Greenspan sees underlying cost pressures beginning to increase in the short-term.

In the longer term, his principal concern is that the economic context for the US will become less favourable as the disinflationary force of global integration ebbs and rising consumption in China and other emerging markets reduces the savings glut and pushes up long term interest rates.

He says his analysis of global savings trends is very similar to that put forward by his successor Ben Bernanke in a speech to the Bundesbank, in Berlin last week - "with one exception."

"He is calculating adjustment over the decades," he says. "I doubt that."

The FT reports that Greenspan admits that he lacks strong evidence that it is short term but he adds with a smile: "I know he doesn't have any evidence that it is long term either."