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.
Did my definition help you understand Bernanke put? If not, please leave a comment below. I read every comment and will reply to clarify your questions just as soon as I can.
If you are interested in finding out more on definitions and glossary terms such as Bernanke put then please sign up for the ‘Word of the Day’ email. Its a great way to learn some new terms which will really help you be an all-round expert at work.
Please leave your comments below. Remember, every comment left gets you another entry into the random prize draw for 100 GBP of Amazon vouchers.
Next winner will be selected on [date]. Comment now!