Debt markets have in recent days been pricing out the chance of aggressive Federal Reserve monetary policy easing - and for investors in Asia that is good news.
Urgent rate cuts - either outside of regularly scheduled policy meetings or overly deep - are something the Fed should avoid if at all possible, in part given the potential for moral hazard from a Bernanke "put."
That doesn't mean the Fed will necessarily shy away from cutting interest rates 25 basis points from the current 5.25% at its next meeting, Sept. 18.
But it does mean any action from the central bank should be designed to avoid conveying a sense of panic to markets.
It also means Bernanke & Co. will avert creating the perception the Fed will rescue markets from themselves.
If investors believe the Fed will always step in to save the day, it could bring about a return to the extreme environment of recent years, when there was no apparent need to worry about risk. That excessive appetite for risk - in a climate of low rates and easy access to money - is the very thing which helped create the recent liquidity crisis.
For Asia, including Australia, a major repository of private equity deals in the past 18 months, one of the worst things that could happen would be that risk appetite becomes unfettered again.
This crisis has been about a repricing of risk to more balanced levels. If that repricing becomes short-lived, the potential for further - and more damaging - crises down the track will become a real concern.
This threat of moral hazard from big rate cuts will no doubt be a major part of the thinking at the Fed in coming weeks.
There will be much focus on Chairman Ben Bernanke's first public comments since the onset of the crisis, when he speaks Friday at the Kansas City Fed's annual symposium in Jackson Hole, Wyoming.
Expect Bernanke - and his colleagues - to talk carefully about the recent volatility, but he may also indicate the central bank is unlikely to move preemptively to cut rates before Sept. 18.
This is a great chance for the Fed to sound a combined note of calm for markets by not encouraging talk of hefty easing.
Such a strategy would be especially justified if cautious optimism continues in the coming week in markets. It would also be justified if data out this week show the U.S. economy remains on a solid footing despite the recent market wobbles.
Urgent rate cuts - either outside of regularly scheduled policy meetings or overly deep - are something the Fed should avoid if at all possible, in part given the potential for moral hazard from a Bernanke "put."
That doesn't mean the Fed will necessarily shy away from cutting interest rates 25 basis points from the current 5.25% at its next meeting, Sept. 18.
But it does mean any action from the central bank should be designed to avoid conveying a sense of panic to markets.
It also means Bernanke & Co. will avert creating the perception the Fed will rescue markets from themselves.
If investors believe the Fed will always step in to save the day, it could bring about a return to the extreme environment of recent years, when there was no apparent need to worry about risk. That excessive appetite for risk - in a climate of low rates and easy access to money - is the very thing which helped create the recent liquidity crisis.
For Asia, including Australia, a major repository of private equity deals in the past 18 months, one of the worst things that could happen would be that risk appetite becomes unfettered again.
This crisis has been about a repricing of risk to more balanced levels. If that repricing becomes short-lived, the potential for further - and more damaging - crises down the track will become a real concern.
This threat of moral hazard from big rate cuts will no doubt be a major part of the thinking at the Fed in coming weeks.
There will be much focus on Chairman Ben Bernanke's first public comments since the onset of the crisis, when he speaks Friday at the Kansas City Fed's annual symposium in Jackson Hole, Wyoming.
Expect Bernanke - and his colleagues - to talk carefully about the recent volatility, but he may also indicate the central bank is unlikely to move preemptively to cut rates before Sept. 18.
This is a great chance for the Fed to sound a combined note of calm for markets by not encouraging talk of hefty easing.
Such a strategy would be especially justified if cautious optimism continues in the coming week in markets. It would also be justified if data out this week show the U.S. economy remains on a solid footing despite the recent market wobbles.
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