Chairman Bernanke gave a highly-anticipated speech today at the Bundesbank (the "Buba"). The topic was Global Imbalances: Recent Developments and Prospects. Given the uncertainty around next week's Fed meeting, the speech was as closely pored over as Paris Hilton's stolen address book. See, for example, here, here, here, here, here, ... (you get the idea). Unfortunately the speech was about as relevant as Paris' address book, and about as old as that story. Bernanke's speech was largely a rehash of his 2005 Savings Glut speech.
Nevertheless, there was one nugget at the end that wasn't in the 2005 speech:
What implications would a gradual rebalancing have for long-term real interest rates? The logic of the global saving glut suggests that, as the glut dissipates over the next few decades and thereby reduces the net supply of financial capital from emerging-market countries, real interest rates should riseHe presumably leaves it as an exercise for the reader to figure out what implications a sudden rebalancing would have on long-term interest rates, like might happen, for example, if U.S. consumers collectively decided tomorrow that they no longer wanted to be the consumers of last resort for the rest of the world. I'm guessing this is what the FOMC was referring to on Aug 17 when they said "the FOMC judges that the downside risks to growth have increased appreciably."
I think it's fair to say that the Fed is now officially in risk-management mode. That means preemptive interest rate cuts. I still think they'll do 25bps to Fed Funds and 50bps to the discount rate, but I wouldn't bet against a 50bp/50bp cut.
As always, views welcome...