Whatever the other merits of the March rescue for struggling broker-dealer Bear Stearns, it has made Thursday’s rate-setting decision easier for the US Federal Reserve. Saving Bear reassured the markets: long-term interest rates and corporate bonds have strengthened, the dollar has stabilised. The result is that, while the Fed needs to pause soon, if it chooses to make one more 25-basis point cut in rates it is unlikely to cause a flight from the dollar or drastic inflationary risks.

The past month has brought a dramatic change in market expectations for interest rates over the next couple of years, without any dramatic change in Fed rhetoric. Yields on two-, five-, and 10-year Treasury notes have risen by 50bp or more. That has three implications. First, calmer markets mean there is less need for the Fed to reassure via interest rates. Second, the market’s view is that rates may not need to go below 2 per cent in the current cycle. Third, the rise in long-term market interest rates tightens overall credit conditions, and so creates scope to cut short-term rates.