Is the era of gradualism at the Federal Reserve over? After 125 basis points of interest rate cuts in the space of eight days some economists are asking whether the US central bank is taking a new approach to monetary policy.
They see the new approach as one that emphasises getting rates down quickly to whatever level looks appropriate in the light of new information, rather than moving in a series of incremental steps.
If these economists are right, the change would have far-reaching consequences for the US economy and financial markets.
For decades the Fed has operated on an incremental basis both in good times and bad. Alan Greenspan, the former Fed chairman, was dubbed "quarter point Al" by traders for his habit of moving in 25 basis point increments.
In his 18 years as the central bank chief Mr Greenspan never cut rates by more than 50 basis points in a single meeting. Ben Bernanke, Mr Greenspan's successor, cut by 75 basis points last week and has followed it up with a further 50 basis point cut this week.
"Greenspan has left the building," says Michael Feroli, an economist at JPMorgan Chase. "What now distinguishes Bernanke is his abandonment of Fed gradualism."
There is a more prosaic explanation for the change: that the Fed simply realised it had fallen behind the curve and reasserted another Greenspan era principle - the "risk management" approach to policy that buys insurance against worst case outcomes.
This is almost certainly the way that longtime Fed officials such as vice-chairman Don Kohn regard the latest cuts. But the academics on the committee may see other reasons for operating in a less gradual fashion that reinforce the traditional risk management logic.
"The kind of moves we have seen recently are unprecedented," says Peter Hooper, chief economist at Deutsche Bank securities. "That certainly raises the possibility of something new afoot here."
Vincent Reinhart, a fellow at the American Enterprise Institute and former chief monetary economist at the Fed, says: "They have moved away from gradualism." He says Fed gradualism was hard to square with cutting edge academic research on optimal control theory. "In these models you front-load policy changes."
One justification for moving incrementally is that it encourages investors to extrapolate a series of moves in the same direction, allowing policymakers to influence long term rates.
However, theory suggests front-loaded rate changes could have an equally powerful effect but in a different way: shifting the yield curve up or down rather than tilting its slope. Such an app-roach would change the way Fed policy affects the economy, altering its relative traction on adjustable rate and fixed-rate mortgages, short and long term investments and bank profitability.
Mr Bernanke is unlikely to favour going all the way to a front-loaded policy framework. He takes seriously the Brainard principle, which advises moving incrementally when the power of a policy move is not known.
But as the Fed chairman explained in a speech in October, the Brainard principle is less compelling in circumstances where there may be heavy costs to delay.
Governor Frederic Mishkin took this argument a step further this month, when he called for a less "inertial" approach to policy in the face of financial disruptions. The result could be a fusion of traditional Fed risk management thinking with a new academic bias towards more front-loading of policy change. The result would be risk management on steroids. However, it would imply a willingness to stay on hold when expected weakness materialises and to raise rates quickly when risks abate.
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