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The Governor of the U.S. Federal Reserve, Ben Bernanke, lowered short-term interest rates yesterday by 0.75%, from 3% to 2.25%.

Markets all around the world, in the U.S., Europe, Asia and Israel and everywhere else, all expected a larger cut of at least 1% - and behaved accordingly.

Over the next few days, it will be interesting to see how the various markets react to the big - but still smaller than expected - rate cut. Will Bernanke achieve what he had hoped for, and where will the new equilibrium point be set in the markets?

Bernanke's decision came at a good time for Israel. Next Monday the governor of the Bank of Israel, Stanley Fischer, will announce April interest rates. The Bank of Israel's rates are now 3.75%. Bernanke's decision to lower rates by 0.75% will make the rate gap between the U.S. and Israel huge - 1.5%.

Exporters and manufacturers are convinced that one of the reasons the dollar crashed against the shekel is that speculators are trying to make money off of this interest rate gap, and are pouring money into Tel Aviv markets. A 1.5% difference certainly invites such speculation from investors all over the globe.

Fischer will have no choice but to lower rates, even if he feels that such a move will make it harder to meet his main goal of price stability and inflation in the 1-3% range for 2008.

Israeli inflation has been hovering around 4% in recent months, well above the government and the Bank of Israel's targets. The central bank's main task, as defined in the law governing the bank, is price stability - and the way to do that is to raise interest rates.

In the discussions leading up to the interest rate decision at the beginning of next week, Fischer and the central bank's senior management will be forced to make a sharp cut in rates. The result will be a 0.5% reduction, which will close the interest rate gap with the U.S. to only 1%. This is still large, but not too large. A larger rate cut, say 0.75% - equal to the American reduction - would only encourage inflationary pressures. And nobody thinks Fischer would lower rates more than that.

The dramatic events of recent days may not yet be over. Any further surprises might yet help Fischer to reach a decision - but most likely, they will only make it more difficult to choose. Fischer has a hard job ahead of him, but that is why we brought him here from America. In any case, any decision he makes may solve one problem, but might make others worse.