At the Federal Reserve's annual retreat in Jackson Hole, Wyoming almost eight years ago to the day, Ben Bernanke presented a paper to Alan Greenspan and other central bankers from around the world setting out how they should respond to changes in the price of stocks, bonds and other assets.

At the time, Mr Bernanke was chairman of the economics faculty at Princeton University, one of the foremost academic economists of his generation, but unknown outside his profession.

Eight years on, Mr Bernanke has succeeded Mr Greenspan as chairman of the Fed. The eyes of the world are on him as he grapples with the real-life, not theoretical, dilemma of how to respond to financial market turmoil. The dramatic response yesterday to the Fed's moves to make money directly available to cash-starved institutions at less penal rates and hint at a possible interest rate cut shows how his decisions affect global markets.

In his 1999 Jackson Hole paper Mr Bernanke and his co-author, Mark Gertler, argued that a central bank should adjust monetarty policy in response to changes in asset prices only to the extent that they affect the outlook for the real economy. A year later in an article in Foreign Policy magazine he put the question in layman's language: "If Wall Street crashes does Main Street follow? Not necessarily."

Mr Bernanke still believes that interest rate decisions should focus on the real economy. This is the paradigm through which he will assess whether to cut rates. But the real world is not as clear cut as academia. The Fed chairman faces uncertainty about how much of an effect market turmoil will have on the economy. Mr Gertler, now a professor at New York University and visiting scholar at the New York Fed, says: "I would be the first to admit there are grey areas."

The decision requires dealing with noisy and contradictory constituencies. Most traders are desperate for a rate cut. Jim Cramer, hedge fund manager and rambunctious CNBC television pundit, spoke - or rather shouted - for them when he demanded the Fed wake up and cut rates. "Bernanke is being an academic . . . He has no idea how bad it is out there. He has no idea!"

But many economists and central bankers believe a rate cut risks the "moral hazard" of bailing out reckless investors. Bill Poole, president of the St Louis Fed, told Bloomberg only a "calamity" would justify a rate cut now. Yesterday's move navigated the middle-ground between the two camps. But traders rejoiced, with one TV pundit calling Mr Bernanke a "rock star".

Mr Bernanke's position ismade harder by his predecessor's long shadow. Investors lovedMr Greenspan, who over the years defused a string of financial crises. But some economists fault him for allowing investors to believe that if things ever got really bad, the Fed would step in to rescue the markets.

This is not the first time Mr Bernanke's reputation has been on the line. Last spring, only a couple of months into the job, investors started to bid up the expected rate of inflation. Traders mocked "Helicopter Ben" - a nickname derived from remarks he made that the Fed could always halt deflation by dropping money from a helicopter.

Mr Bernanke showed then that he was not cowed. He responded with a tough speech that punished those who had doubted his inflation-fighting credibility. A few months later hemade a hard call to halt the series of rate rises, earning the admiration of Fed colleagues that he would not take undue risks with the economy to prove a point.

"One of the things he has in common with Greenspan is calmness - unflappability, if that is a word," says Alan Blinder, a professor at Mr Bernanke's old university of Princeton and former vice-chairman of the Fed. "Greenspan was calm in a storm. Bernanke is like that also."