Is the Fed Put Kaput?

For those new to the game, the "Fed put" is a belief among investors that the Federal Reserve will come to the rescue anytime the stock market drops a certain amount. While much of the belief in the Fed Put is based on wishful thinking, it has proven to be the case enough times over the past 35 years or so that many investors have come to expect it.

Belief in the Fed put dates back to former Fed chair Alan Greenspan, who lowered interest rates and eased monetary policy numerous times during market turmoil, starting with the 1987 stock market crash. Since then, all his successors have followed the same basic policy, from Ben Bernanke to Janet Yellen to Jerome Powell, from the 2001 terrorist attacks to the 2008 global financial crisis to the 2020 coronavirus outbreak.

Of course, nearly all of those examples of the Fed put occurred during periods of benign inflation, when the Fed felt safe lowering interest rates to zero and injecting enormous amounts of money into the economy without fear of igniting price increases. Now, however, we live in a world of 8% inflation, and the Powell Fed has stated quite clearly that battling inflation is Priority No. 1, practically its only mission at the moment.

Indeed, when the S&P 500 fell 18% between reaching its all-time high of 4766 on December 27 through the recent low of 3901 on May 16 (the plunge in NASDAQ was even worse), the Fed sat on its hands, indicating the put is no longer suitable in this environment.

But since then (as of June 8) the S&P has rallied more than 6%. Is that a sign that some market watchers believe the Fed is once again going to exercise its put, or was it merely a dead cat bounce or buying the dip (or whatever you want to call it) on the road to even lower stock prices?

The Fed has already indicated that more interest rate increases are in the offing, as is a reduction in its $9 trillion bond portfolio. So far this year, since stating its determination to put the inflation genie back in the bottle, the Fed has raised interest rates exactly twice – 25 basis points in March and another 50 bps in early May. We've been told to expect many more between now and the end of next year, which would bring the Fed's target rate to more than 3%, yet the market now appears to be acting like the inflation dragon has been slain once and for all.

While the Fed certainly deserves most of the blame for the current rate of inflation, given its history since 2008 of low interest rates and quantitative easing, it also seems to be doing all of the work in trying to get it back under control. Meanwhile, the fiscal side of the equation—meaning out-of-control government spending—has also done its share of the damage yet shows no inclination or responsibility for doing anything about it.

To hear President Biden himself tell it, "My plan is to address inflation. That starts with a simple proposition: Respect the Fed, respect the Fed's independence, which I have done and will continue to do." In other words, not my job. In an op-ed piece in the Wall Street Journal last month, Biden offered little in the way of what his administration can do on its part, other than noting again that "the Federal Reserve has a primary responsibility to control inflation," as if his administration has none. Rather, he submitted the usual blather about making billionaires pay their fair share of taxes and blaming high oil prices on Vladimir Putin. No mention of unleashing America's energy industry to flood the market with oil; no, the answer is for Congress to "pass clean energy tax credits and investments that I have proposed."

Last week, Treasury Secretary—and former Fed chair herself—Janet Yellen echoed those comments, telling the Senate Banking Committee that "the clean energy initiatives and plans to reform the prescription drug market can help lower the costs paid by American consumers." Yeah, that will get it done.

Before her testimony, Yellen admitted in an interview on CNN that she has been "wrong about the path that inflation would take. There have been unanticipated and large shocks that have boosted energy and food prices, and supply bottlenecks that have affected our economy badly that I... at the time, didn't fully understand." Now she tells us.

So, if you're still expecting the Fed to exercise its put while the White House is telling the Fed that fighting inflation is its sole responsibility, good luck with that.

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George Yacik
INO.com Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.