For many years investors have spoken of a “Fed put” for the stock market. The idea is that if the market tumbles, the Fed will ride to the rescue and ease policy so stocks can rebound.
In late 2018, the Fed abandoned its interest-rate hikes as the stock market fell. And in early 2020, the Fed cut rates as the market plunged.
Of course, the Fed wasn’t just reacting to financial markets. Its primary concern is the economy.
But the central bank’s moves to ease during periods of weakness in the stock market, beginning under the chairmanship of Alan Greenspan (1987-2006), led to the idea of the Fed put.
Now experts are questioning whether the Fed would adjust policy in case of a major stock decline.
“The idea of a Fed put and that the Fed is always going to be there to bail out my bad investment decisions is really not cogent investment policy to hold onto for a long time,” the legendary short-seller Jim Chanos told CNBC Monday.
“The fact that it will bail out the stock market at some predetermined level of losses, … I think it’s a very dangerous idea to uphold.”
In the current economic environment, with inflation running at 7%, it would be difficult for the Fed to back off its tightening program, regardless of what happens to stocks.
“They have a serious problem and even if the S&P 500 corrects, the Fed will have to ignore it, because it is behind the curve and its credibility is on the line,” Ed Yardeni, president of Yardeni Research, told Barron’s.
He referred to behind the curve in combating inflation.