What is Meant by Fed Put?
Posted on 01/25/2022
A “Fed Put” is simply having the Federal Reserve engage in a series of policy easings following large U.S. stock market declines in the intermeeting period. Essentially it is Federal Reserve policy accommodation following poor equity market returns. The pattern of the Fed Put emerged in the 1990s and held through the 2007-2009 global financial crisis.
Is the Fed Put dead? The Fed Put worked in the past as inflation was not an issue. Now that U.S. inflation is appearing in levels not seen since the late 1970s, the Fed Put could find itself out of style.
The Fed Put was originally called the Greenspan Put, named after Federal Reserve Chairman Alan Greenspan. The Greenspan-led Federal Reserve was proactive in halting excessive U.S. stock market declines, acting as a form of insurance against losses.
The success of a Fed Put depends in part on how investors are being surprised. The Federal Reserve Open Market Committee has to beat market expectations on order for the Fed Put to counter U.S. stock market declines. This is why the Federal Reserve has been far more aggressive since 2008 by increasing the size of the Fed’s balance sheet with open market purchases on bonds and mortgage-backed securities.
Keywords: Federal Reserve System.