Between the comments and speeches last week, it appears Federal Reserve Committee members are worried about backlash from an economic slowdown. So, they have decided to cushion the landing with all the resources they have. This includes using the Fed “put”.
What is the Fed put?
The Fed put occurs when the committee states they will come to the rescue if chaos hits the markets. It’s a promise to supply ample liquidity and create conditions favorable for investing in risky assets. In other words, they will keep rates low for as long as needed in order to put more money into the pockets of banks and investors. The more accessible money is, the more can be lent to individuals and companies to keep the economy humming along.
Here’s a sample headline from last week:
Fed Chair Powell Says U.S. Economy Is ‘In A Good Place’, FOMC Patient Hiking Rates
NY Fed president John Williams said, “If economic conditions dictate a policy change to lower rates to zero or even negative rates, we will do what is appropriate.” His aggressive tone caught many off-guard, but it’s just the latest statement supporting an easy monetary policy.
Is this policy fair? Some analysts argue that price discovery is not natural and could lead to price distortions. Others predict hyperinflation from such a loose monetary policy. Argue all you want, because at the end of the day, you aren’t going to change the Fed’s mind. My job is to identify opportunities and make money – not prove who is right or wrong.
A coordinated global easing policy is currently in place among other central banks (Japan, ECB and China, to name a few). Nobody wants to create instability with a rogue monetary policy. When/if conditions start to decay or tighten, they follow the Fed’s lead. It worked in 2000, 2003 and 2008-09.