The Fed Put ~ a term originated from the idea of selling a put option in the equity market. When we sell a put option, it gives us the obligation to buy a stock at a certain strike price if there’s a buyer out there willing to take it off your hands. So when a central bank is easing monetary policy, they think they have a good idea of how low its willing to see markets fall before stepping in with liquidity pumps to substantiate the valuations.
The genesis of the Fed put is the “Greenspan put” (and later, the “Bernanke Put”). Old Al, former Fed chairman, lowered interest rates in response to the 1998 collapse of hedge fund Long-Term Capital Management. Pushing down interest rates helped gas up both business investors and the general consumer into spending money.
The Fed is now cornered; if they don’t keep inflating the pig (affectionately known as the stock market), people will wake up from their decade long bull-run slumber and see the negative wealth effect baked into a declining S&P 500. Once shareholders lose their shekels and business valuations miraculously come back down to earth, they’ll likely be less inclined to go out and take risks after getting their teeth punched out in the markets. What happens when this growth stalls? We get less wealth creation for consumers, stagflation, and a transition from the offensive to the defensive.
Quantitative Easing has entered the chat. As practical human beings, we know there’s no such thing as a free lunch (unless you took a PPP loan), so with all these moving parts it’s no small wonder that these concepts would intersect at some point, right? Low interest rates have caused massive debt bubbles in the past, while the consumers are being motivated to take on even more cheap debt. This leads to inflation, last i checked. The Fed will have to raise rates and we’ll have to endure the hangover at some point. Until then- hair of the dog, baby.