Wall Street Beware: There Is No 'Powell Put' At The Fed

U.S. stocks rallied sharply in response to what investors saw as a capitulation by Federal Reserve officials to weakening market conditions.

But Wall Street is dead wrong to believe there is a new “Powell Put” at the U.S. central bank,  a reference to what was known as the “Greenspan Put” back when Alan Greenspan was the long-time Fed Chairman and markets always believed, not always correctly, that he would ride to their rescue in case of a slump. (A put is an option contract that gives its owner the right but not the obligation to sell a specified amount of an asset at a set price within a specified time.)

Instead, the Fed is merely acknowledging a weakening in both global and domestic economic conditions that, yes, has been in part reflected in weaker stock prices and higher levels of perceived risk in corporate credit markets. That’s why it shifted the language of its statement to show that gradual rate hikes are no longer a sure thing.

Just last week, the IMF’s latest economic outlook warned of slowing growth across most of the world, including the United States. 

I have been arguing for a long time now that Fed officials should think twice about raising interest rates before officials see concerted, sustained wage growth for the majority of the population.

A new study published Wednesday by my colleague Josh Bivens at the Economic Policy Institute reinforces that conviction, showing U.S. workers still have quite a long way to go before they recover their pre-recession share of corporate income. 

Another part of the Fed’s decision that got lots of attention was the latest iteration of its periodic statement of long-run goals, which included a reference to possible use of bond buys in the event of another recession. While the Fed sees this as prudent long-run planning, markets seized on it as just another element of this perceived “Powell Put.”

The Fed started raising interest rates in December of 2015 and has boosted them to  a range of 2.25% to 2.5%, but recently changed its tune regarding the prospect of additional increases.

Instead of suspecting some insidious “Powell Put,” markets might want to consider the possibility that the Fed is actually doing the right thing – paying attention to the economic data, finding it underwhelming, and pausing its monetary tightening accordingly.