I’m looking for a test this week of the new “Fed Call” theory.
A few weeks ago, before last week’s rally anyway, the theory starting going around that the “Fed Put” (sometimes called the “Powell Put”) was dead. The Fed Put (in place since the days when it was called the “Greenspan Put”) held that investors and traders didn’t have to worry about the dangers of a big downside move in the stock market because the Federal Reserve would ride to the rescue, flooding the financial markets with cheap money, and rescuing stocks.
The new thinking, however, was that with the Fed looking to contain potentially run-away inflation, the Fed would be happy to see stocks take a substantial but not dangerous tumble because that would act to damp sentiment and restrain spending. A decline in stock prices was, from this point of view, an ally of the Fed’s policy of increasing interest rates.
The question is, of course, how active the Fed would be in “encouraging” a decline in stock prices. Higher interest rates by themselves would put downward pressure on stock prices. But would the Fed also try to jawbone prices lower by giving speeches that emphasized the central bank’s commitment to repeated interest rate increases.
After a week when stock markets finally broke a string of seven consecutive down weeks would seem the time for a test of how far the Fed wants to go in depressing the prices of stocks.
This week is an especially important test because of an accident of timing. The Federal Reserve’s Open Market Committee, the Fed group that sets interest rates, meets on June 15. Which means that, because of the Fed’s quiet period policy, Fed officials have only about a week to give speeches and press conferences to influence markets, assuming that’s what they want to do. (I’d note that encouraging stock prices to decline isn’t one of the Fed’s official powers or goals. But then neither is encouraging stock prices to rise. Which didn’t stop a string of Fed chairs from Greenspan to Bernanke to Yellen from pursuing that goal.)
The Fed’s quiet period, which is by no means absolute, according to the St. Louis Fed website “limits the extent to which FOMC participants and staff can speak publicly or grant interviews during Federal Reserve blackout periods, which begin the second Saturday preceding a Federal Open Market Committee (FOMC) meeting and end the Thursday following a meeting.” That would schedule this quiet period to run from Saturday June 4 through June 16.
Speak now, Fed officials, or forever (or at least until after June 16) hold your peace.
