The Legend Of The Fed Put
At 10 o’clock this morning, every terminal and smartphone on Wall Street will tune into the address by the Chairman of the Federal Reserve, Jerome Powell.
However, this is no ordinary address. Today, Wall Street is under significant stress, the nation teeters on the brink of recession, and the financial markets reflect that uncertainty. Shortly, the market will enter its most precarious time of the year, fall — that time when most stock market crashes happen.
Additionally, the nation is in the middle of an election. An election that could see the Democrats lose control of at least one branch of Congress. And thereby tilt the balance of power.
Against this backdrop, the Chairman will rise to address the Jackson Hole Conference he’s attending and the rest of the country via the internet. In what could well be his most important speech ever.
One misstep and he could send the financial markets into a tailspin and seriously harm the election chances of the democrats. Don’t forget that Democrat President Joe Biden re-nominated Powell for a second term as Chairman just three months ago.
So Powell will say just what his four predecessors have said: that the Fed Put is alive and well and intends to use it. Wrapped in the language of a Central Banker, he will weave a story of how carefully the Fed is managing monetary policy and how it is meeting its twin mandates of full employment and stable prices. He will observe that the Fed will use all the conventional tools to keep this economy strong and healthy. But in the end, should the market falter, Powell will bring out the ultimate Fed weapon: the Put.
What, you may ask, is the Fed Put? And just how did it come about?
Now, the history of the Put goes back just 35 years, to the autumn of 1987. Ronald Reagan, the hero of capitalism everywhere, was President. And he had just appointed a new Chairman of the Fed, Alan Greenspan.
It was Greenspan’s task to replace the legendary Paul Volcker, the most independent of all Fed Chairman. Just seven years before, Volcker defied Reagan by raising interest rates to sky-high levels to fight inflation. Volcker was certainly no one’s patsy, and he went against a sitting President with some relish.
Now it was Greenspan’s turn to manage the Fed, and more than a few doubted he was up for the job. His background was primarily in private investment management, and he was a disciple of Ayn Rand. Many on Wall Street considered that two strikes were against him. First, he wasn’t from the bureaucracy and wouldn’t know his way around Washington. And second that he valued the ideas of Objectivism.
After barely two months on the job, Greenspan faced the Crash of 1987. The most catastrophic financial crisis in generations. A time when the markets were incredibly overwhelmed.
1987 was before computers when almost every order was by telephone. I was working at a West Coast regional brokerage firm then, and I remember the never-ending ringing of the phones. It seemed that every client wanted to sell and sell now. We would come to work at 4:30 or 5:00 to answer phone call after phone call. Only to drag ourselves home 12 hours or more later. And then do it all over the next day.
Although the markets settled in just a few days, it took months for the firms to dig themselves out of all the backorders.
Wall Street was in trouble, as indeed was the entire financial system. Something needed to happen. And in unison, we all turned to this new Fed Chairman. Until then, none of us would have even considered turning to the nation’s central bank. We all thought of the Fed, as we had under Chairman Volcker, as a wholly independent and removed institution. The Fed was as quiet as a church mouse throughout the dreadful bear market of the 1970s, just the decade before. Mum was their word.
There was a wall between investment markets and commercial banks. And the Fed was on the bank’s side. The Fed had nothing to do with Wall Street, and that’s how both sides liked it.
But that all changed in those eventful days in 1987. Suddenly we tried things we thought we’d never see. And to a large extent, they worked.
President Reagan instituted the President’s Working Group on Financial Markets. The so-called Plunge Protection Team. Its job was to ensure all the various agencies, exchanges, and firms worked together. We were pulling on the same side of the rope.
But it was Greenspan who was the money man. The one who brought the liquidity so that banks, and the brokers who used them, could pay everyone. Sellers, especially, and that seemed to be the entire country, needed to know that they would receive their cash.
Without that confidence, the entire financial system could have melted down with runs, not only on the Brokers but also on the Banks.
And the man who provided that backstop was Alan Greenspan. He opened up the Fed window, and in the arcane method of the Fed, funds flowed from 33 Liberty Street in Manhattan through the money center banks and to the rest of the country.
In a matter of weeks, the nation returned to normal. The crash was over and gone so quickly that those who weren’t on Wall Street were barely affected.
Although, for those of us in the many brokerage offices around the country, we’ll never forget it.
It was one of the most dramatic stock market plunges of all time.
And because of his actions, Alan Greenspan became known as the Maestro, and the strategy of unlimited liquidity was named: the Put.
Economic News
There are a couple of items in economic news today before we get to the Chairman’s speech. First up is the latest report on Personal Income and Spending. Wall Street expects that Personal Income will rise by six-tenths percent. That might sound good until you realize that inflation is growing at seven-tenths per month, which means that the American Workers’ pay continues to fall in real terms. We are rapidly losing purchasing power.
Also, Personal Spending is expected to increase fractionally; most of this is due to the higher cost of essentials such as food and fuel.
And then we will have the latest reports on the Trade in Goods. Last year was the first ever that America had a trillion dollar deficit in the Trade in Goods, and we will easily surpass that this year.
Only one major company reporting earnings this morning, Ubiquity Incorporated, an electronics and network company, is trading unchanged on their results.
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