Fed changes course to boost the markets; another Greenspan-like put?

Federal Reserve Chairman Jerome Powell announced today that they would exercise patience with respect to interest rate increases, and respond to economic conditions as they arise. This is in stark contrast to his statement in October that rates were “a long way from neutral,” or even in December, when he said that rates were “at the low end of neutral.”

In addition, the Fed announced that they would be soon eliminating their Quantitative Tightening (QT) program of reducing their holdings of treasuries and mortgage backed securities. This program is currently reducing the Fed’s balance sheet by $45 billion per month, and Powell is previously on record as saying that this reduction would continue unabated.

What this all amounts to is a “Greenspan put” – a phrase introduced in the 1980s and 1990s to reflect the opinion of many economists that Alan Greenspan, the Fed Chairman from 1987 to 2000, would make monetary policy decisions based on keeping the stock market from suffering severe declines. Critics of Greenspan believed this policy led investors to think the government would always come to their aid, thus eliminating the moral hazard or risks inherent in stock market investing and speculation.

This leads to inefficient allocation of capital and excessive booms and busts in asset prices. The balloon is getting bigger, and it is only a matter of time before it pops!