The now “Bernanke Put”

The “Greenspan Put,” according to Wikipedia, is referred to “when a crisis arose, the Fed came to the rescue by significantly lowering the Fed Funds rate, often resulting in a negative real yield…The Fed’s pattern of providing ample liquidity resulted in the investor perception of put protection on asset prices. Investors increasingly believed that in a crisis or downturn, the Fed would step in and inject liquidity until the problem got better. Invariably, the Fed did so each time, and the perception became firmly embedded in asset pricing in the form of higher valuation, narrower credit spreads, and excess risk taking.” We can of course overlay this reference to the now “Bernanke Put” and nothing is more evident of this than the market action since July 29th when Bullard said more QE may come again, followed by the Aug 3rd WSJ article that the Fed will buy more MBS/Treasuries with the proceeds of maturing securities. The markets got excited and asset prices rallied without any thought to whether the policy would actually help economic growth. The FOMC has thus put themselves in the position today that IF they don’t follow thru, we will see a sharp selloff in Treasuries, MBS, corporates and stocks as markets have been so trained to get bailed out by the Fed every time economic data turns down. In terms of spurring economic activity though, I repeat again, the Fed is now impotent. The only influence they have left is on asset prices.

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