In the land of the Federal Reserve and its market-manipulating mechanisms, there’s now an unofficial market term called the “Powell Put” or the “Powell Pivot.”
It is in direct reference to Fed chairman Jerome Powell. Before he became chairman, Wall Street referred to prior heads’ policies with terms like the “Greenspan Put” the “Bernanke Put” and the “Yellen Put.”
In layman’s terms, what the term means is that if the markets fall by too much, the Fed will swoop in and try to save the day, the month, or the year. A “put” in options terminology is insurance against a drop in prices. Nowadays, the “Powell Put” is the market’s insurance that the Fed will act to stimulate the markets if necessary.
Markets had been waiting for it to materialize. But Powell had previously talked about the need to raise rates to give the Fed “enough ammunition to fight the next crisis.” The size of the Fed’s balance sheet would also have to be reduced enough to provide it enough room to grow if needed.
Markets began to worry the Powell Put might never materialize when he raised interest rates in December, when the market was in the middle of a severe correction (that nearly culminated in a bear market). He also said the balance sheet reductions, or quantitative tightening, would run on “autopilot.”
Markets tanked on his comments. But then on Jan. 4, after stocks fell nearly 20%, the “Powell Put” finally materialized.
In comments addressing the American Economic Association, Powell said he was “prepared to adjust policy quickly and flexibly.”
And about the balance sheet reduction policy that was on autopilot in November, he said
“We wouldn’t hesitate to change it.
Powell has subsequently emphasized the need for “patience.” The Dow has continued to rally behind his newfound dovishness. In fact, this January was the best January in 30 years. If the rally continues, the market could soon be testing its early October highs.
What this means is that the Fed isn’t going to raise rates anytime soon. As my colleague Jim Rickards has explained,