Federal Reserve officials are well aware that they risk being seen as coming to Wall Street’s rescue unless they raise rates at their next meeting — one of the many dynamics at play in the decision.
If the central bank decides not to tighten, said Federal Reserve Bank of Atlanta President Dennis Lockhart Friday, “we’ll hear the argument that we’re the handmaiden of the financial markets.”
Lockhart, a voter on the monetary policy committee, clarified that the Fed’s decisions are not driven by stock movements, and that the move to lift rates from zero for the first time since the financial crisis “would have to be evaluated in terms of its effect on Main Street” as opposed to Wall Street.
For decades, the Fed has suffered from the perception, earned or not, that it will step in to make money more available in the wake of big stock market losses by lowering interest rates.
The phrase “Greenspan Put” was created in the late 1990s after the failure of the hedge fund Long-Term Capital Management, when the Alan Greenspan-chaired Fed lowered interest rates. A “put” is an option contract, the opposite of a “call,” that gives the owner of a security the option to sell a security at a specified price at a certain time. In other words, it provides insurance against the asset losing value.
The Greenspan Put has come into play in recent weeks, as stock markets have endured massive volatility in the wake of China’s devaluation of its currency. The market turbulence came just as investors had begun to expect a rate increase from the Fed in September, given the overall improvement of the economy and jobs market over the past year.
The idea that the Fed is acting on behalf of banks and investors is one that its members are keen to avoid, given the politically charged atmosphere.
Hard feelings over the bailouts and seven subsequent years of extraordinary fiscal measures have manifested themselves at the monetary policy conference hosted by the Kansas City Fed in Jackson Hole, Wyo. Lockhart appeared on Bloomberg TV from the conference, while conservatives criticized the Fed’s attempts to ease money at a counter-conference hosted by the nonprofit American Principles Project nearby. Meanwhile, the liberal Fed Up group also organized in the resort town to protest any move to raise interest rates without significant wage gains for workers.
Several Fed members sought Friday to reassure the public that while financial market movements can influence their view of the health of the economy, the decision to raise rates or not will be driven by their assessment of inflation and employment, not day-to-day stock market fluctuations.
“The Fed is a credible institution,” said Loretta Mester, the president of the Cleveland Fed, in a separate interview. “We want to set our policy based on what the economic data is telling us to do. I think we’re consistent with that.”
Mester, who is not a voting member of the monetary policy committee this year, said that she was “reasonably confident” that the Fed was on track to hit its inflation and unemployment goals, implying that she would favor raising rates.
The most outspoken opponent of raising rates, Minneapolis Fed President Narayana Kocherlakota, said that inflation was still too low to act. He nevertheless sounded similar notes about the Fed’s “credibility” resting on it being focused on its goals. “I think that we should be telling a coherent story that we’re not about what happened the last 10 days on Wall Street,” Kocherlakota said on Bloomberg. “We’re trying to shape inflation and employment in a year to two years.”
