he recent gut-wrenching drop in asset prices began on the first day of the job for new Federal Reserve Chairman Jerome Powell.
How is Mr. Powell likely to react to a suddenly sick-looking market? Will he step in forcefully to reassure investors that there’s a “Powell put” in place as a backstop?
To address these questions, former analyst at the Federal Reserve Bank of Dallas, Danielle DiMartino Booth, returns to the podcast this week. In her opinion, having studied Powell’s previous statements, she thinks those expecting him to continue the market support his predecessors provided will likely be quite disappointed.
Powell appears to be no large fan of continued quantitative easing, and has long been on the record as concerned about the eventual pain its unwind will cause. He very well may resist riding to the market’s rescue at this time, allowing natural market forces to finally have their way:
Look, this is a message that market participants do not want to hear: It is not the Federal Reserves job to put a floor under risky asset prices.
Compare and contrast Jerome Powell’s silence in the wake of the flash crash on his first day at work to Alan Greenspan — who got on an airplane the day after the Black Monday crash of 1987, canceling an appearance he was to have made, and reassuring the markets with a statement on Tuesday morning that the Federal Reserve was standing by and ready and willing and available to satisfy any kind of disruption in the banking and financial systems. That was the day — October 20, 1987 — that the Greenspan put was born.
My issue with the mainstream media these past few weeks is that they have been insistent on the fact that there is going to be a Powell put to follow the Greenspan, then Bernanke, and then Yellen put. I’ve been pushing back against that conventional wisdom, mainly because of A) the release of the 2012 FOMC transcripts when we finally got to hear words coming out of Powell’s mouth which showed that he was no pushover and B) the fact that he worked for a $1 salary to educate the Congress on the perils of the Untied States defaulting on its debt.
Powell himself has stated that was concerned that quantitative easing would end up being habit-forming for the markets.
So I read his silence these last few days as prudent and cleaving to the original intention of the Federal Reserve being lender of last resort; not babysitter to the stock market.
Click the play button below to listen to Chris’ interview with Danielle DiMartino Booth (40m:10s).