What is the Fed ‘Put’?

Have you ever heard of the expression 'gravy train'? It's the idea that the Fed will always come to the rescue.
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Giles Coghlan
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Just had a question from Carlos asking, “What is the Fed put?”

Now that’s a great question, Carlos. You’d often see that in analyst reports.

We’ll refer to the Fed put, now put options are most commonly used in the stock market to protect against a fall in the price of a stock below a specified price, so their way of insuring against losses in the stock market.

So the idea of the Fed put is essentially the belief that the Federal Reserve will keep on lowering interest rates, stepping in to help the market in times of need. Originally, the term put came from the Greenspan put, a time when Allen Greenspan was the Chair of the Federal Reserve, and he was lowering interest rates and it was known as the Greenspan put.

At the moment, we have the Powell put, which is the belief that Jerome Powell will do whatever it takes to keep on helping the stock markets. So whenever you hear the term Powell put, that’s what it’s referring to.

It’s also closely tied in with the idea of moral hazard, that people are being incentivized to increase their risk because they won’t bear the full cost of that risk. So the fact that the Federal Reserve is always there to bail out the markets to back up investors, that’s known as the put.

I hope that helps, Carlos.

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