In the past, the Federal Reserve had tried to stem steep declines in equity prices by cutting interest rates or by postponing planned rate hikes. Called either the “Fed put” or the “Greenspan put,” after former Fed Chairman Alan Greenspan, investors should not expect such an intervention in the near future, The Wall Street Journal reports. The main reasons are, per the Journal, strength in the economy and stock market valuations that are excessive by many historic measures.
On February 8, the S&P 500 Index (SPX) dropped by 3.75%. Since reaching a record high at the close on January 26, the index has retreated by 10.16%, making this period officially a correction. Despite the recent decline, the S&P 500 is up by 12.48% during the past year, from its close on February 8, 2017.
The Journal cites recent research by academic economists who find that stock market returns are a more powerful predictor of changes in the Fed’s interest rate policy than 38 other economic indicators, including employment, consumer spending and even inflation. Moreover, they indicate that attempts by the Fed to stem stock market declines are more common than actions to rein in stock market gains and deflate speculative bubbles. From their analysis of the minutes of Fed meetings, the authors deduce that falling stock prices may damage the economy, as consumers reduce spending in response to their decreased wealth, and as companies find it more difficult and expensive…