The “Fed Put” is the widespread believe that the U.S. Federal Reserve can always rescue the economy by decreasing interest rates. The reality is the Federal Reserve has been supporting the stock market since the housing crash between 2008 through quantitative easing.
The Fed Put originated in 1998 when Long-Term Capital Management, founded in 1994 by John W. Meriwether, experienced massive losses following the 1997 Asian financial crisis and 1998 Russian financial crisis, where the company lost $4.6 billion in four months. The Federal Reserve, at the time led by Alan Greenspan, stepped in and funded a bailout that prevented a massive global market crash. Since then, the Federal Reserve has stepped in and lowered interest rates to prop up the stock market during economic crashes.
In the last 12 months, the Federal Reserve has raised interest rates four times to take liquidity out of the market place, essentially reversing the quantitative easing that restarted the markets back during the housing crisis. This signals that the Federal Reserve is no longer in the business of propping up the U.S. stock market. They see the economy as their only focus. All interest rate decisions will be based on how the economy is doing and right now the economy is good. Think of it as a life raft – the Fed is slowly deflating the raft. No longer is the raft keeping us afloat. We need to float on our own.
What does this mean for you?
To put it simply, this means you need to be investing in companies that have good fundamentals, good leadership, high sector influence, and will have a role in changing how we will live in the future. The time of indexing your portfolios may have just come to an end. True stock pickers may be the purveyors of higher returns. Think of it as purpose driven investing.
If you have questions about the Federal Reserve, how its action impact the markets, and what this may mean for you, please reach out to me. Email me at firstname.lastname@example.org.