FX168 Financial News (North America) News The Federal Reserve has sent a signal that it will lower interest rates if the economy or financial markets collapse. In the 1980s and 90s, the market was used to expecting the Federal Reserve to step in when financial markets were under pressure, leading to a rise in the stock market. #2024宏观展望 #

“Fed put options” originate from the options market, and investors can hedge their bets on stocks and bonds by purchasing insurance against stocks and bonds. Investors are not required to buy Fed put options, though. It's hidden, and it brings comfort every time the market falls drastically.

When inflation is moderate and growth is in focus, put options performed well, as they did for most of the four decades before the pandemic ended. When inflation becomes an issue and the Federal Reserve aims to balance maintaining the economy with curbing inflation, it doesn't work as well. This is one reason the Federal Reserve is unable to see stock options during the 2022 bear market. The Federal Reserve's goal is to fight inflation, not to boost economic growth.

However, last week's reviews suggest that put options could make a comeback. The market expects the Federal Reserve to keep the federal funds rate unchanged between 5.25% and 5.5%, but Federal Reserve Chairman Jerome Powell said at a press conference that all future monetary policy options will be on the table. The Federal Reserve's official interest rate statement is as follows:

“In evaluating the appropriate position on monetary policy, the Committee will continue to monitor the impact of incoming information on the economic outlook”, which means that if inflation is low enough, the committee is willing to cut interest rates, and “if risks arise, the Commission will be prepared to adjust the monetary policy position as appropriate.”

This is a balanced statement, and it also adapts to the market. The inflation rate has declined from its post-pandemic peak but is still stubbornly above the Federal Reserve's 2% target. Growth is strong but is slowing down. As a result, the Federal Reserve must keep interest rates unchanged for the time being. But it also shows that Powell is prepared to cut spending if economic conditions require it.

Current put options are very different from those used in the deflationary 90s, 2000s, and 2010s. At the time, nothing seemed to drive inflation and economic growth beyond single digits, and the Federal Reserve was more willing to send a strong signal to the market that it was ready to cut interest rates. Now that inflation is a more common part of the economy, Powell's put options may appear less public. Still, a mild form of a Fed put option is better than a no-put option.

Rhys Williams (Rhys Williams), chief investment officer of Wayve Capital Management, said, “This is one of the reasons I had a very constructive attitude about the market in the second half of the year.” “The Federal Reserve does have potential put options if inflation weakens.”

The stock market might not even need a put option from the Federal Reserve, though. The earnings season was strong, and the Atlanta Federal Reserve's GDP Now tool expects the economy to grow 4.2% in the second quarter. Together, they form a powerful blend, said Chris Senyek, chief investment strategist at Wolfe Research (Wolfe Research).

He wrote, “Powell's renewed confidence in the 'Federal Reserve Put Options' last week, and the very steady profit trend in the first quarter earnings season, made us take a constructive attitude about the [market] outlook.”

This reflects the market environment in 2019. The S&P 500 index fell at the end of 2018 after being sold off due to the Federal Reserve's interest rate hike, and entered that year. Subsequently, the Federal Reserve kept interest rates stable in January 2019 and said it would carefully consider inflation and other economic data when making interest rate decisions. The market sees this as a sign that the Federal Reserve will eventually cut interest rates, and the S&P 500 index rose 29%.

This year's results may not be exactly the same as 2019, but with the Federal Reserve cutting interest rates, this should still be a pretty good year.