Bill Poole: The Fed "Put" Exists

Provocative speech by St. Louis Fed commissioner Bill Poole at the Cato Institute today. Among other things, he unapologetically confirms that  a “Fed put” — i.e., a predictable bailout to financial markets — exists. Here is an excerpt:

Did the Fed “bail out” the markets with its policy adjustments starting in August of this year? Have we observed an example of what some observers have come to call the “Fed put,” typically named after the chairman in office, such as the “Greenspan put” or the “Bernanke put”? Why has no one, at least not recently to my knowledge, argued that a more expansionary Fed policy in 1930-32 would have “bailed out” the stock market at that time and, by implication, have been unwise?

I can state my conclusion compactly: There is a sense in which a Fed put does exist. However, those who believe that the Fed put reflects unwise monetary policy misunderstand the responsibilities of a central bank. The basic argument is very simple: A monetary policy that stabilizes the price level and the real economy cannot create moral hazard because there is no hazard, moral or otherwise. Nor does monetary policy action designed to prevent a financial upset from cascading into financial crisis create moral hazard. Finally, the notion that the Fed responds to stock market declines per se, independent of the relationship of such declines to achievement of the Fed’s dual mandate in the Federal Reserve Act, is not supported by evidence from decades of monetary history.

According to the wires, Poole apparently added some rate-cut color after the speech, saying that a strong job report could change the markets’ view on rates. That will keep people hopping next week around employment data.

Turning to his speech again, I take particular issue with the following statement toward the end:

Macroeconomic stabilization does not raise moral hazard issues because a stable economy provides no guarantee that individual firms and households will be protected from failure.

I cordially disagree. The trouble is, as has been demonstrated many times, some financial services companies — LTCM, major banks, etc. — have been deemed too big to fail in the past, and will likely be again in the future. So while, in general, individual firms and households cannot expect to be protected from failure — thumbtack manufacturers don’t get bailed out — that is not the same as saying that there are companies in certain sectors, financial services in particular, that do not predictably end up being collateral non-damage from the Fed put.


  1. Assuming acceptance of the concept that some companies and institutions are too big to fail gracefully, another method of dealing with moral hazard.
    I suggest that the entire senior management of a company plus the board are required to resign and forfeit all bonus and pay. Admittedly, this does not deal a dose of pain to the investors. So in that case the share price could be frozen and dividends provided to either the government or some philianthropic trust for a period of years say 5. During that time the investors can’t unload their shares, realise capital gains nor get dividends. Something of a punishment.
    Of course there is a slight problem with working out which companies to so punish. But that is a minor issue I am sure :)

  2. I can understand Poole’s point… sure, the Fed might not allow Citi or BofA to fail, but it can’t create moral hazard because it can’t really encourage people to become a Citi or a BofA.
    It’s unfair, it might anger some people, but that’s different than saying it creates moral hazard in the economic sense.

  3. John Bleck says:

    Forget about moral hazard, what about cognitive hazard? In cutting rates and doing whatever possible to stimulate the expansion of credit, does the Fed distort the signals from the market about the most profitable employment of resources?