Dow Volatility: Will the Fed Dial Back Rate Increases?

Summary

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WSJ Your Money Briefing: "Dow Volatility: Will the Fed Dial Back Rate Increases?"

Date: February 8, 2018
Host: JR Whalen
Guest: Justin LeHart, Heard on the Street Columnist, The Wall Street Journal

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Episode Overview

This episode explores the recent volatility in the stock market and whether ongoing fluctuations could push the Federal Reserve to reconsider its pace of interest rate increases. Host JR Whalen is joined by Wall Street Journal columnist Justin LeHart to discuss the concept of the "Fed put," the reasoning behind the Fed’s interventions (or restraint), and why incoming Fed Chairman Jay Powell may take a cautious approach to market turbulence.

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Key Discussion Points & Insights

1. The "Fed Put": Definition and History

• What is the “Fed put”?
  LeHart explains:

  “A put is an options thing that basically gives people insurance on the downside. So the idea is that the Fed is there to give you insurance on the downside.” (01:13)

• The term emerged in the 1990s—then known as the “Greenspan put.”
• Historical interventions: During financial crises, notably in 2016 and the late 1990s, the Fed dialed back planned rate hikes in response to market fragility.

2. Rate Hike Expectations vs. Market Sentiment

• Investors speculate the Fed might be forced to limit rate increases due to recent market volatility.
• LeHart notes the gap between investor sentiment and actual Fed policy decisions:

  “The Fed is really—even the Fed's own projections aren't necessarily going to predict what it's going to do. It's very dependent on the economy.” (02:31)

• The Fed is pragmatic and reactive to broader economic shifts, not just market sentiment.

3. Is the Current Drop Actually a Crisis?

• Recent sell-offs, amounting to about 8%, looked dramatic, but in context were not catastrophic:

  “The market went up so much ... that this sell-off only got us back down to, at the worst, early December. And now we're in January again. That isn't the thing that the Fed is going to worry about.” (03:26)

• The Fed’s intervention typically requires more sustained, severe declines with clear economic spillover.

4. Why the Fed Watches the Stock Market

• The Fed acts only if market drops threaten real economic harm.
• Two main worries:
  • Lower investor confidence reduces spending
  • Companies may struggle to raise new capital
• LeHart sums up:

  “We're not at that point at all now where you'd think that, oh my God, this volatility in the stock market is going to hurt the economy. You got to think it would have to fall a lot more than this.” (03:56)

5. Jay Powell’s Approach as New Fed Chair

• Powell was one of the "three amigos" at the Fed who, since the 2013 "Taper Tantrum," has been cautious about financial market excesses.
• The episode notes that Powell’s background implies he would not reflexively act to cushion market losses.
• On allowing some excess to come out of the markets:

  “Right now we're looking at a stock market that even after the sell off, valuations seem very elevated… all signs of a little excess or richness at least in the market. So he's going to worry a little bit about that. And he might not be too upset to see a little gas being taken out…” (06:05)

• The risks of setting an unhealthy precedent:

  “You’re going to come in and be the person who held the market's hand because of a drop. That sets ... a lousy precedent. That's the type of thing that get people thinking, oh, the Fed's always going to be there for us. This guy's a patsy. That's not really what he wants to be.” (06:29)

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Notable Quotes & Memorable Moments

• On the "Fed put" and its purpose:
  “A put ... gives people insurance on the downside. So the idea is that the Fed is there to give you insurance on the downside.” – Justin LeHart (01:13)

• On investor hopes vs. Fed reality:
  “Even the Fed's own projections aren't necessarily going to predict what it's going to do. It's very dependent on the economy.” – Justin LeHart (02:31)

• On current market conditions:
  “We're not at that point at all now where you'd think that, oh my God, this volatility in the stock market is going to hurt the economy.” – Justin LeHart (03:56)

• On Powell’s potential approach:
  “He might not be too upset to see a little gas being taken out of the market, a little jolt here and there.” – Justin LeHart (06:18)

• On the risk of setting precedent:
  “That sets a ... lousy precedent ... That's not really what he wants to be.” – Justin LeHart (06:29)

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Timestamps for Key Segments

• [01:13] – The history and logic behind the "Fed put"
• [02:31] – Fed projections vs. reality
• [03:26 – 03:56] – Why the recent sell-off isn't alarming to the Fed
• [05:02 – 06:29] – How Jay Powell’s background shapes his likely response to volatility
• [06:29] – Dangers of the Fed appearing too willing to intervene

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Conclusion

This episode provides clear, nuanced insight into how and why the Federal Reserve responds to market turbulence, differentiated from simple market panic. While recent sell-offs grabbed headlines, both Whalen and LeHart agree this is not yet the kind of crisis that would prompt Fed intervention—particularly under the cautious eye of Chair Jay Powell. The discussion sheds light on the complexities of Fed policymaking and investor psychology in volatile times.

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Transcript

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[JR Whalen]

Welcome to your Money Matters. I'm JR Whalen in New York. One contributor to the current volatility and wild swings on Wall street is speculation that the Federal Reserve might raise interest rates more than three times this year, as is expected. But if the volatility continues on Wall street, could the Fed try to stabilize the markets? Wall Street Journal Heard on the street columnist Justin LeHart is here to discuss. So Justin, you mentioned in your column that the Fed put is a real thing. That's where the Fed steps in to try to calm the waters. How often does something like that happen?

[Justin LeHart]

We've seen it a number of times over the years. We definitely saw it. The last time we saw it was in 2016, early 2016, if you remember, there were all these worries about the global financial markets and that there was global fragility and it was going to hamstring the recovery here. And going into 2016, the Fed said, expected that they were going to raise rates four times. They quickly dialed that back, took it down to just one, and the market, of course, recovered on that. But we've seen it before. We saw it certainly during the financial crisis. I guess we'd probably all think that with good reason, most of us. We also saw it in some of the crises in the 1990s, and that was when this notion of the Fed put came about. People called it the Greenspan put. We should just explain. A put is an options thing that basically gives people insurance on the downside. So the idea is that the Fed is there to give you insurance on the downside.

[JR Whalen]

Now, we saw following Monday's sell off that the sentiment among investors was that the Fed might limit rate increases to three times this year. But investor sentiment and what the Fed actually does, those tend to be two different animals.

[Justin LeHart]

Yeah, those could be very different. If we think about last year, the Fed came into last year, they said that they were going to raise rates three times. Nobody believed them then. In fact, they did raise rates three times. The Fed is really even the Fed's own projections aren't necessarily going to predict what it's going to do. It's very dependent on the economy. Right. But we have seen that when things get really hairy in financial markets, they will either step in with a rate cut or they will dial back their expectations for raising rates.

[JR Whalen]

The series of sell offs in early February that we've seen were certainly a jolt. But I guess when you consider the dow was at 26,000, declines amounting to about 8% are not particularly catastrophic or really amount to a crisis.

[Justin LeHart]

Yeah, I think that's the thing that people are skipping out, might be skipping out on here. First thing, the market went up so much, especially in the last month or so, that this sell off only got us back down to, at the worst, early December. And now we're in January again. That isn't the thing that the Fed is going to worry about. And I think what's important to think about is why does the Fed react to the stock market? And there's been some research on it. And one of the things people might say, oh, well, the Fed thinks the stock market is really good at predicting what the economy does. That doesn't seem to be what the Fed is doing. Instead, the Fed worries that a falling stock market can hurt the economy either because investors, people are going to be worried they're not going to spend as much money or because. Or because companies are going to be worried because they can't raise money as easily. Right. We're not at that point at all now where you'd think that, oh my God, this volatility in the stock market is going to hurt the economy. You got to think it would have to fall a lot more than this.

[JR Whalen]

All right. We're speaking with Wall Street Journal Hurt on the street columnist Justin Lehart, and you're listening to your Money Matters from the Wall Street Journal. Welcome back, everybody. So, Justin, as you mentioned in your column, incoming Fed Chairman Jay Powell is unlikely to make a move. And simply, as you put it, to save stock investors from themselves. You said even though there could be a call from investors, he would need to see some real tangible signs that things are going downhill.

[Justin LeHart]

Yeah, I think this is an interesting moment for all this to happen with a new Fed chairman coming in. A couple of things about Jay Powell. First, if you remember, in 2013, there was this thing called the Taper Tantrum. Before the Taper Tantrum, there few people at the Federal Reserve that were worried that investors were taking a lot of untoward risks. One person at the Fed called Them, the three amigos. And one of the three amigos was Jay Powell. He worries about financial markets and he comes from that background. So he seems to put more weight on worrying about kind of financial market excesses. And look, right now we're looking at a stock market that even after the sell off, valuations seem very elevated. Right. And then in other places you have very low bond yields, very low sort of spreads between high yield credit and comparable Treasuries and all that, all signs of a little excess or richness at least in the market. So he's going to worry a little bit about that. And he might not be too upset to see a little gas being taken

[JR Whalen]

out of the market, a little jolt here and there.

[Justin LeHart]

Yeah. Then the other thing is think he is the or he's been at the Fed, but he is the new guy.

[JR Whalen]

Right?

[Justin LeHart]

The new guy. As chairman, the first thing that you or one of the first things that you come in, you're going to come in and be the person who held the market's hand because of a drop. That sets a kind of, I guess I'm going to say lousy precedent. That's the type of thing that get people thinking, oh, the Fed's always going to be there for us. This guy's a patsy. That's not really what he wants to be.

[JR Whalen]

All right. Well, we will see many chapters of this to come that's heard on the Street. Columnist Justin Lehar joining us here in our studio. Justin, thanks for being with us.

[Justin LeHart]

Thanks.

[JR Whalen]

And thank you for listening to your Money Matters. I'm JR Whalen in New York for the Wall Street Journal.

[Small Business Owner]

Access to affordable credit helps me pay my employees, but I don't really need it.

[Retail Industry Representative]

Infliction is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.

[Small Business Owner]

See, banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[Retail Industry Representative]

they need while increasing megastore profits. They deserve it, don't they?

[Electronic Payments Coalition Spokesperson]

Tell Congress, stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.