Dow Volatility: Will the Fed Dial Back Rate Increases?
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What is the main topic discussed in this episode?
This is Your Money Matters from The Wall Street Journal. Welcome to Your Money Matters. I'm J.R. Whelan 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 Layhart 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?
We've seen it a number of times over the years. No, we definitely saw it. The last time we saw it was in 2016, early 2016.
What is driving the recent volatility on the Dow and Wall Street?
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 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 describe, you know, explain, you know, 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.
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 investors' sentiment and what the Fed actually does, those tend to be two different animals.
Yeah, those could be very different. You know, 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. And then, in fact, they did raise rates three times. So 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.
And 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.
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. This sell-off only got us back down to, at worst, early December. And now we're in January again.
How has the Federal Reserve used a 'Fed put' to calm markets in past crises?
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 companies are going to be worried because they can't raise money as easily. 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've got to think it would have to fall a lot more than this.
All right. We're speaking with Wall Street Journal heard-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 simply, as you put it, to save stock investors from themselves.
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Chapters
4 chapters
1
What is the main topic discussed in this episode?
0:02–0:49
2
What is driving the recent volatility on the Dow and Wall Street?
0:49–3:14
3
How has the Federal Reserve used a 'Fed put' to calm markets in past crises?
3:14–5:15
4
When did the Fed change planned rate hikes in response to market stress?
5:15–6:37
Speakers
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