Risk Management, the Greenspan Put, and the Fed

“Risk-management considerations arising from today’s unusual circumstances strengthen the case for additional accommodation,” ... “It may well be appropriate to insure against adverse shocks that could push the economy into territory where a self-reinforcing downward spiral of economic weakness would be difficult to arrest.”  -Yellen

 Hazards to U.S. growth are “skewed to the downside, reflecting risks posed by developments in Europe and the impending U.S. fiscal cliff.” ... “The costs associated with such downside outcomes are likely to be considerably higher than the costs of realizing upside surprises.”  - Dudley

“Policy makers need to consider not only the most likely future path for the economy but also the distribution of possible outcomes about that path.”... Officials “operating under a risk-management paradigm may be led to undertake actions intended to provide some insurance against the emergence of especially adverse outcomes.”  -Greenspan 

There has been reported a shift in the rhetoric by some Fed officials that there needs to be more stimulus based on the uncertainty that is present in the economy. The added stimulus would be a form of insurance against downside growth risk. This is a policy that was stated by Greenspan and may have been one of the cornerstones of the Greenspan put strategy so often mentioned during the rein of Greenspan.

The alternative policy is the "leave some dry powder" policy which would be to hold off with anymore stimulus until it is absolutely necessary. This choice between activist intervention before a problem hits versus waiting on policy action may be one of the key drivers in investor expectations over the next few months.