Greenspan puts are now Fed calls, and a likely collar

 

We have gone through decades of what was originally called the "Greenspan put". The market perceived that the Fed would step-in and arrest any major market decline to maintain financial stability and stop any potential financial crisis from spilling over to the real economy. The finance channel was viewed as a key area that the Fed could control as the lender of last resort. The Fed accepted a rising stock market as a channel for growth.

However, we may now be in a new era of the "Powell call" which will cap any gains in the stock market. The Fed's key worry is that a hawkish fight against inflation will lead to a hard landing. The key signal for a hard landing will be negative signals from the stock market. If the stock market crashes, the financial stress will lead to the hard landing the Fed would like to avoid. If the market declines slowly or the market rallies, the Fed has a signal that it can raise rates higher and faster. An up-market move will give the Fed the latitude or flexibility to be more hawkish which will cap any equity gains. Hence, the Powell call is born. 

We could go further and say there is a Powell collar. If there is a financial crisis, the Fed will protect the market, but the strike is much lower than 20%. The calls are close to being at the money. If the market stays flat for the rest of the year, the Fed would be comfortable with a continued policy of raising rates.