The Federal Reserve is about to make available the minutes from its last meeting, the first at which Fed Chairman Jerome Powell raised interest rates.
What many are looking for in those minutes, released at 2 p.m. ET Wednesday, are signs of a Powell "put," meaning the Fed chairman would use a lighter hand on policy levers if markets get too frantic.
Since the Alan Greenspan era, whenever markets were rocked by turbulence, investors imagined the Federal Reserve would have their back and, like a good hedge, act as a put to protect against downside. While investors are comfortable with the new Fed chairman, his dedication to getting interest rates to a more normal level hasn't convinced them that he would be ready to loosen up if markets get agitated.
"The sense I got was his mission is normalization, and I think that's part of the reason for the volatility and investors aren't convinced there's a Powell put, and I'm not convinced there is right now," said Jack Ablin, CIO of Cresset Wealth Advisors.
All through the financial crisis, as Fed Chairman Ben Bernanke used quantitative easing and zero interest rates to rescue the economy, and into the tenure of Janet Yellen, who moved the Fed slowly toward a more normal path, markets understood the Fed would do something if financial conditions got out of hand.
Powell has so far made it clear the Fed will raise interest rates on the road to normalization, but he hasn't assured markets that he will do an about face if markets get agitated. The Fed is also moving forward to systematically reduce the securities on its balance sheet.
"There is a Powell put. It's just much further out of the money, and I think the reason why equities fell is important," said Michael Gapen, chief U.S. economist at Barclays. Gapen said the Fed's response is now not as urgent because the economy and markets are doing better. The decline in risk assets has also been because of trade tensions or worries about more Fed rate hikes, not economic concerns.
"I've used a 15 percent drop as when they start talking about it. If it's viewed by the Fed as part of a risk-off move, or a loss of confidence by the markets on the outlook, that's something they would respond to. If it's the market pricing in a little more Fed hikes, the view is they're not going to respond to it," Gapen said.
Gapen said the Fed in fact could hint in its minutes that it will be more aggressive even with market volatility. "I will be watching the discussion around balance of risks. On one side, you have anti-trade, and on the other side you have a lot of fiscal stimulus. It looks like their forecast is dependent on the idea that the fiscal stimulus is going to win out," he said, adding the Fed could have to adjust its forecast toward more rate hikes.
Ablin said he will be looking in the minutes for discussion on market conditons, volatility in the stock market or increasing uncertainty.
Greenspan started his tenure at the Fed just months before the October 1987 stock market crash. "Any time the economy had the sniffles he just lowered the borrowing costs and encouraged people to expand their credit," said Ablin.
In a recent note, Alan Ruskin, Deutsche Bank macro strategist, said the Fed's "'put' is widely associated with a Greenspan inspired policy buffer against extreme downside equity price action that started in the immediate aftermath of the 1987 stock market crash. Bernanke and Yellen were seen as adopting variants of the Greenspan approach, although they were better at placing extreme equity price movements in the context of financial conditions."
He added: "Jay Powell in his early days as Fed Chair continues to speak about financial conditions, of which equity prices are one important component. To that extent the overall context of the Federal Reserve policy responsiveness to market stress, is likely to have changed only at the margin with the new Fed leadership."