Bernanke Put

The “Bernanke put” is a put option named after Ben Bernanke, member of the Board of Governors of the Federal Reserve System from 2002 to 2005 and chairman of the Federal Reserve from 2006 to 2014. Investors believed that the Federal Reserve would protect their investments, as if investors had a put option.  Investment professional John Brynjolfsson told Barron’s in January 2003:
 
“We’ve heard a lot in the past about the ‘Greenspan put’ on the stock market. Now we hear about the [Federal Reserve governor Ben] ‘Bernanke put.’ He reinforced the idea that monitoring corporate-bond spreads and the health of our nation’s corporations was an appropriate part of monetary policy. Around Nov. 15, he made a speech that referenced corporate-bond spreads, even though, historically, monetary policymakers are tight-lipped about what they target. Bernanke talked about the Fed having the ability to buy assets other than Treasury securities, to inject money into the system and create stability in the form of a bid for non-Treasury product.”
 
The term “Bernanke put” became popular in October 2005, after Bernanke’s nomination for Federal Reserve chairman.
 
“Greenspan put”/“Fed put” (after Federal Reserve Chairman Alan Greenspan, from 2000), “Yellen call” (after Federal Reserve Chairwomen Janet Yellen, from 2014) and “Keynesian put” (after Keynesian economics, from 2016) are similar terms.
     
 
Wikipedia: Greenspan put
The “Greenspan put” refers to the monetary policy approach that Alan Greenspan, the former Chairman of the United States Federal Reserve Board, and other Fed members exercised from late 1987 to 2000.
 
Overview
The term “put” refers to a put option, a contractual obligation giving its holder the right to sell an asset at a particular price to a counterparty. The put option can be exercised if asset prices decline below that put price, protecting the holder from further losses. During Greenspan’s chairmanship, when a crisis arose and the stock market fell more than about 20%, the Fed would lower the Fed Funds rate, often resulting in a negative real yield. In essence, the Fed added monetary liquidity and encouraged risk-taking in the financial markets to avert further deterioration.
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Bernanke Put
In 2007 and early 2008, the financial press had begun discussing the Bernanke Put, as new Federal Reserve Board chairman, Ben Bernanke continued the practice of reducing interest rates to fight market falls. The decision by the Fed to lower short-term interest rates to 50 basis points (0.5%) on October 8, 2008, and thereafter a range from 0.00-0.25% rate in December 2008 suggests attempts to create a Bernanke put similar to the Greenspan put. New steps in quantitative easing further illustrate the Fed’s attempt to moderate the business cycle. Recent (post March 2011) declines in measures of velocity and related declines in monetary growth measures suggest there is a limit to market manipulation.
 
9 January 2003, Barron’s, “Ushering in reflation” by Erin E. Arvedlund, pg. L6, col. 4:
(Interview answer by John Brynjolfsson.—ed.)
So yes, risk assets benefit from a reflationary environment. We’ve heard a lot in the past about the “Greenspan put” on the stock market. Now we hear about the [Federal Reserve governor Ben] “Bernanke put.” He reinforced the idea that monitoring corporate-bond spreads and the health of our nation’s corporations was an appropriate part of monetary policy. Around Nov. 15, he made a speech that referenced corporate-bond spreads, even though, historically, monetary policymakers are tight-lipped about what they target. Bernanke talked about the Fed having the ability to buy assets other than Treasury securities, to inject money into the system and create stability in the form of a bid for non-Treasury product.
     
Google Groups: misc.invest.stocks
GM in $10bn offering to close pension fund hole
David
6/23/03
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Yes, I recall. The ‘Greenspan put’. Followed by Bernanke hinting at purchases of long bonds: the ‘Bernanke put’.
 
November 2003, Institutional Investor, “Rethinking the Fed” by Deepak Gopinath, pp. 26-33:
Bernanke’s remarks set the markets abuzz. Traders began loading up on Treasuries, figuring that the Fed was becoming so worried about the deflation threat that is was bound to lower interest rates still further, driving up bond prices. Fed expert Paul McCulley of giant bond fund company Pimco coined the phrase “Bernanke put” to describe this new Fed anti-deflation policy, because it seemed to put a floor on the market.
     
Google Groups: misc.invest.mutual-funds
Bush nominates Bernanke
Neill Massello
10/25/05
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My fear of Bernanke began during the great deflation scare of a few years ago, when he was the most outspoken advocate within the Fed for the “whatever it takes” approach to pumping out money to sustain economic growth. He advocated open market operations to buy long term Treasury and even corporate debt, if necessary, to drive down long-term interest rates. For an approving account of this “Bernanke put” from a four-square Keynesian, read Paul McCulley’s Fed Focus column from December 2002.
 
24 October 2005, Financial Times, “Market Overview” by Dave Shellock, pg. 1:
Tony Crescenzi, chief bond market strategist at Miller Tabak, said that equities might be benefiting from the Bernanke choice partly because it was assumed that the famed “Greenspan put” would be rolled into the “Bernanke put”.
 
“The Greenspan put, of course, is a safety net based on the assumption that Fed Chairman Alan Greenspan stands at the ready to respond to any force that would ultimately threaten the welfare of the stock market,” Mr Crescenzi said.
 
31 October 2005, Barron’s, “Market Watch,” pg. 50, col. 3:
The New Put
Cantor Viewpoint
by Cantor Market Data
135 East 57th Street, New York, N.Y. 10022
Oct. 24: In our opinion, Mr. Bernanke is the perfect person for the Fed post if the U.S. housing market does turn into a massive bubble burst. The “Bernanke Put” for such a deflation of home-asset values is already well-scripted from 2002 and 2003. However, we worry that knowledge of that “Bernanke Put” could introduce a “moral hazard” risk into the U.S. housing market over the next few years prior to the next recession (in 2010, we believe), at which time it would likely be the case for a home-price decline.
 
Thus, the “Bernanke Put” is a dual-edged sword: On the one hand, it is the right medicine should the housing bubble burst, but, knowledge of the existence of that “put” could lead to even further housing inflation over the next few years. Our call remains a 4.50% federal-funds target rate on January 31, a 4.5575% target rate on March 28, and additional risks of 25.0 basis points of rate hikes through year-end 2006-for a year-end 2006 target of 4.8075%, versus the market’s year-end target of 4.52%. We continue to think that, should the Fed hike rates to 4.75% by March 28, the Fed will likely “pause” for a “considerable period” (yes, that phrase might return).
-JOHN HERRMANN
 
Barron’s
Fear Triggers Buying of VIX Calls
Events in Ukraine and Gaza show that volatility can increase on bad news much faster than it can decline on good developments.
By STEVEN M. SEARS
July 19, 2014 4:08 a.m. ET
The “Fed Put” may be destined to become the “Yellen call.”
 
Unfortunately for investors, the call is on the CBOE Volatility Index (VIX), not the stock market. And VIX calls increase in value when the stock market declines.
 
The potential recasting of the famous Fed Put—named in years past for former Federal Reserve chiefs Alan Greenspan and Ben Bernanke, whose policies seemed designed to support the stock market—follows recent statements from Janet Yellen, the central bank’s current chair, that investors are too complacent about risk. This suggests that the days of historically low options volatility, a byproduct of a market grinding higher, are poised to end as the Fed prepares to wrap up its bond-buying program.