A Yellen put?

Share prices around the world have been looking a bit shaky in recent weeks, which is perhaps no surprise after a seven-year bull market. Today has seen markets, at least initially, pull back sharply in response to the appalling events in Paris on Friday. Does all of this have any implications for the Fed's policy decision in December?

In the absence of strong global economic fundamentals, there's little room for doubt that the steady rise in stock prices has been largely driven by the abundant cheap money doled out by the major central banks.  The combination of free money and low yields on fixed income assets (two sides of the same coin, of course) has inevitably driven yield-hungry investors towards riskier asset classes, including equities and real estate. It can be no coincidence that as the Fed has begun to signal its resolve to start raising rates, if not in December then soon after, global equity markets have run out of momentum.

If Alan "Three Bubbles" Greenspan were still at the Fed, there would be every reason to think that the Fed would hold off on a rate hike in December. The Greenspan Fed regularly demonstrated that it saw maintaining confidence in equity markets as a key part of its mandate, along with keeping inflation in check and promoting economic expansion. It happened so many times that equity investors even coined a term for it: the Greenspan put. If your equity investments were about to go sideways, fear not: the Fed would be along to bail you out with a rate cut.

Will Janet Yellen do the same?  Although today's early market selloff is not surprising, it's difficult to make a case that the Paris massacres in and of themselves will have a severe effect on the global economic outlook. The market weakness that was evident before last week may be a different matter, but if the Fed focuses, as it should, primarily on the US domestic economy, then the case for some modest tightening remains unanswerable. Look at it this way: if the Fed can't raise rates when unemployment is at a seven-year low and wage gains are at a seven-year high, just when will it ever be able to raise rates?