`Greenspan Put' Fading, Federal Reserve Loses Market Clout, UniCredit Says

Investors should not live in hope that fresh Federal Reserve stimulus efforts will underpin stock prices because the U.S. central bank has lost the clout to offset a slowdown, according to UniCredit SpA.

“The scope of U.S. monetary policy to successfully counter an economic downswing has narrowed considerably,” Equity Strategist Tammo Greetfeld and Chief U.S. Economist Harm Bandholz wrote in a report dated yesterday. “A more pessimistic assessment of the ability of the U.S. central bank going forward to successfully counter-steer in the event of economic downswings or crises will probably have far-reaching ramifications for the behavior of equity investors.”

Former Fed Chairman Alan Greenspan’s practice of lowering interest rates to prop up markets became known as the “Greenspan put” after the derivatives contracts that give the right to sell a security at a set price, insuring against a drop below that level. The central bank cut rates in 1995 after Mexico devalued the peso as well as following Russia’s debt default and the collapse of the hedge fund Long-Term Capital Management LP in 1998.

The Standard & Poor’s 500 Index has fallen 4.8 percent since Aug. 10 even as the Fed pledged to maintain its holdings of securities to stop money from draining out of the financial system. Increasing skepticism among investors about the ability of the Fed to kick-start the economy “would be tantamount to a paradigm shift from the ‘Greenspan put,’” Munich-based Greetfeld and New York-based Bandholz wrote.

$2.05 Trillion Floor

The Fed on Aug. 10 set a floor on its holdings at the current $2.05 trillion level, aiming to stop any contraction in the balance sheet from pushing up borrowing costs during a slowdown in economic growth. Unlike past occasions, the Fed may prove fruitless in bolstering markets, UniCredit wrote.

“In light of already low capital market rates and unresolved structural problems, we believe namely that doubts exist concerning the efficacy of an even more expansive monetary policy,” the report said. “First, the impact of further quantitative easing on capital market rates is likely to be limited. Second, the transmission channels of lower interest rates to the real economies are clogged.”

U.S. and European equity markets are likely to move “sideways” in the second half as a “best-case scenario,” Greetfeld wrote.

To contact the reporter on this story: Alexis Xydias in London at axydias@bloomberg.net.

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