Yellen Leaves Greenspan ‘Put' Behind as She Charts Rate Increase

Janet Yellen is leaving the Greenspan “put” behind as she charts the first interest-rate increase since 2006 amid growing financial-market volatility.

The Federal Reserve chair has signaled she wants to place the economic outlook at the center of policy making, while looking past short-term market fluctuations. To succeed, she must wean investors from the notion, which gained currency under predecessor Alan Greenspan, that the Fed will bail them out if their bets go bad -- just as a put option protects against a drop in stock prices.

...U.S. central bankers are counting on supervisory tools, such as their current stepped-up focus on lending standards in the high-yield loan market, and higher levels of bank capital and liquidity to help make the financial system more resilient to shocks.

The so-called Tier 1 capital ratio, a core measure of a bank’s strength comparing capital to risk-weighted assets, more than doubled to 11.6 percent at the end of 2013 for the 30 largest banks compared with the first quarter of 2009, according to the Fed’s most recent stress-test report issued last March.

“They feel they have taken steps so they don’t have to use monetary policy to stabilize the system,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey.