Wash put repeats Greenspan's 19-year-old myth

The market's belief in a "Wash put" for AI stocks rests on a misreading of Greenspan-era history — the Fed never guaranteed downside protection.

Investors betting on a "Wash put" to backstop AI stocks are repeating a fantasy — the Greenspan put was never real, and Kevin Wash's rule-based approach makes it even less likely.

"Greenspan-era monetary policy was highly mechanical, closely tracking the Taylor Rule," researchers at the Richmond Federal Reserve found. "Rate cuts were responses to economic data, not a deliberate backstop for equities."

The strongest evidence against the Greenspan put myth came in 2001: the Fed began cutting rates as the dot-com bubble burst, yet the Nasdaq Composite continued falling for nearly two more years, losing more than 70 percent of its value from its peak. Greenspan himself warned of "irrational exuberance" in December 1996 — three years before the market topped out, illustrating that even a Fed chair cannot reliably identify or time asset bubbles in real time.

For investors piling into AI stocks at elevated valuations, the stakes are clear. If the Fed under Wash refuses to intervene in asset prices — as his stated preference for rule-based policy suggests — a correction in AI equities could be deeper and longer than those expecting a "Wash put" anticipate. The next Fed meeting under Wash's leadership in March will be the first real test of this doctrine.

The Greenspan Put That Never Was

The myth of the Greenspan put took shape over 19 years, from August 1987 to January 2006. During that period, the Fed cut rates after the 1987 stock market crash, the 1998 Long-Term Capital Management collapse and Russian debt default, and the 2000 dot-com bust. Each intervention reinforced the belief that the Fed provided an implicit floor under equity prices.

But Richmond Fed research shows these moves were predictable responses to economic conditions, not discretionary rescues. The Taylor Rule — which prescribes rate changes based on inflation and output gaps — explained Greenspan-era policy with remarkable accuracy. The Fed's rate cuts were a byproduct of economic stabilization, not a put option for stock holders.

The last time the Fed used language suggesting concern about financial conditions was in 2019, when it cut rates three times after a market selloff. That precedent, however, came during a different economic regime — inflation was below target, not above it as it was through much of the post-pandemic period.

Wash's Rule-Based Doctrine Clashes With Market Hopes

Kevin Wash has signaled a sharp departure from the Greenspan-era approach. He favors a more disciplined, rules-based framework that reduces the Fed's discretion in responding to market moves. This stance directly contradicts the "Wash put" narrative gaining traction among AI stock bulls.

The current fed funds rate stands at 4.25 to 4.50 percent after the 25-basis-point cut in December 2024, the last move of the current cycle. OIS markets price a 58 percent probability of a hold at the next meeting in March, according to CME FedWatch data. Under a rules-based framework, any future cuts would depend on inflation and employment data, not equity valuations.

For AI stocks, which have driven much of the S&P 500's gains over the past year, the absence of a Fed put introduces a risk that markets have not priced. The Nasdaq 100's concentration in AI-related names means a sector rotation could trigger outsized losses. Investors who assume Wash will ride to the rescue may find themselves repeating the same mistake that dot-com bulls made in 2001 — betting on a safety net that was never there.

This article is for informational purposes only and does not constitute investment advice.