The “presidential put”

Through various U.S. administrations, one overall policythrust has remained constant — a decided pro-growth stance. Many market participants are familiar with what is referred to as the “Greenspan put.” This is the recognition by Chairman Greenspan that, with over half of American families owning equities directly or indirectly, the health of the stock market is vital from a systemic point of view. The Federal Reserve, under Greenspan’s stewardship, has repeatedly demonstrated its willingness to offset the economic impact of falling equity prices by dramatically lowering interest rates.

There is now talk of a “presidential put” that similarly implies the U.S. president will approve the release of strategic petroleum reserves in the event of a supply-side shock that risks a run up in oil prices that in turn threatens price stability and economic recession. As a presidential candidate, George W. Bush was critical of the Clinton Administration’s decision to tap the SPR, but now following Hurricane Katrina, the Bush Administration has done the same thing.

Whenever a significant threat to oil inventories arises because of an unforeseen crisis, the market expects the U.S. government to release SPR to mitigate impact on oil prices, gas prices and, ultimately, inflation and growth. Those expectations are quite reasonable, as a U.S. president will have little choice if the political and economic consequences of not doing so are unacceptably high.