Free markets to Fed markets: How modern monetary policy impacts equity markets. Flashcards
What did the author investigate regarding the relationship between the stock market and the Federal Reserve’s actions?
The author investigated the correlation between stock returns and the changes in the Federal Reserve’s balance sheet, exploring both lagged and lead correlations.
What were the two relationships identified between stock returns and the Federal Reserve’s balance sheet changes?
Negative lagged correlations up to 4 weeks before indicate that negative returns in the stock market prompt the Federal Reserve to buy assets, leading to positive stock returns up to 4 weeks after.
How does a negative shock in stock returns impact the Federal Reserve’s balance sheet expenditure?
A negative shock in stock returns prompts the Federal Reserve to increase its balance sheet expenditure, reaching its peak in 15 weeks.
What are the three paths through which the Federal Reserve’s balance sheet expansion increases stock prices?
The paths include lower long-term interest rates, the expectation of a better future economy, and direct purchase of specific assets, causing investors to buy other assets.
How do different sectors respond to the Federal Reserve’s quantitative easing?
Cyclical sectors, such as consumer, high-tech, and energy, show a greater response to the Federal Reserve’s actions compared to non-cyclical sectors like retail, utilities, and telecommunications.
