Fed Interest Rate Policy and Returns on Selected American Stock Indexes

Abstract

This article examines the relationship between the nature of the Fed’s monetary policy and the returns on the Russell 2000 and S&P 500 stock indexes. The research shows that the Fed’s accommodative monetary policy promotes high returns on both of the studied American stock indexes. Returns on the small-cap index are higher than those on the large-cap index in years of the Fed’s accommodative monetary policy. In turn, in years of the Fed’s restrictive monetary policy, it is definitely worth investing in large-cap companies from the S&P 500 index. It is advisable to use the “first cuts” and “first increases” of the Fed’s discount rate to link the Fed’s monetary policy with the stock market situation. An indicator of monetary easing can be created. It is worthwhile to employ a strategy of trading up and down on the two studied stock indexes based on the beginning and end of the Fed’s accommodative and restrictive monetary policy.