Empirical Evidence of the

Impact of FOMC Monetary

Policy on the U.S. Equity
Market, 1990-2002

Khai Nguyen, California State University, Long

Beach
Jonas Neubauer, California State University, Long
Beach
Objectives

2 Main Areas of Focus:

 Macroeconomic Factors and the Equity

Market

 FOMC Monetary Policy and the Equity Market

 Sample Data 1990-2002 *Indices are used as

proxies for the Equity Market
Overview

Indices used:
 Dow Jones Industrial Average
 S&P 500
 Nasdaq Composite
 Russell 3000
 Value Line
 Philadelphia Gold & Silver Index
Literature Review

 A previous study has shown that changes of

reserves have little impact on stock returns
(Hein and Stewart, 2002)

 There is an existing negative correlation

between expected inflation and stock
returns (Lyng and Zumwalt, 1980)

 A change in the Federal fund rate is followed

by a move in stock market returns in the
opposite direction (Sack, 2002)
Economic Indicators

3 Influential Macroeconomic
Variables

 Capacity Utilization
 Consumer Sentiment
 Depository Reserves
 CPI, PPI, Unemployment
insignificant
 Table 1.1: Summary of
Coefficients
Major Indices
Macroeconom NASDA Russell Value Gold/Silve
DJIA S&P 500
ic Factors Q 3000 Line r

CPI -0.71 -0.78 -1.44 -0.9 0.07 -2.07

PPI -0.57 -0.16 1.49 -0.003 -0.29 0.93

CU -1.95** -1.83** -2.46* -1.83** -1.95** -1.79

CS 0.08 0.09 0.21 0.10 0.19** -0.09

DR -0.30** -0.25** -0.57** -0.26** -0.37** 0.05

UE -0.14 -0.15 -0.16 -0.14 -0.07 0.30

* Significant at 10% level ** Significant at 5%

level
Table 1 Summary

 Capacity Utilization – Significant

negative correlation, inconsistent with
previous studies **(Anomaly explained
by our second study)

 Consumer Sentiment – Significant

positive correlation, consistent with
previous studies

 Depository Reserves – Significant

negative correlation

 Gold/Silver – Acts as a hedge for the

equity market
FOMC Monetary Policy

Previous studies indicate:

 Negative correlation between

movements in the Federal
Reserve Rate and equity returns

 Equity Markets more affected by

rate cuts than rate hikes
 Indices Response to FOMC
Monetary Policy (Table 2)
Major Indices
Macroeconomi NASDA Russell Value Gold/Silve
DJIA S&P 500
c Factors Q 3000 Line r

Rate Hikes -1.58 -0.30 0.95 -0.40 -0.46 -2.07

Rate Cuts -3.47* -4.91** -8.98** -5.06** -6.39** -2.24

* Significant at 10% level ** Significant at 5% level

Twelve-month Major Indices Returns Post

Rate-Cuts Period (Table 3B)
Different S&P Russell Value
DJIA NASDAQ Gold/Silver
Periods 500 3000 Line

1990-2002 7% 4% 16% 6% 1% 7%
1995-1999
24% 21% 70% 20% 4% -6%
Bull Market
200-2002
-11% -18% -34% -17% -19% 28%
Bear Market
Summary

 Precious metals act as a hedge

against the systematic risk of
equity markets

 Lower depository reserves and

higher consumer sentiment are
indicative of increased consumer
spending and are useful in
predicting security returns
 CPI, PPI, and Unemployment
were not as useful
Summary

 Indices response to movements in

the fed rate are negative and
asymmetrical in terms of
significance

 FOMC influence on indices returns

is diminished in bear markets