How has the Federal Reserve System been affecting the S&P 500’ performance?

Abstract

The period of over 13 thousand daily observations of S&P 500 stock price index and changes in the official Federal fund rates, from 1971 to 2022, resulted in the division of the period into subcategories of the official 454 FOMC meetings, the two-week before the FOMC meetings and one-week afterward, and the outside of the sample period. Furthermore, the whole period was divided into non-transparent periods 1971-1994 and the Fed’ public-open trans- parent period afterwards. Additionally, every trading day was run via particular models of monetary shocks to iden- tify the anticipated and unanticipated part. The results of the daily returns of the S&P 500 stock index over different sub-periods were additionally supported by periods of economic boom and seven crises over time. The analysis reveals that the S&P 500 index generally yielded superior returns around the FOMC meetings, espe- cially if any FFR changed. The study further distinguishes the market's response to policy changes outside the offi- cial FOMC dates, highlighting the positive impact of expansionary monetary policy on average stock gains, and the specific response to restrictive policy measures during economic downturns. The transition from a non-transparent to a transparent period has significantly influenced stock return volatility and trading volumes. This research con- tributes to a deeper understanding of how the FOMC decisions impact equity markets and underscores the evolving nature of this relationship amidst increased policy transparency.