The Impact of Large-Scale Asset Purchases on the S&P 500 Index, Long-Term Interest Rates and Unemployment

Abstract

After the bankruptcy of Lehman Brothers in September of 2008 and the financial panic that ensued, the Federal Reserve moved rapidly to reduce the federal funds rate to .25%. It was quickly judged that additional measures were needed to stabilize the U.S. economy. Beginning in December 2008, the Federal Reserve Bank initiated three rounds of unconventional monetary policies known as Quantitative Easing. These policies were intended to reduce long-term interest rates when the short term federal funds rates had reached the zero lower bound and could not become negative. It was argued that the lowering of longer-term interest rates would help the stock market and thus the wealth of consumers. This paper carefully investigates three hypotheses: QE impacting long-term interest rates, QE impacting the stock market and QE impacting unemployment using a Markov regime switching methodology. We conclude that quantitative easing has contributed significantly to increases in the stock market but less significantly to long-term interest rate and unemployment.

Keywords: Quantitative Easing, Stock Market, S&P 500 Index, 10 Year Notes, Unemployment

JEL Classification: C10; C51; C58; E52; E58