From Free Markets to Fed Markets: How Unconventional Monetary Policy Impacts Equity Markets
32 Pages Posted: 8 Jun 2020 Last revised: 13 Oct 2020
Date Written: September 1, 2020
In response to the COVID-19 pandemic, the US Federal Reserve almost doubled its balance sheet by adding $3 trillion of assets (13% of GDP) in the space of three months, constituting the most aggressive unconventional monetary policy on record. We show that these actions had a substantial effect on stock markets, accounting for one-third of the rebound in markets since March 2020 (increasing returns by 10-15%) and contributing to the apparent disconnect between stock prices and the economy. Using dynamic time-series models, we characterize the strong bi-directional symbiotic relation between the Fed’s balance sheet and stock markets.
Keywords: stock markets, monetary policy, quantitative easing, liquidity, COVID-19
JEL Classification: E58, E44, E52, G12, G14, C54
Suggested Citation: Suggested Citation