The paper tackles the question of whether and how the Federal Reserve’s monetary policy actions f... more The paper tackles the question of whether and how the Federal Reserve’s monetary policy actions following the crisis affected financial markets focusing on the S&P 500 stock market index in the United States.
It starts with a historical overview of the Fed to get an evolutionary perspective of central banking in the U.S. with reasons for its existence, policy responses to crises, and ideological changes along the way. This part is included because history provides us with a dynamic framework where we see how and why central banking became what it is today. Seeing the precedents for triumph and adverse reaction of monetary policy throughout the century and the changes they brought about propels us to think critically about it. We see that the question of what the goal of central banking or the toolkit they use is or should be have been and still is debated. Assessing what is “natural” or “normal” with regard to policy actions and their effects as opposed to “induced” or “excessive” still remains a major challenge. In this first part, I review the Fed’s policy evolution organized around the Great Depression, the Great Inflation and the Great Recession; the three major economic events that defined macro policies since its founding in 1913.
The second part looks at the Fed’s current policy framework including its “dual mandate”, the pre- and post-crisis toolkit and an outlook for the near future with policy normalization and zero lower bound limitation in a possible economic downturn.
The third chapter looks at the stock market and the determinants of stock market prices independently from monetary policy. The determinants are broken down into two groups. One affects corporate earnings which is a more objective measure, and the other group relates to the more subjective valuation level. In the corporate earnings section, I introduce how forward earnings estimates are generally used in the industry and how these estimations and market prices following them get complicated by business cycles. Business cycles seem to have major impacts on financial markets, and also connect them to central banking. I review some methods used in the financial sector to assess where the economy in a business cycle framework is and where it is headed. I also survey what the most notable economic schools’ focus was when addressing the problem. Private demand, money supply, and debt-creation are the three critical elements in cycle theories; but Edward Yardeni puts the emphasis on corporate profits which approach seems particularly reasonable from a stock market perspective. The second section in this chapter looks at methods used to assess valuation levels in the stock market. The first is the Fed Model which compares the forward earnings yield to the ten-year Treasury note yield. The second is the CAPE ratio which is a cyclically adjusted price-earnings ratio using the inflation-adjusted S&P index and the ten-year average of real earnings to assess valuation levels relative to historical measures. Since the stock market valuation level is first and foremost assessed in relation to Treasury bond yields, the question of what drives long-term yields is also addressed. Lastly, I look at the implied equity risk premium, which is a forward-looking estimated measure of market risk regarding stocks.
The fourth chapter connects monetary policy with the stock market through the monetary transmission mechanism and looks at quantitative measures to assess the impact of the Fed’s actions first on bond yields, then on the stock market. The last section is an international outlook. The thesis focuses narrowly on U.S. monetary policies and stock market and the cumulative effects of all central banks pursuing expansionary policies on global markets are not addressed in depth. This is a logical next step without which the question of how crisis responses affected financial markets cannot be fully answered.
The paper tackles the question of whether and how the Federal Reserve’s monetary policy actions f... more The paper tackles the question of whether and how the Federal Reserve’s monetary policy actions following the crisis affected financial markets focusing on the S&P 500 stock market index in the United States.
It starts with a historical overview of the Fed to get an evolutionary perspective of central banking in the U.S. with reasons for its existence, policy responses to crises, and ideological changes along the way. This part is included because history provides us with a dynamic framework where we see how and why central banking became what it is today. Seeing the precedents for triumph and adverse reaction of monetary policy throughout the century and the changes they brought about propels us to think critically about it. We see that the question of what the goal of central banking or the toolkit they use is or should be have been and still is debated. Assessing what is “natural” or “normal” with regard to policy actions and their effects as opposed to “induced” or “excessive” still remains a major challenge. In this first part, I review the Fed’s policy evolution organized around the Great Depression, the Great Inflation and the Great Recession; the three major economic events that defined macro policies since its founding in 1913.
The second part looks at the Fed’s current policy framework including its “dual mandate”, the pre- and post-crisis toolkit and an outlook for the near future with policy normalization and zero lower bound limitation in a possible economic downturn.
The third chapter looks at the stock market and the determinants of stock market prices independently from monetary policy. The determinants are broken down into two groups. One affects corporate earnings which is a more objective measure, and the other group relates to the more subjective valuation level. In the corporate earnings section, I introduce how forward earnings estimates are generally used in the industry and how these estimations and market prices following them get complicated by business cycles. Business cycles seem to have major impacts on financial markets, and also connect them to central banking. I review some methods used in the financial sector to assess where the economy in a business cycle framework is and where it is headed. I also survey what the most notable economic schools’ focus was when addressing the problem. Private demand, money supply, and debt-creation are the three critical elements in cycle theories; but Edward Yardeni puts the emphasis on corporate profits which approach seems particularly reasonable from a stock market perspective. The second section in this chapter looks at methods used to assess valuation levels in the stock market. The first is the Fed Model which compares the forward earnings yield to the ten-year Treasury note yield. The second is the CAPE ratio which is a cyclically adjusted price-earnings ratio using the inflation-adjusted S&P index and the ten-year average of real earnings to assess valuation levels relative to historical measures. Since the stock market valuation level is first and foremost assessed in relation to Treasury bond yields, the question of what drives long-term yields is also addressed. Lastly, I look at the implied equity risk premium, which is a forward-looking estimated measure of market risk regarding stocks.
The fourth chapter connects monetary policy with the stock market through the monetary transmission mechanism and looks at quantitative measures to assess the impact of the Fed’s actions first on bond yields, then on the stock market. The last section is an international outlook. The thesis focuses narrowly on U.S. monetary policies and stock market and the cumulative effects of all central banks pursuing expansionary policies on global markets are not addressed in depth. This is a logical next step without which the question of how crisis responses affected financial markets cannot be fully answered.
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Papers by Gergo Keri
It starts with a historical overview of the Fed to get an evolutionary perspective of central banking in the U.S. with reasons for its existence, policy responses to crises, and ideological changes along the way. This part is included because history provides us with a dynamic framework where we see how and why central banking became what it is today. Seeing the precedents for triumph and adverse reaction of monetary policy throughout the century and the changes they brought about propels us to think critically about it. We see that the question of what the goal of central banking or the toolkit they use is or should be have been and still is debated. Assessing what is “natural” or “normal” with regard to policy actions and their effects as opposed to “induced” or “excessive” still remains a major challenge. In this first part, I review the Fed’s policy evolution organized around the Great Depression, the Great Inflation and the Great Recession; the three major economic events that defined macro policies since its founding in 1913.
The second part looks at the Fed’s current policy framework including its “dual mandate”, the pre- and post-crisis toolkit and an outlook for the near future with policy normalization and zero lower bound limitation in a possible economic downturn.
The third chapter looks at the stock market and the determinants of stock market prices independently from monetary policy. The determinants are broken down into two groups. One affects corporate earnings which is a more objective measure, and the other group relates to the more subjective valuation level. In the corporate earnings section, I introduce how forward earnings estimates are generally used in the industry and how these estimations and market prices following them get complicated by business cycles. Business cycles seem to have major impacts on financial markets, and also connect them to central banking. I review some methods used in the financial sector to assess where the economy in a business cycle framework is and where it is headed. I also survey what the most notable economic schools’ focus was when addressing the problem. Private demand, money supply, and debt-creation are the three critical elements in cycle theories; but Edward Yardeni puts the emphasis on corporate profits which approach seems particularly reasonable from a stock market perspective. The second section in this chapter looks at methods used to assess valuation levels in the stock market. The first is the Fed Model which compares the forward earnings yield to the ten-year Treasury note yield. The second is the CAPE ratio which is a cyclically adjusted price-earnings ratio using the inflation-adjusted S&P index and the ten-year average of real earnings to assess valuation levels relative to historical measures. Since the stock market valuation level is first and foremost assessed in relation to Treasury bond yields, the question of what drives long-term yields is also addressed. Lastly, I look at the implied equity risk premium, which is a forward-looking estimated measure of market risk regarding stocks.
The fourth chapter connects monetary policy with the stock market through the monetary transmission mechanism and looks at quantitative measures to assess the impact of the Fed’s actions first on bond yields, then on the stock market. The last section is an international outlook. The thesis focuses narrowly on U.S. monetary policies and stock market and the cumulative effects of all central banks pursuing expansionary policies on global markets are not addressed in depth. This is a logical next step without which the question of how crisis responses affected financial markets cannot be fully answered.
It starts with a historical overview of the Fed to get an evolutionary perspective of central banking in the U.S. with reasons for its existence, policy responses to crises, and ideological changes along the way. This part is included because history provides us with a dynamic framework where we see how and why central banking became what it is today. Seeing the precedents for triumph and adverse reaction of monetary policy throughout the century and the changes they brought about propels us to think critically about it. We see that the question of what the goal of central banking or the toolkit they use is or should be have been and still is debated. Assessing what is “natural” or “normal” with regard to policy actions and their effects as opposed to “induced” or “excessive” still remains a major challenge. In this first part, I review the Fed’s policy evolution organized around the Great Depression, the Great Inflation and the Great Recession; the three major economic events that defined macro policies since its founding in 1913.
The second part looks at the Fed’s current policy framework including its “dual mandate”, the pre- and post-crisis toolkit and an outlook for the near future with policy normalization and zero lower bound limitation in a possible economic downturn.
The third chapter looks at the stock market and the determinants of stock market prices independently from monetary policy. The determinants are broken down into two groups. One affects corporate earnings which is a more objective measure, and the other group relates to the more subjective valuation level. In the corporate earnings section, I introduce how forward earnings estimates are generally used in the industry and how these estimations and market prices following them get complicated by business cycles. Business cycles seem to have major impacts on financial markets, and also connect them to central banking. I review some methods used in the financial sector to assess where the economy in a business cycle framework is and where it is headed. I also survey what the most notable economic schools’ focus was when addressing the problem. Private demand, money supply, and debt-creation are the three critical elements in cycle theories; but Edward Yardeni puts the emphasis on corporate profits which approach seems particularly reasonable from a stock market perspective. The second section in this chapter looks at methods used to assess valuation levels in the stock market. The first is the Fed Model which compares the forward earnings yield to the ten-year Treasury note yield. The second is the CAPE ratio which is a cyclically adjusted price-earnings ratio using the inflation-adjusted S&P index and the ten-year average of real earnings to assess valuation levels relative to historical measures. Since the stock market valuation level is first and foremost assessed in relation to Treasury bond yields, the question of what drives long-term yields is also addressed. Lastly, I look at the implied equity risk premium, which is a forward-looking estimated measure of market risk regarding stocks.
The fourth chapter connects monetary policy with the stock market through the monetary transmission mechanism and looks at quantitative measures to assess the impact of the Fed’s actions first on bond yields, then on the stock market. The last section is an international outlook. The thesis focuses narrowly on U.S. monetary policies and stock market and the cumulative effects of all central banks pursuing expansionary policies on global markets are not addressed in depth. This is a logical next step without which the question of how crisis responses affected financial markets cannot be fully answered.