The stock market as monetary policy junkie: Quantifying the Fed’s impact on the S&P 500
One of the stated goals of the policies that the Fed has been pursuing since the Global Financial Crisis is to raise asset prices.
In this short White Paper GMO shows that this has been standard operating procedure for the Fed since Greenspan’s tenure began. However, the transmission mechanism doesn’t appear to be lower rates, lowering the discount rate. Rather, it seems to come from the influence that the FOMC announcements have on market sentiment or “animal spirits.”
They find find that Federal Reserve influence on the stock market has become particularly pronounced since the onset of its unconventional policies.
They construct an alternative valuation measure (the Monetary Policy-Adjusted CAPE) that modifies Robert Shiller’s Cyclically-Adjusted P/E ratio (CAPE) in order to gauge the impact the Federal Reserve policies have been having on the S&P500.
Read the full White Paper here.
