The Effect of Federal Open Market Committee on Major Stock Market Indexes

Abstract

This project examined the impact of changes in the federal funds rate target on equity prices. The project used ordinary least squares regression to consider the effects of those changes along with corporate profits on stock market value. The goal of the project was to confirm the results of other more narrowly defined studies and in doing so show that the causal relationship is even stronger. The data sets were taken from 1990 through 2006, using the adjusted level of corporate profits and federal funds rate targets as explanatory variables and NYSE and NASDAQ composite indices as dependant variables. The results of this project showed that corporate profits were the largest driver of equity prices, as suggested by current research. It also showed that federal funds rate changes have no impact on equity prices in a direct fashion, because federal funds rate is not the rate directly faced by firms in the market. Overall results did confirm the findings of previous research.