Impact of Contractionary Monetary Policy on the S&P 500

Abstract

This thesis investigates the effects of an increase in the Federal Funds rate on the S&P 500 index from 2003 to 2023. Utilizing a Structural Vector Autoregressive (SVAR) model, we analyzed the impact of monetary policy on stock prices, incorporating variables such as consumer prices, commodity prices, and industrial production. Our findings show a negative correlation between the Federal Funds rate and the S&P 500, with an unexpected 1% increase in the interest rate leading to an immediate 0.58% drop in stock prices. These results suggest that the influence of the Federal Funds rate on American stock prices has diminished over time. This study contributes to the understanding of monetary policy's evolving impact on financial markets, providing valuable insights for investors and policymakers.