Impact of Federal Funds Rate on Monthly Stocks Return of United States of America

Sarfaraz Javed,Mohammed Shahfaraz Khan,Uvesh Husain,Baaeth Atallah Aldalaien

doi:10.5539/ijbm.v14n9p105

Abstract

This study examines the impact of federal funds rate on monthly stocks return of the United States of America. The study made use of secondary data from 31st January 1980 to 31st December 2009 gotten from Fred Economic Data and Economic Research Federal Reserve Bank of St. Louis and the Ordinary Least Square Method was applied to perform the analysis using Eviews 9.0. The findings of this study reveal that before the crisis, the rate of interest significantly predicted monthly stock return while during the crisis; the rate of interest did not significantly predict monthly stock return. In addition, the growth rate of industrial production significantly predicted monthly stock return with while FFR did not significantly predict monthly stock return. Likewise, change in FFR significantly predicted monthly stock return while the growth rate of industrial production did not significantly predict monthly stock return.

Highlights

Financial policy activities have an important and powerful influence on the returns of the stock market
Federal Funds Rate (FFR), which is put in place by the Federal Open Market Committee (FOMC) is known as the rate of interest which federal funds are transacted within the depository firms
The present study examines the impact of federal funds rate (FFR) on monthly stocks return in the United States of America

Summary

Introduction

Financial policy activities have an important and powerful influence on the returns of the stock market. Bomfim (2003) and Sarfaraz (2017) indicated that the application of day-to-day data might reduce the accuracy of the influence of the news projected because of further financial data, which could be made available to the public later that same day He stressed that optimistic shock in FFR target rate alteration is likely to reflect a higher impact on the day-to-day instability of S&P500 index compared to pessimistic shock. There is another effect, which is because of alteration in general financial variables alongside the rate of borrowing money from the stock market Such alterations influence the projected cash flow of market members used for predicting the current worth of a company (Bernanke & Kuttner; Ioannids & Kontinikas, 2008; Lobo, 2000; Khan & Javed, 2016). 3) Does Federal funds rate and growth rate of industrial production significantly influence monthly stock return?

Methodology

Estimating

Discussion of Findings

Findings

Implications and Limitation