The Fed and the Market: Evaluating the Federal Reserve's Influence During Economic and Geopolitical Shocks"

The goal of my research for this thesis is to delve further into the connection between the Federal Reserve and the U.S. Equity Market. Specifically, how the U.S. Equity Market reacts to monetary policy changes during major geopolitical and economic events. The events I have chosen to evaluate are the 2016 Election, the COVID-19 pandemic, Brexit, January 6th, and the Russia and Ukraine conflict. It is widely known that the U.S. equity market does not move linearly. Many factors of the current state of the globe, economy, and politics greatly influence the market's movements. Arguably, the entity with the most influence over the U.S. equity market is the Federal Reserve. Over the past 4 years, the Fed has been implementing an aggressive interest rate cycle, first to ease the U.S. economy during COVID-19 and then to combat inflation due to the pandemic. Traditionally, cutting the Federal Funds rate enhances the stock market, while an interest rate hike negatively affects the equity market. On the surface, this is because lower rates lower the cost of capital, which increases equity evaluations and decreases the attractiveness of standard fixed-income investments. However, this is simply the surface level when, in fact, many factors affect the equity market's reaction to monetary policy. It is my hope that my research will contribute to evaluating how monetary policy, when coupled with external state factors, affects the U.S. equity market. I will utilize sentiment and economic variables to control other impacts on the SP500. Dummy event variables represent the chosen events and will interact with the Federal Funds rate as a representation of monetary policy. This results in a model that will identify which events have the most significant influence on the equity market and to what effect.