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The Asymmetric Effects of Monetary Policy on the Stock Market

The extent to which the Federal Reserve’s expansionary monetary policy is beneficial to the stock market may be contingent upon periods of stock market performance and policy phases throughout U.S. history.

Cheng Jiang designed a robust composite index to accurately predict the beginnings and ends of falling (bear) markets throughout history, finding that every economic recession in the U.S. was associated with a bear market. Furthermore, expansionary monetary policy only had positive impacts on stock returns when they were used as targets to keep the economy and financial market on track.

Jiang’s research can help monetary policymakers make better decisions about when to best implement expansionary monetary policy to stimulate the market.