Question

Why would stock prices increase if investors believe that the Federal Reserve will not be raising interest rates and may even be cutting them?

Why Does Wall Street Care about Monetary Policy?

Answer 1

GDP = C(Consumption) + G (Government spending) + I (Business Investment) + X (net exports) Where GDP is the gross domestic product that is the sum of all goods and services produced in an economy. When the Federal reserve lowers interest rates, the Fed (Federal Reserve) is increasing money supply by making it cheaper to borrow. In other words, when the interest rates are cut by the Fed the Fed is making borrowing cheaper. Cheaper borrowing leads to more consumption and business investment . An increase in consumption and business investment leads to an overall increase in GDP. A higher GDP means that there is more output and there are more jobs. More jobs leads to higher purchasing power of consumers that leads to higher demand for goods and services. In addition, higher output leads to higher demand for goods and services by businesses. A higher demand for goods and services implies that the companies that are listed on the stock exchange will have higher earnings. There will be a higher demand for stocks when companies listed on the stock exchange are expected to have higher earnings. A higher demand for stocks leads to an increase in the stock prices of the well performing companies. Therefore, wall street follows the monetary policy set by the Fed closely.