Common wisdom holds that Federal Reserve interest rate policy changes have a large effect on equity returns.
The Fed represents, many believe, the ultimate market traffic light. If the Fed raises short-term rates, the signal turns red and the market slams on its brakes; if the Fed loosens (by embarking on another round of Quantitative Easing, the light turns green and the market can continue on pedal-to-the-metal. Everyone takes this mental model for granted, but is it really true?
The simple answer: “Not at all.” Let’s look at the evidence.
