be_ixf;ym_201909 d_21; ct_50

Select Page

Maybe the Fed Doesn’t Really Influence the Stock Market

Maybe the Fed Doesn’t Really Influence the Stock Market

“Three steps and a stumble” tells us that stocks are set to fall.

This rule dates to at least the 1950s. It’s a simple market timing rule — when the Federal Reserve raises rates three times, stocks fall. Last month’s increase in the fed funds rate was the third step. Now it’s time for the stumble.

Or is it? The chart below shows that stocks often ignore the Fed for years at a time.

It’s a simple market timing rule — when the Federal Reserve raises rates three times, stocks fall. Now it’s time for the stumble ... or is it?

(Sources: Federal Reserve and Banyan Hill calculations)

Let me explain that chart.

Fed economists often mention the Taylor rule. The Taylor rule tells us what the interest rate should be given the current rate of economic growth and inflation.

We can subtract the fed funds rate from the Taylor rule rate to see if the Fed is following an easy or tight money policy. That’s what the chart shows.

When the difference is greater than zero, the Fed is raising inflation by printing money. In contrast, tight money policies are designed to lower inflation. This shows up in the chart as times when the difference is less than zero.

Right now, we are in an easy money period. Most analysts think this is bullish for stocks.

The chart, however, shows a surprise: The easiest money policy in history coincided with a brutal stock market. Prices went nowhere from 1966 to 1982 as the Fed printed money.

Analysts also think tight money is bearish, which leads to the “three steps” rule. But the data reveals an inconvenient truth: The great bull market from 1982 to 2000 coincided with a tight money policy.

A Fed policy jump started the current bull market in 2009. But the Fed might not matter anymore. Economic growth and strong earnings could propel the market to levels no one can imagine.


Michael Carr, CMT
Editor, Peak Velocity Trader

About The Author

Michael Carr, CMT, CFTe

Michael Carr is an American investor, a Chartered Market Technician (CMT) and a contributing editor for Sovereign Investor Daily. He is a longtime member of the Market Technicians Association (MTA), where he serves as the editor of its newsletter, “Technically Speaking.” He is also a contributor to various publications related to trading, including the Journal of Technical Analysis, MoneyShow, SFO Magazine and Futures Magazine. Michael is the author of two books, Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing (2008) and Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends (2010).



I am up $20,070 in closed positions from Feb. 18 through March 7.

- Bob Rowe

I started your system in December … I am ahead $29,000 … I put total faith in you and your system and it has worked for me very nicely. Thanks again I sure like your humble approach about this whole thing

- Dale Leiffer

I have made a little over $4,000 while being cautious.

- Chuck Goss

Share This