QE & Federal Fund Rate
Let’s see from the figure. During the crisis, Fred conduct QE, pooling money into the market, and reduce the federal fund rate, trying to activate the market. As in the shaded area, which represents the crisis period, the green line jumps with the dropping of the blue line.
US Dollar Index & Federal Fund Rate
In the last post, US Dollar & Commodity Price, I discussed the fact that increasing the interest rate in the U.S. market would result in appreciation of the US dollar because the US dollar would be more attractive for investors. Meanwhile, in the crisis especially, unsafety concerns and greater demand for necessitates such as commodities and energy (oil), would also increase the demand for US dollar, as they are traded by US dollar, and thus result in appreciation of US dollar. The conflicts emerge during the crisis period, the shaded area, that Fred reduced the federal rate to activate the market, but the US dollar index increased instead. It seems the demand for necessities dominates the effects of decreasing the federal rate in the crisis.
$$ Federal Rate \downarrow \Rightarrow US Investment \downarrow \Rightarrow US Dollar Index \downarrow $$
$$ Crisis \Rightarrow Uncertainty + Demand for Commodity \& Energy \uparrow \Rightarrow Demand for US Dollar \uparrow \Rightarrow US Dollar Index \uparrow$$
In the crisis, demand for necessities pushes up the demand for the US dollar and thus lifts the US dollar index. However, those two indices work in the same way (positive correlated) in the non-crisis period.
Stock Market Index & Federal Rate
I would use the Wilshirefred 5000 index as the stock market index as it is available in a longer period range in FRED.
While including the stock market index, it seems the stock market grows at a similar path to M2. Although no data is presented about the GDP, it is easy to imagine that the stock market would grow on the same path as the GDP as well. A spurious relationship exists clearly.
Could we explain the growth of the stock market cap as people hold more money and invest in stocks? Maybe right or wrong.
The Figure below shows the nearly random walk of the stock market growth. Presumably, if draw a histogram of the stock market return, it would most likely to be normally distributed and the mean might be positive because the market cap keeps growing (extreme value affects).