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2. Discuss the possibility that Fed's monetary policy may indirectly affect the prices of equity securities.

2. Discuss the possibility that Fed's monetary policy may indirectly affect the prices of equity securities.

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Answer #1

Federal monetary policy can increase or decrease liquidity . Hence when fed loosens it monetary policy there are rate cuts and open market operations. Due to rate cuts companies invest in capital expenditure and there cost of capital decreases. Hence there will be increase in price of equities.

By tightening monetary policy the rates are increased and also tightens liquidity in the country. This decreases demand in the market and decreases the capital expenditure of companies . Hence there will be decrease in price of equities.

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