Journal of Business & Economic Policy

Inflation-Targeting Monetary Policy and Stock Prices
Keun H. Lee, Ph.D

Abstract
The Federal Reserve Bank has recently tweaked its monetary policy stance of easy money and raised the interest rate to tame inflation. The rationale is that a higher interest rate would bring down demand and lower prices. But a higher interest rate generally lowers the stock market also. Falling demand and the stock market fall, in turn, may also slow down the economy. This paper examines how a rising interest rate could moderate inflation and bring down the stock market. It also examines the possibility that raising interest rates to tame inflation may not necessarily lead to an economic slowdown.

Full Text: PDF