The Impact of Monetary Policy on Bull Market Cycles

The market trough marks not only its lowest point, but it can also signal its beginning; such potential recovery can be further expedited through central bank interventions and improved economic indicators.

Lower interest rates encourage consumer spending and make financing projects with cost-efficient debt more achievable for businesses, leading to greater profits and an overall boost to our economy.

The Federal Reserve

When the Fed announces its intentions of cooling the economy by raising interest rates (and thus pushing prices higher and increasing borrowing costs), bonds tend to get dumped; prices decline while interest rates increase and bondholders experience losses.

The Federal Reserve is an influential central bank which forms key U.S. monetary policy at regular meetings of its 12-person Federal Open Market Committee. The FOMC’s purpose is to move closer toward Congress-mandated goals of maximum employment and price stability for our economy.

When the economy is strong, the Federal Reserve reduces interest rates to make borrowing cheaper for individuals and businesses alike, in turn stimulating economic activity and supporting the financial system, particularly during recessions or crises. Stocks usually rally during these expansionary rate cuts cycles with Nasdaq outperforming S&P 500 during non-recessionary rate cut cycles resulting in shorter and shallower market downturns than during recessionary cycles.

The European Central Bank

The European Central Bank (ECB) coordinates monetary policy across 19 EU member countries that use euro as their common currency. Its primary mandate is to maintain price stability within eurozone nations while simultaneously targeting 2% inflation as an effective safeguard against deflation.

As Mario Draghi took over for Jean-Claude Trichet in November 2011, markets expected him to become less aggressive against inflation; instead he quickly disproved this fear through quantitative easing (QE), an unconventional bond-buying program designed to stimulate economic growth and consumer spending.

The European Central Bank (ECB) operates via two bodies that make policy decisions: the Governing Council and Executive Board. The former assesses economic and monetary developments, defines eurozone monetary policy, and sets interest rates commercial banks can borrow from it; while its Executive Board handles day-to-day operations under powers delegated from the latter; presidents and vice-presidents of each are appointed for eight year terms by their country leaders.

The Bank of Japan

The Bank of Japan plays an indispensable role in Japan’s economy. It regulates money circulation and provides essential economic data used by policymakers, academics and investors.

Money supply control also involves setting interest rates, which affect the cost of borrowing in an economy. Lower rates encourage borrowing by making it cheaper – encouraging spending and economic expansion while higher interest rates reduce borrowing activity, leading to deflationary pressures and slowdown.

The BOJ is currently conducting a review of its policies to decide whether it will start increasing interest rates soon, with full results set for release later in 2018. While their full findings won’t be made available until later this year, it seems clear that they are exploring ways to promote inflation and the economy; which could mean Japanese banks, industrials and consumer discretionary companies seeing increased demand as wages rise and inflation accelerates; thus increasing profit margins and revenues of these businesses as spending picks up again.

The People’s Bank of China

The People’s Bank of China (PBoC) oversees China’s monetary policy and financial stability. PBoC serves an array of functions, such as writing laws and regulations for itself, issuing Renminbi currency, regulating financial markets, setting reserve requirements, setting interest rates, providing grants transfers to public companies and managing foreign exchange transactions. Led by a Governor and several Deputy Governors.

PBoC is also responsible for implementing “Xi Jinping’s Thought on Socialism with Chinese Characteristics in a New Era,” an economic philosophy which is having far-reaching ramifications on economic policy decisions in ways not witnessed in years.

PBoC monetary policymakers possess a considerable degree of discretion, though this can be limited by external forces such as high U.S. interest rates and deflation concerns. As these constraints loosen up, the PBoC may become more willing to cut rates again and stimulate markets further by raising stimulus measures or volatility temporarily; but continued manipulation of money supply has unintended repercussions that the PBoC cannot fully anticipate or manage.