Stock Prices, Expectations, and Policy Changes
Explain, using the expectations model (and their role in determining asset prices) how the stock market is likely to react to each of the following scenarios:
a) The Fed, as expected, raises the policy rate by 0.25 percentage points (25 basis points).
b) The Fed unexpectedly raises the policy rate by 0.50 percentage points (50 basis points).
c) At a meeting in which a rate hike was widely anticipated, the Fed surprises observers by leaving the policy rate unchanged.
d) The latest BLS jobs report shows no change in the unemployment rate, a number of jobs added that is in line with expectations, and a surprisingly strong rate of wage growth.
e) The government, as expected, enacts a $1 trillion tax cut.
f) The government unexpectedly announces the elimination of several government programs totaling $400 billion in annual government spending.