The paper studies the macroeconomic implications of monetary policy in the US, focusing on the role of financial markets in amplifying or mitigating the impact of changes in interest rates on inflation and economic activity.
The analysis shows that the response of financial markets to the decisions of the Federal Reserve has a critical influence on how interest rates affect the economy. A drop in interest rates has a modest impact on stock and bond returns, while an increase in rates has a strong negative impact. Due to this asymmetry, production, employment and consumer prices respond more significantly to hikes in interest rates, specially if these take place during periods of financial distress.
