The stock market enjoyed robust gains during the bull market that began in 2009, rising for more than seven years despite the United States' consistently slow growth rate. In March 2016, the Federal Reserve predicted continued weakness in the expansion over the next few years. Considering the circumstances, some may wonder why the stock market has continued to appreciate. Many have credited its steady climb to easy money policies, which encourage borrowing to jump-start business conditions.

Accommodative Monetary Policy

The Fed began using accommodative monetary policies in 2008, consisting of bond purchases and interest rate cuts. By buying debt-based securities, the central bank aimed to expand the money supply and place downward pressure on interest rates. The financial institution bought bonds with varying maturities to create a broad reduction in borrowing costs.

The central bank used these easy money policies for several years, buying trillions of dollars worth of assets and keeping its rates near record lows. The Fed announced the end of its last bond purchase program in October 2014 and its first rate hike in almost a decade in December 2015. Even then, the rate increase was modest, as the Fed revealed its target for the benchmark federal funds rate was rising to between 0.25 and 0.50%, after staying within a range of zero to 0.25%.

At the time, the central bank indicated it would continue using its policy levers to pursue its dual mandate of maximum employment and modest inflation. "The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation,” the central bank said in a statement released Dec. 15, 2015. In spite of this sustained use of monetary easing, several key economic indicators remained stubbornly weak. Consumer spending, which accounts for roughly two-thirds of U.S. economic output, has met with continued challenges. Businesses have also reigned in their spending amid concerns about the strength of economic conditions.

Economic Strength and Sentiment

One variable that can substantially affect both consumer and business spending is sentiment. The Fed's actions are frequently interpreted as signals to the broader economy, and market participants might feel more confident about a recovery if the central bank either announces or maintains accommodative policies. This, in turn, could bolster spending and borrowing.

However, simply flooding the capital markets with easy money does not guarantee robust growth, job creation or sufficient inflation, and the continued weakness of U.S. growth following the financial crisis illustrates this point. Additionally, keeping interest rates near record lows for sustained periods could have adverse impacts for lenders and those who rely on fixed-income payments, such as retirees.

Lackluster Spending

Following the financial crisis, consumer spending suffered as citizens recovered from this tumultuous event. Some consumers saw their retirement savings decline sharply in a short period. Others were reluctant to spend after much of the world's wealth disappeared in the real estate crash. These unexpected developments helped sour the moods of many, and the impact lingered long after the Great Recession ended. As a result, the U.S. savings rate remained stubbornly high.

The savings rate, a key measure of how much consumers put away instead of spending, has historically averaged roughly 2% in the United States. During the expansion that took place right before the financial crisis, this rate repeatedly fell to zero or even a negative percentage. In contrast, the savings rate repeatedly surpassed 5% after the financial crisis.

Business spending is another area of the economy that suffered following the financial crisis. Many companies were reluctant to purchase equipment and hire employees as they struggled to pay off the debt they built up before the Great Recession. Additionally, many small businesses faced difficulty getting the capital they needed to expand as a result of lenders’ risk aversion.

Summing It Up

While the U.S. economy faced many challenges after the financial crisis, the stock market was able to generate sharp gains. The Standard & Poor’s Index (S&P 500), a benchmark group of stocks, surged more than 200% after hitting a 12-year low in March 2009, while the Dow Jones Industrial Average (DJIA) surpassed 18,000 for the first time. Because these key indices reached several milestones while U.S. economic growth remained weak, investors may learn more about the key role central bank policy can play in the global asset markets.

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