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    • Abbreviated Title: J. Econ. Bus. Manag.
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    • DOI: 10.18178/JOEBM
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HOME > Archive > 2025 > Volume 13 Number 1 (2025) >
JOEBM 2025 Vol.13(1): 131-136
DOI: 10.18178/joebm.2025.13.1.856

The Federal Reserve’s Interest Rate Decision Mechanism and Its Impact: On the Perspectives of Taylor Rule, Economy and Stock Market

Sihan Zhang
Guanghua Qidi Education, Shanghai, China
Email: 3237572502@qq.com (S.H.Z.)

Manuscript received December 3, 2024; revised January 24, 2025; accepted February 22, 2025; published March 10, 2025.

Abstract—This paper delves into the monetary policy decision-making mechanism of the Federal Reserve and examines the impact of Fed policies on economic growth, the stock market, and the financial crisis from various perspectives. It discusses the relationship between interest rates and the economy, considering the Fed’s interest rate decision-making process. The paper also provides a dialectical analysis of the Taylor rule’s effectiveness and limitations. Furthermore, it analyzes the impact of Fed policies on the stock market and economy from the perspectives of easing and tightening, as well as considering the influence of firm characteristics, the magnitude of interest rate hikes, and their underlying mechanisms. This paper presents a thorough investigation into the monetary policy decision-making framework of the Federal Reserve. It provides a comprehensive assessment of the impact of Fed policies on economic growth, stock market performance, and financial crisis from diverse perspectives. The analysis delves into the relationship between interest rates and the economy, considering the Fed’s interest rate decision-making process. Furthermore, the paper offers a nuanced examination of the Taylor rule’s effectiveness and potential limitations. What’s more, it appraises the impact of Fed policies on the stock market and economy, examining both easing and tightening measures, as well as the influence of firm characteristics, the magnitude of interest rate hikes, and their mechanisms. The Taylor rule proposed by Taylor has long been considered a tool for predicting the future interest rate policy of the Federal Reserve. However, the Taylor rule has many limitations. The Federal Reserve’s interest rate hike has a negative impact on the global economy. Its monetary policy has a greater impact on developing economies than on developed ones. This is because the significant rate hike by the Federal Reserve has led to the flight of high-quality investors from emerging markets. In this context, it is essential to explore the role of the Taylor rule in the monetary policy framework of the Federal Reserve, particularly in the context of the global economy. This analysis offers valuable insights into the complex interplay between interest rates, economic growth, and financial stability, highlighting the limitations and potential implications of the Taylor rule. Moreover, it sheds light on the differences in the impact of Fed policies on developed and developing economies, emphasizing the importance of considering firm characteristics and the underlying mechanisms of interest rate hikes.

Keywords—economic growth, financial crisis, monetary policy, stock market reaction, Taylor rule

Cite: Sihan Zhang, "The Federal Reserve’s Interest Rate Decision Mechanism and Its Impact: On the Perspectives of Taylor Rule, Economy and Stock Market," Journal of Economics, Business and Management, vol. 13, no. 1, pp. 131-136, 2025.

Copyright © 2025 by the authors. This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited (CC BY 4.0).

 

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