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The stock market, not Janet Yellen, is the real Fed chair

After the Federal Reserve's decision Thursday to keep rates unchanged, opinions sprung up left and right—either exalting or despising the actions.

But here's the thing: the Fed's decisions are almost entirely dictated by the stock market.

At least that's the analysis from the global markets research group at Deutsche Bank. Stuart Kirk, a Deutsche managing director, said the "Fed bashers who say monetary policy is a slave to Wall Street" have a point, showing data to support that claim.

  1. Since 1994, rate cuts have followed a 5 percent annualized average decline in the S&P 500 since the previous meeting.
  2. When the Fed held rates steady, stocks had rallied by 11 percent (annualized) since the previous meeting
  3. In over 20 years, the Fed has never hiked once with the market down year-over-year. "By that logic, forget the dots," said Kirk, referring to the "dot plot" graph on which individual Fed members pin their expectations for rates. "If the S&P 500 is below 1989 come December, expect another hold."

Kirk points out perhaps the most amazing fact of all: A New York Fed study (PDF here) showed that if you bought the market in the 24 hours leading to a Fed decision (and then sold it), you would have made 80 percent of the entire market's return in the 17-year period between 1994 and 2011.

David Lucca and Emanuel Moench, authors of the study, wrote "since 1994, the S&P 500 index has on average increased 49 basis points (0.49 percent) in the 24 hours before scheduled FOMC announcements," and "the statistical significance of the pre-FOMC return is very high; a simple trading strategy of holding the index only in the 24 hours leading up to right-before an FOMC announcement would have yielded an annualized Sharpe ratio of above 1.1." (The Sharpe ratio measures return adjusted for risk.)

With these type of consistent returns in such a simple and easy-to-do strategy, it's no surprise Kirk said "certainly investors trust in this central bank put."

Since the beginning of 1994, there have been a total of 30 rate hikes. In 29 of those cases, the S&P 500 was up year-over-year at the time of the cut. The only other time was a 1.9 percent drop in the year prior to the February 1995 meeting.

"It's very hard to say which is greater," said Deustche Bank associate Rineesh Bansal, "the Fed's influence on the market or the market's influence on the Fed"

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