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Fed Research Examines Effects of Monetary Policy on Lending Rates


April 4 - The Federal Reserve has taken steps since the financial crisis to push both short- and long-term interest rates to historically low levels. These steps have aimed to reduce financing costs generally and, more specifically, to lower the interest rates charged to finance consumer spending, which accounts for about 70 percent of all spending in the economy.

However, interest rates charged by lenders to consumers do not change automatically when the Federal Reserve alters the stance of monetary policy. The extent to which policy actions pass through to consumer interest rates determines, in part, the effectiveness of monetary policy. Typically, when the Federal Reserve wants to provide policy stimulus to the economy, it lowers its target for the federal funds rate—its main policy interest rate. But when the short-term rate hits the zero bound as it did in the financial crisis, there are fewer options, and the effects are less certain. Thus, it is particularly important to evaluate this pass-through from monetary policy to consumer loan rates when central banks ease policy through unconventional tools such as purchases of longer-term securities and communication to the public about the
future path of policy.

The data show that, since unconventional monetary policy was introduced at the end of 2008, this pass-through has weakened. The weaker response is not limited to one group of banks but characterizes both large banks and  community banks. This means the effect of monetary policy on consumer spending may have declined.

The full paper can be downloaded at