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Monetary Policy and Bank Funding Costs: Patterns and Predictability in the Transmission of the Policy Rate to U.S. Banks’ Funding Costs

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Abstract

This paper shows that U.S. commercial banks' funding betas rise predictably with the length, magnitude, and direction of each monetary policy cycle: longer cycles and those with larger changes in the policy rate yield stronger pass-through in both tightening and loosening cycles, with modest asymmetry favoring slightly greater transmission during loosening cycles. Nondeposit liabilities consistently adjust more than deposits. Crucially, at the aggregate banking-system level and across banks grouped by size, this cycle-dependent relationship has remained remarkably stable over three decades, highlighting the durability and predictability of interest-rate transmission to banks' funding costs.

Suggested Citation

  • Daniel A. Dias & Sophia Scott, 2025. "Monetary Policy and Bank Funding Costs: Patterns and Predictability in the Transmission of the Policy Rate to U.S. Banks’ Funding Costs," Finance and Economics Discussion Series 2025-083, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2025-83
    DOI: 10.17016/FEDS.2025.083
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    File URL: https://www.federalreserve.gov/econres/feds/files/2025083pap.pdf
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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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