Monetary Normalizations and Consumer Credit: Evidence from Fed Liftoff and Online Lending

On December 16th of 2015, the Fed initiated "liftoff," raising the federal funds rate range by 25 basis points and initiating a significant step in the monetary normalization process. We use a unique panel dataset of 640,000 loan-hour observations to measure the impact of liftoff on interest rates, demand, and supply in the online primary market for uncollateralized consumer credit. We find that the average interest rate dropped by 16.9-22.9 basis points. This holds for a number of window sizes, including 3 days, 7 days, and 14 days around liftoff, and is robust to the inclusion of a broad set of loan-level controls and fixed effects. We also find that the interest rate declined more for borrowers with subprime characteristics, leading to a 16% reduction in the spread. We reject a number of candidate explanations for these results, including a change in borrower composition, a collapse in demand, and a shift in risk appetite. Our findings are consistent with an investor-perceived reduction in default probabilities; and suggest that liftoff may have provided a strong, positive signal ab out the future solvency of borrowers.