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How Do Deposit Rates Respond to Monetary Policy?

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Abstract

When the Federal Open Market Committee (FOMC) wants to raise the target range for the fed funds rate, it raises the interest on reserve balances (IORB) paid to banks, the primary credit rate offered to banks, and the award rate paid to participants that invest in the overnight reverse repo (ON RRP) market to keep the fed funds rate within the target range (see prior Liberty Street Economics posts on this topic). When these rates change, market participants respond by adjusting the valuation of financial products, of which a significant category is deposits. Understanding how deposit terms adapt to changes in policy rates is important to understanding the impact of monetary policy more broadly. In this post, we evaluate the pass through of the fed funds rate to deposit rates (that is, deposit betas) over the past several interest rate cycles and discuss factors that affect deposit rates.

Suggested Citation

  • Alena Kang-Landsberg & Matthew Plosser, 2022. "How Do Deposit Rates Respond to Monetary Policy?," Liberty Street Economics 20221121, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:95154
    Note: Editor’s Note: When this post was first published the entries in the legend for the first chart were transposed; the legend has been corrected (November 21, 9:45 a.m.).
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    Cited by:

    1. Gara Afonso & Marco Cipriani & Gabriele La Spada, 2022. "Banks’ Balance-Sheet Costs, Monetary Policy, and the ON RRP," Staff Reports 1041, Federal Reserve Bank of New York.

    More about this item

    Keywords

    deposits; beta; fed funds; monetary policy;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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