How Do Deposit Rates Respond to Monetary Policy? – Liberty Street Economics – Liberty Street Economics –

by | Nov 21, 2022 | Financial

Alena Kang-Landsberg and Matthew Plosser

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.)

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.      

Deposit Betas

Deposits make up an $18 trillion product category that is critical to the funding structure of banks and a key source of savings for households and businesses. The degree to which changes in the target fed funds rate pass through to deposits is important for bank funding, monetary policy transmission, and depositors’ finances. The deposit beta is the portion of a c …

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