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

September 2025

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

Daniel A. Dias; Sophia C. Scott

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.

Keywords: Bank funding betas; Deposit vs. nondeposit funding costs; Monetary policy cycles; Interest-rate transmission

DOI: https://doi.org/10.17016/FEDS.2025.083

PDF: Full Paper