Do changes in the Federal Funds Rate influence commercial lending

Publication Date

Spring 2026

Presentation Length

15 minutes

College

Jack C. Massey College of Business

Department

Economics and Finance

Student Level

Undergraduate

Faculty Mentor

Dr. Colin Cannonier

Metadata/Fulltext

Metadata ONLY

Presentation Type

Talk/Oral

Summary

Monetary policy shapes economic activity through its influence on interest rates, inflation, and financial markets. The Federal Reserve’s primary policy instrument is the federal funds rate, which affects both the short-term interest rate and borrowing costs. Changes in the federal funds rate also affect commercial banks’ willingness and ability to lend. The main objective of our research is to determine the relationship between the Federal Funds Rate and commercial bank loans, which is important to understand because it has significant economic implications. For example, after the 2020 pandemic, the U.S. economy faced low interest rates and high inflation, and policymakers had to figure out how to distribute money to combat it. The hypothesis we have formed is that an increase in the Federal Funds Rate would decrease commercial lending because, when it costs banks more to borrow, they will be forced to raise prices for borrowers. Previous literature suggests that an increase in policy interest rates would reduce the bank’s ability to supply credit. However, the literature does not provide sufficient detail on the bank lending channel and inflation during the pandemic, a period of high inflation. To address the research gap, this paper uses the pandemic year as a dummy variable to run regression and time-series analyses on empirical data.

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