Analyzing the Effect of Changes in the Federal Funds Rate on U.S. Household Consumption Expenditures

Abstract

The federal funds rate is an integral part of U.S. monetary policy. It is lowered in economic downturns to stimulate consumption and is raised during economic upswings to curb high inflation. This paper examines the effect of the effective federal funds rate (EFFR) on US household expenditures using data compiled from the U.S. Bureau for Labor Statistics’ Consumer Expenditure Survey. I use an OLS regression model to test the effects on total expenditures and a multivariate multiple regression model to analyze the effects on individual expenditure categories. The findings suggest that a 1% decrease in the EFFR results in a 1.47% increase in total expenditures. I find that food, transportation, healthcare, and housing expenditures are negatively correlated with the EFFR, implying that expenditures in these categories drive up total household expenditures during economic downturns. These findings suggest that that lowering the FFR is effective at stimulating consumer spending.