Bank for International Settlements publishes research finding household inflation expectations drive spending and portfolio responses to rate changes

The Bank for International Settlements has published a working paper examining how U.S. households perceive monetary policy and adjust their behaviour. Using a survey of more than 25,000 households and randomized information treatments, the paper finds that households say they cut spending when policy rates rise, especially on durable goods, but only modestly. The main transmission channel in the survey is not the standard real interest rate or income effect. Instead, households tend to associate higher policy rates with higher inflation, and they respond to higher expected inflation by reducing consumption. The paper finds that a one percentage point increase in the federal funds rate leads households to report a drop of less than 0.1 percentage point in overall spending and about 0.13 percentage point in durable goods spending, while rate cuts generate little reported spending response. Households expect tighter policy to raise borrowing and deposit rates, increase inflation and unemployment, and lower stock prices, but they do not expect a meaningful effect on wages. The authors conclude that inflation expectations account for much of the perceived effect of monetary policy on consumption, while portfolio responses mainly involve shifting away from stocks and toward bank deposits, driven by expected higher inflation, weaker stock returns and higher house prices. The paper notes that these are the authors' findings and not necessarily the views of the BIS or its member central banks.