How deviations from FOMC’s monetary policy decisions from a benchmark monetary policy rule affect bank profitability: evidence from U.S. banks

Abstract

This paper aims to provide fresh empirical evidence on how Federal Open Market Committee (FOMC) monetary policy decisions from a benchmark monetary policy rule affect the profitability of US banking institutions. It thereby provides a link between the literature on central bank monetary policy implementation through monetary rules and banks’ profitability. It uses a novel data set from 11,894 US banks, spanning the period 1990 to 2013. The empirical findings show that deviations of FOMC monetary policy decisions from a number of benchmark linear and non-linear monetary (Taylor type) rules exert a negative and statistically significant impact on banks’ profitability.