New York Fed: most firms barely change investment after a rate surprise

Victoria Shinder12 October 2026, 08:282 min read

A post on the New York Fed's Liberty Street Economics blog on 7 October, by Thomas Drechsel, Daniel Lewis, Davide Melcangi and Laura Pilossoph, asks which companies actually change their investment when the Federal Reserve surprises markets — and finds that the answer moves around more than the usual explanations suggest. It summarises a longer New York Fed Staff Report.

How they measured it. Monetary policy surprises are taken from moves in federal funds futures in a narrow window around Fed announcements, the standard approach in this literature. Investment is the quarterly growth of the capital stock of publicly listed U.S. firms in the Compustat database. Instead of testing one firm trait at a time — size, age, leverage — the authors estimate the whole distribution of responses, grouping each firm in each quarter as a high or low responder.

What they found.

• In the vast majority of firm-quarters, investment responds little to monetary surprises — but not zero: all firms cut investment when rates rise.
• For about 5% of firm-quarters, a surprise that raises the federal funds rate by 1 percentage point lowers the growth rate of capital by about 4 percentage points.
• Very little of the variation is common to all firms at the same time, and only a limited share reflects permanent differences between firms. Most of it is within firms over time: a company can be highly sensitive in one quarter and relatively insensitive for several quarters after.

What predicts sensitivity. The study confirms earlier findings that smaller and younger firms cut investment most after a tightening, and that the two interact. Firms with shorter debt maturity are more sensitive. The authors also point to behavioural factors: firms' perceptions of discount rates and the cost of capital correlate with sensitivity, and more optimistic firms cut investment less. Even so, much of the variation remains unexplained.

Why it matters for policy. Average effects can mislead. If a rate move bites hard on a small, shifting set of firms and barely touches the rest, the aggregate response depends on how many firms happen to be in a sensitive state when policy changes — which may help explain why estimated effects of monetary policy on investment vary across periods. The authors' conclusion is methodological: look at the full distribution of responses, not only the mean. The post presents research findings; it does not state a Fed policy view.

Source: Liberty Street Economics, 7 October 2026 — https://libertystreeteconomics.newyorkfed.org/2026/10/firm-heterogeneity-and-the-response-of-investment-to-monetary-policy/