01-20-2026
When the Federal Reserve changes interest rates, most people think the story is simple: borrowing gets cheaper or more expensive, consumers and firms respond, and the economy speeds up or slows down. But new research shows that this view misses the most powerful part of the transmission mechanism. Monetary policy does not move through the economy firm by firm. It travels through supply chains.
In a paper published in The Review of Financial Studies, “Monetary Policy through Production Networks: Evidence from the Stock Market,” Daniels School Professor of Finance Michael Weber and his coauthor Ali Ozdagli from the Federal Reserve Bank of Dallas show that between 55% and 85% of the total effect of monetary policy on the economy is driven by production networks — the web of relationships linking industries through their purchases and sales of intermediate goods. Their evidence comes from financial markets, which react within minutes to Federal Reserve announcements, and from real data on sales and profits that evolve over time. The message is clear: what happens between firms matters as much as what happens between consumers and banks.
To see why, consider a rate cut that stimulates consumer demand for cars. Auto manufacturers ramp up production. That increases their demand for tires, electronics, steel and logistics. Tire producers then demand more rubber, energy and machinery. These upstream suppliers, in turn, hire more workers and buy more inputs. Some of that extra activity loops back to automakers themselves. What started as a consumer-demand shock becomes a cascade that moves through the entire production network.
Weber and Ozdagli show that these higher-order effects — industry-to-industry spillovers — are not small. Using detailed U.S. input-output tables and stock market reactions around Federal Open Market Committee (FOMC) announcements, they find that only about 15% of the total impact comes from firms’ direct exposure to consumer demand. The rest comes from how shocks propagate through supplier and customer relationships.
What makes this especially striking is that the U.S. production network is relatively sparse: most industries are not directly connected to others. But the structure of those connections is highly uneven. Some sectors sit deep in the middle of supply chains and act as hubs. When demand rises or falls, these hubs transmit and amplify shocks across the economy.
For monetary policymakers, this means that central banks should explicitly model production networks, use market-based data to track how shocks are spreading and recognize that exposure depends on where firms sit in the production chain. Models that focus only on interest rates, borrowing costs and representative firms leave out the main transmission channel. If 60%–80% of the impact flows through production networks, central banks need tools that capture those linkages. That means using input-output data and network-based models alongside traditional macroeconomic frameworks. It also means paying attention to high-frequency financial data, like stock returns around policy announcements, which reveal how shocks are propagating across industries in real time.
The research also shows that not all sectors respond equally. Industries that sell directly to consumers — such as retail, hospitality or consumer goods — experience larger “direct” effects. Industries further upstream such as materials, chemicals, energy and specialized manufacturing feel most of the impact through network spillovers. This suggests that a uniform view of policy sensitivity is misleading. Where a firm sits in the production chain largely determines how it will be affected.
For macroeconomics more broadly, the findings reinforce the idea that the economy cannot be understood as a collection of identical firms. Input-output networks should be central to understanding fluctuations, allowing researchers to separate direct demand effects from indirect network amplification. Aggregate outcomes emerge from a web of interconnections. By decomposing responses into direct and indirect components, economists can better explain why monetary shocks sometimes produce delayed, uneven or asymmetric effects across industries.
For businesses, the implications are just as important, requiring they plan with supply-chain exposure in mind. The structure of production linkages determines how strongly monetary policy will hit revenues, jobs and spending. Firms embedded deep in supply chains may experience much larger swings when monetary policy changes, even if their own customers are not directly affected. Investment, hiring and pricing decisions should take into account not only a company’s own customers, but also the broader network in which it operates.
Households feel these network effects, too. Monetary policy influences incomes not just through wages and interest rates, but through how profitability and employment shift across linked industries. A policy change that seems remote from a worker’s sector may still arrive through their employer’s position in the supply chain.
According to Weber and Ozdagli, business leaders can take steps now to strengthen their production network:
Taken together, the research suggests a more realistic way to think about economic policy: as a shock to a connected system rather than a lever pulling on isolated parts. Supply chains are not just about logistics and cost management. They are the channels through which macroeconomic forces flow. Understanding those intricacies is now essential for anyone who wants to know where the economy is headed.
