The dramatic expansion of stock market participation among American households over the past four decades may have weakened the ability of interest rate changes to influence economic output, according to research published by the Federal Reserve Bank of New York.

Juan M. Morelli, a research economist at the New York Fed, found that the response of industrial production to unexpected interest rate increases has diminished as equity ownership has broadened. When participation rose from 25 per cent to 55 per cent of households, the output response to rate changes fell by approximately 20 per cent, his model suggests.

In the mid-1980s, fewer than 30 per cent of US households held equities. By the early 2000s, more than half owned stocks, whether directly or through mutual funds and retirement accounts such as 401(k) plans.

The research, published on the New York Fed’s Liberty Street Economics blog, argues that when equity ownership is concentrated among relatively few households, stock market risk amplifies movements in spending, asset prices and investment following monetary policy changes. As participation widens, that risk spreads across a larger population, reducing each investor’s exposure to swings in equity values.

Analysis of household consumption data from 1990 to 2007 supports this view. Stockholders consistently cut spending more sharply than non-stockholders following unexpected rate rises, but this gap narrowed substantially as participation increased through the period.

The pattern held across US states: those with lower equity market participation exhibited larger consumption responses to rate changes, even after controlling for demographic and income differences.

Morelli cautioned that the rise in participation coincided with other structural economic changes, meaning the findings should be interpreted carefully. Nevertheless, the evidence from household spending, aggregate output and regional comparisons pointed in the same direction.

The research suggests that shifts in household portfolio composition may be a meaningful factor in determining how effectively monetary policy transmits to the real economy.