This paper investigates the relationship between the Federal Funds Rate (FEDFUNDS) and the University of Michigan Consumer Sentiment Index (UMCSENT). This study uses Johansen cointegration tests, Vector Error Correction Models (VECM), and Threshold Vector Error Correction Models (TVECM); this study explores the cointegration, short-term dynamics, and threshold effects between these macroeconomic indicators. Results show that there is cointegration between FEDFUNDS and UMCSENT. Further, findings also reveal a stable long-term relationship between FEDFUNDS and UMCSENT. The VECM analysis shows short-term adjustments in both variables, which suggests their interdependence. The TVECM analysis indicates a threshold effect, indicating a change in the relationship when FEDFUNDS passes a specific threshold value.
