Elevated Option-Implied Interest Rate Volatility and Downside Risks to Economic Activity

Measures of uncertainty about U.S. short maturity interest rates derived from options have risen sharply since October 2021, reaching their highest levels in more than a decade. This note first uses survey-based measures of economic uncertainty to argue that this increase in option-implied measures likely reflect higher uncertainty about inflation, the associated monetary policy response, and the perceived resulting downside risks to economic activity.

DOI: https://doi.org/10.17016/2380-7172.3404

The Third SNB-FRB-BIS High-Level Conference on Global Risk, Uncertainty, and Volatility: Monetary Policy and Banking Regulation under Elevated Uncertainty

The Swiss National Bank (SNB), the Division of International Finance of the Federal Reserve Board (FRB), and the Bank for International Settlements (BIS) jointly organized the third High-Level Conference on Global Risk, Uncertainty, and Volatility on November 14 and 15 of 2023. The conference brought academics and policymakers together to discuss the many sources of risk and uncertainty under which monetary policymakers and bank regulators operate, recent advances in measuring the multi-faceted nature of uncertainty, and how policymakers respond to these challenges.

DOI: https://doi.org/10.17016/2380-7172.3431

An update on Excess Savings in Selected Advanced Economies

In a previous FEDS Note, de Soyres, Moore, and Ortiz (2023), we conducted a comparison of household excess savings across advanced and emerging economies over different historical episodes. In that analysis, we found that the stock of excess savings accumulated during the pandemic in the U.S. was exhausted by 2023Q1, while other advanced economies were not expected to deplete their excess reserve until late in 2023.

DOI: https://doi.org/10.17016/2380-7172.3426

Money Market Fund Repo and the ON RRP Facility

Between January 2021 and June 2022, money market funds' (MMFs') investments in the Federal Reserve's Overnight Reverse Repurchase (ON RRP) facility rose by $2 trillion, while their private repo lending fell by almost $500 billion. These sizable shifts give us an opportunity to examine how monetary policy implementation and the ON RRP facility interact with the private repo market.

DOI: https://doi.org/10.17016/2380-7172.3412

Second-Round Effects of Oil Prices on Inflation in the Advanced Foreign Economies

Harun Alp, Matthew Klepacz, and Akhil Saxena

The surge in oil prices in the wake of the post-COVID-19 economic rebound and Russia's invasion of Ukraine exerted significant upward pressure on consumer price inflation around the world.  As seen in the left panel of Figure 1, Brent crude oil prices soared to nearly $130 a barrel in March 2022 and remained elevated through June, before only slowly retracing the gains.

DOI: https://doi.org/10.17016/2380-7172.3401

Monetary Policy Tightening and Debt Servicing Costs of Nonfinancial Companies

Rapid monetary policy tightening in most advanced economies in 2022 and 2023 was accompanied by substantial increases in prevailing interest rates for new credit to businesses and households. In addition to increasing the cost of new borrowing, monetary policy tightening may also be associated with increases in costs of servicing existing debt, potentially leading to the tightening of firms' and households' financial constraints, leaving them with less cash for investment and consumption. 

DOI: https://doi.org/10.17016/2380-7172.3410

Assessing the Extent of Trade Fragmentation

Justin R. Pierce and David Yu

Globalization increased steadily for decades following the end of World War II, with trade as a percentage of global GDP rising from 20 percent in the early post-war period to nearly 60 percent just before the Global Financial Crisis (GFC) (Aiyar et al., 2023). Since the GFC, however, this move toward globalization has stalled, and recent events—U.S.-China trade tensions, the Covid-19 pandemic, and the Russian invasion of Ukraine—have raised the prospect of a reversal.

DOI: https://doi.org/10.17016/2380-7172.3387

Greater Wealth, Greater Uncertainty: Changes in Racial Inequality in the Survey of Consumer Finances

Aditya Aladangady, Andrew C. Chang, and Jacob Krimmel with assistance from Eva Ma

We document racial disparities in financial well-being in the 2022 Survey of Consumer Finances. The typical White family had about six times as much wealth as the typical Black family, and five times as much as the typical Hispanic family.

DOI: https://doi.org/10.17016/2380-7172.3405

U.S. Families' Experiences of the COVID-19 Pandemic: Evidence from the Survey of Consumer Finances

Jesse Bricker, Sarena Goodman, Kevin Moore, Sarah Reber, Alice Henriques Volz, and Richard Windle with assistance from YeJin Ahn

Between 2019 and 2022, the COVID-19 pandemic caused severe disruptions to the U.S. labor market and broader economic activity, leading to unprecedented levels of fiscal support. Nonetheless, over this period, net changes in major economic indicators were consistent with a robust economy, and according to the 2022 Survey of Consumer Finances (SCF), U.S. families experienced broad-based improvements in their finances, particularly with respect to net worth (Aladangady et al., 2023).

DOI: https://doi.org/10.17016/2380-7172.3406

U.S. Interest Rates and Emerging Market Currencies: Taking Stock 10 Years After the Taper Tantrum

Nira Harikrishnan, Benjamin Silk, and Emre Yoldas

In 2013, a shift in expectations of market participants for the timing of the tapering of the Federal Reserve's asset purchases, and its ramifications for normalization of U.S. monetary policy, led to sharp increases in longer-term U.S. Treasury yields and volatility in broader financial markets. The episode came to be known as the "taper tantrum" because the strong market reaction came in response to Federal Reserve communications that were largely consistent with market analysts' expectations.

DOI: https://doi.org/10.17016/2380-7172.3385

Measuring U.S. Cross-Border Securities Flows: New Data and A Guide for Researchers

Understanding the effects of capital flows across countries depends critically on accurate and comprehensive data. For the U.S., data on cross-border securities holdings and transactions are collected through the TIC (Treasury International Capital) data system. As we have previously noted, it has long been difficult to reconcile the TIC data on securities holdings with the TIC S transactions data (see Bertaut and Tryon (2007) and Bertaut and Judson (2014, 2022)).

DOI: https://doi.org/10.17016/2380-7172.3392

Global Inflation Uncertainty and its Economic Effects

Policymakers, including Federal Open Market Committee (FOMC) participants, have been stressing the elevated level of uncertainty, especially related to inflation, and the challenge this poses for monetary policy. As seen in Figure 1, with few exceptions, FOMC participants see the level of uncertainty around their forecasts for core PCE inflation as high, compared to the average over the past 20 years.

DOI: https://doi.org/10.17016/2380-7172.3391

Corporate Profits in the aftermath of COVID-19

This note documents the behavior of corporate profit margins during and in the aftermath of the pandemic. As the traditional measure of corporate profit margin is heavily affected by fiscal support and its withdrawal, it also proposes an alternative measure.

DOI: https://doi.org/10.17016/2380-7172.3364

A Sourcing Risk Index for U.S. Manufacturing Industries

Modern manufacturing production is organized in complex global value chains (GVCs), whereby the production process of a good is split into multiple stages across many countries and sectors. By allowing producers to specialize in a narrow set of tasks according to their comparative advantage, GVCs have brought significant productivity gains.

DOI: https://doi.org/10.17016/2380-7172.3367

Hedge Fund Treasury Exposures, Repo, and Margining

Hedge funds have become among the most active participants in U.S. Treasury (UST) markets over the past decade. As a result, the financial stability vulnerabilities associated with their leveraged Treasury market exposures, which are facilitated by low or zero haircuts on their Treasury repo borrowing, have become more prominent.

DOI: https://doi.org/10.17016/2380-7172.3377

Examining CBDC and Wholesale Payments

Jon Durfee, Jesse Leigh Maniff, and Priyanka Slattery

This paper explores whether a new settlement asset in the form of central bank money is essential for a new platform that processes wholesale payment transactions. Central bank money currently exists for wholesale transactions in the form of depository institution balances at the Federal Reserve (Reserve Banks) used for Fedwire® Funds Service (Fedwire).

DOI: https://doi.org/10.17016/2380-7172.3368

Understanding Workers' Financial Wellbeing in States with Right-to-Work Laws

Kabir Dasgupta and Zofsha Merchant

As public interest in labor unions has increased in recent months, along with an increase in union representation petitions, it is valuable to understand the economic implications of labor unions. Previous empirical studies on the effects of labor unions and collective bargaining processes have focused on several economic outcomes ranging from workers' pay and productivity to firms' profitability, investments, and overall economic performance.

DOI: https://doi.org/10.17016/2380-7172.3372

Analyzing State Resilience to Weather and Climate Disasters

Celso Brunetti, Benjamin Dennis, Gurubala Kotta, and Adam Smith

The National Oceanic and Atmospheric Administration (NOAA) reports that climate change is increasing the frequency of extreme conditions that lead to disasters such as droughts, hurricanes, flooding, and wildfires. These climate-related physical risks are likely to disrupt local economic activity.

DOI: https://doi.org/10.17016/2380-7172.3342

Size and Survival of Entrants to Retail Banking

The establishment of new banks and branches is especially important in the banking sector. Many consumers still use physical bank branches to access banking services (Annenberg et al, 2018; Jiang, Yu, and Zhang, 2023).

DOI: https://doi.org/10.17016/2380-7172.3345

Recent Developments in Hedge Funds’ Treasury Futures and Repo Positions: is the Basis Trade “Back"?

Daniel Barth, R. Jay Kahn and Robert Mann

In short, the answer is "probably", at least to some degree. This note summarizes recent developments in hedge funds' Treasury futures and repo positions derived from the Commodities Futures and Trading Commission's (CFTC's) Traders in Financial Futures data and the Office of Financial Research's ("OFR") Cleared Repo Collection.

DOI: https://doi.org/10.17016/2380-7172.3355

FinTech-Issued Personal Loans in the U.S.

Jessica N. Flagg and Simona M. Hannon

The financial technology advances of the past decade brought to prominence a new group of lenders active within the personal loan space—financial technology (FinTech) lenders. Although traditional lenders such as banks, thrifts, credit unions, and finance companies continue to play an important role in providing personal loans to consumers, FinTech lenders gained a notable market share.

DOI: https://doi.org/10.17016/2380-7172.3362

Price-Setting During the Covid Era

Hugh Montag and Daniel Villar

The Covid-19 pandemic has had enormous effects on every aspect of the economy, including inflation which has become one of the most pressing economic problems of the recovery period. Although inflation fell significantly at the onset of the pandemic, the increase seen since early 2021 has brought inflation to levels not seen since the 1980's.

DOI: https://doi.org/10.17016/2380-7172.3298

Non-Completion, Student Debt, and Financial Well-Being: Evidence from the Survey of Household Economics and Decisionmaking

Jacob Lockwood and Douglas Webber

As the price of college and student loan debt has grown relative to inflation in recent decades, many have questioned the return on investment offered by a college degree. Recent research tends to highlight the importance of risk when examining the question of "is college worth the investment?" (Hendricks and Leukhina, 2018; Akers, 2021).

DOI: https://doi.org/10.17016/2380-7172.3371

Europe: Well-positioned to get through next winter without major gas shortages

Following Russia’s invasion of Ukraine in early 2022 and resulting international sanctions, natural gas imports from Russia to Europe declined drastically to well below their historical averages. This reduction raised concerns about Europe’s energy supply, given its dependence on Russian gas.

DOI: https://doi.org/10.17016/2380-7172.3365

The Restrained Recovery of State and Local Government Payrolls from the Pandemic Recession

On the eve of the outbreak of the COVID-19 pandemic, state and local government (S&L) employment in the U.S. stood at 20 million. In the first three months of the pandemic, S&L payrolls plunged 1.5 million as social distancing reduced the need for many government services, such as in-person schooling, and S&L governments feared sharp revenue declines.

DOI: https://doi.org/10.17016/2380-7172.3369

Financial Flows to the United States in 2022: Was There Fragmentation?

Events of the last five years, such as the U.S.-China trade war, the COVID-19 pandemic, and—most recently—Russia’s invasion of Ukraine, have raised concerns in the popular press and among policymakers that the international economic and financial system is at risk of becoming significantly fragmented (Aiyar et al., 2023; Ip, 2023; Shin, 2023). Most recently, attention has shifted to the possibility of fragmentation along geopolitical lines, where countries primarily trade with and invest in other countries with which they share close diplomatic and political ties (International Monetary Fund, 2023a,b).

DOI: https://doi.org/10.17016/2380-7172.3322

Dealers' Treasury Market Intermediation and the Supplementary Leverage Ratio

Paul Cochran, Sebastian Infante, Lubomir Petrasek, Zack Saravay, Mary Tian

Treasury market intermediation by dealers, including Treasury securities market making and financing, requires regulatory capital. In particular, the six largest U.S. Treasury securities dealers are subsidiaries of large U.S. bank holding companies (BHCs), which are required to maintain a supplementary leverage ratio (SLR) of at least 5 percent at the BHC level.

DOI: https://doi.org/10.17016/2380-7172.3341

Empirical assessment of SR/CA small-dollar lending letter impact

Daniel Gorin, Sarah Gosky, and Michael Suher

Guidance is used by bank regulators to communicate supervisory expectations to both examiners and banks. In March 2020, in response to pandemic shut-downs, financial regulators issued a joint statement encouraging small-dollar lending to meet temporary cash-flow imbalances, unexpected expenses, or income short-falls.

DOI: https://doi.org/10.17016/2380-7172.3329

What determines passthrough of policy rates to deposit rates in the euro area?

Interest rates on bank deposits are sticky and move only sluggishly following changes in central bank policy rates. As deposits are typically the largest share of bank liabilities, deposit rate stickiness plays a key role for bank funding costs and profitability.

DOI: https://doi.org/10.17016/2380-7172.3297

The Persistent Urban Shortfall in Leisure and Hospitality Employment

Brendan J. Chapuis, Seth Murray, and Brendan M. Price

As a high-contact service sector with limited capacity for remote work, the US leisure and hospitality sector—which includes restaurants, bars, hotels, museums, and movie theaters—was hit particularly hard by the COVID-19 pandemic. In the first two months of the pandemic, leisure and hospitality lost over 8 million jobs, nearly half its employment (Figure 1, solid red line).

DOI: https://doi.org/10.17016/2380-7172.3358

A (Bayesian) Update on Inflation and Inflation Persistence

Inflation in 2021 reached the highest level seen since the early 1980s. High inflation has raised questions regarding the speed with which inflation may return to the 2-percent range consistent with the Federal Reserve's inflation objective.

DOI: https://doi.org/10.17016/2380-7172.3349

A New Index to Measure U.S. Financial Conditions

This note proposes a new index that can be used to gauge broad financial conditions and assess how these conditions are related to future economic growth. The index is broadly consistent with how the FRB/US model generally relates key financial variables to economic activity.

DOI: https://doi.org/10.17016/2380-7172.3281

Impact of Leverage Ratio Relief Announcement and Expiry on Bank Stock Prices

Ahmad Rahman and Missaka Warusawitharana

The onset of the Covid-19 pandemic in early 2020 drastically increased uncertainty throughout the economy. This led to turmoil in various financial markets, evidenced by the Dow Jones Industrial Average in March 2020 posting its largest single-day drop since the 2008 global financial crisis.

DOI: https://doi.org/10.17016/2380-7172.3330

The Transmission of Global Risk

Turmoil in the banking sector in the U.S. and Europe in early 2023 brought jitters to financial markets and increased concerns about a global risk-off event. Risk-off episodes—periods of increased global risk aversion—are characterized by sharp increases in credit spreads, high volatility in equity markets, and appreciation of reserve currencies

DOI: https://doi.org/10.17016/2380-7172.3327

2nd Annual International Roles of the U.S. Dollar Conference

Alain Chaboud, Ricardo Correa, Patrick Douglass, Linda S. Goldberg, Juan M. Londono, and Fabiola Ravazzolo

The U.S. dollar plays a central role in the global economy. In addition to being the most widely used currency in foreign exchange transactions, it represents the largest share in official reserves, international debt securities and loans, cross-border payments, and trade invoicing.

DOI: https://doi.org/10.17016/2380-7172.3344

"The International Role of the U.S. Dollar" Post-COVID Edition

For most of the last century, the preeminent role of the U.S. dollar in the global economy has been supported by the size and strength of the U.S. economy, its stability and openness to trade and capital flows, and strong property rights and the rule of law. As a result, the depth and liquidity of U.S. financial markets is unmatched, and there is a large supply of extremely safe dollar-denominated assets.

DOI: https://doi.org/10.17016/2380-7172.3334

Accumulated Savings During the Pandemic: An International Comparison with Historical Perspective

The COVID-19 pandemic gave rise to unprecedented global economic conditions. Due to a mix of government-imposed restrictions and voluntary personal decisions, mobility levels collapsed in March 2020 and subsequently closely tracked the successive waves of the pandemic.

DOI: https://doi.org/10.17016/2380-7172.3326

Distressed Firms and the Large Effects of Monetary Policy Tightenings

The stance of U.S. monetary policy has tightened significantly starting in March 2022. At the same time, the share of firms in financial distress has reached a level that is higher than during most previous tightening episodes since the 1970s.

DOI: https://doi.org/10.17016/2380-7172.3279

Real GDP and Productivity Measurement: What Do Macro Data Capture?

François de Soyres, Alexandre Gaillard, and Henry Young

Since the publication of their 2021 "Blue Book", the UK's Office for National Statistics started to measure real GDP in the national accounts using double deflation. This methodological update follows the premise that "double deflation is internationally accepted as the best approach to producing volume estimates of industry Gross Value Added".

DOI: https://doi.org/10.17016/2380-7172.3317

Private Firm Repayment Vulnerabilities and Adverse Economic Conditions

Matt Darst, Mary Zhang

This note extends to private firms an analysis of the impact of macroeconomic conditions on corporate interest coverage ratios (ICRs), a measure of repayment risk developed by McCoy et al. (2020). Our analysis is complimentary. We utilize unique data on private-firm balance sheets obtained through the Federal Reserve's Comprehensive Capital Analysis and Review (CCAR) process and evaluate the impact of updated and new macroeconomic projections on the distribution and path of corporate interest coverage ratios.

DOI: https://doi.org/10.17016/2380-7172.3254

Winners and losers from recent asset price changes

Asset prices and interest rates have changed dramatically and unexpectedly over the last two years as the Federal Reserve has raised its policy rate to combat higher inflation. In this note, we clarify the redistributive effects of these asset price changes in terms of welfare, which contrast sharply with those of wealth. Figure 1 depicts changes in the paths of six macroeconomic aggregates in the February 2023 CBO projection relative to their paths in the July 2021 projection.

DOI: https://doi.org/10.17016/2380-7172.3287

Did the Pandemic Change Who Became Behind on Rent? Characteristics of Renters Behind on Rent Before and After the Pandemic Onset

Zofsha Merchant, Erin Troland

As millions lost their jobs at the start of the COVID pandemic, many Americans risked missing their rent payments. Policymakers responded to the pandemic with hundreds of billions of dollars in government assistance and restrictions on evictions.

DOI: https://doi.org/10.17016/2380-7172.3292

From-Whom-to-Whom Relationships in the Financial Accounts of the United States: A New Methodology and Some Early Results

Michael Batty, Elizabeth Holmquist, Robert Kurtzman

The Financial Accounts of the United States (the Accounts or FAUS) provide data on the financial assets and liabilities of major sectors of the United States economy, disaggregated by financial instrument. The Accounts can thus serve many purposes, such as sizing sectors and instruments, analyzing changes in credit flows, and assessing the net worth of households.

DOI: https://doi.org/10.17016/2380-7172.3273

Gender Gaps in the Labor Market Widen Every Summer

Brendan M. Price and Melanie Wasserman

Gender gaps in labor market activity are pervasive, longstanding, and a regular subject of policy debates. Relative to men, women tend to work fewer hours per week, more conventional hours, and fewer years over the course of their lives.

DOI: https://doi.org/10.17016/2380-7172.3274

Nonresidential construction spending is likely not as weak as it seems

Unlike any other major component of GDP, private investment in nonresidential structures excluding drilling and mining (henceforth "NRS") has steadily declined since the start of 2020. Figure 1 shows the evolution of GDP as well as the main components of private domestic final demand since 2019.

DOI: https://doi.org/10.17016/2380-7172.3283

Measurement and Effects of Supply Chain Bottlenecks Using Natural Language Processing

Supply chain bottlenecks can have significant impacts on the real economy. When firms experience shortages, shipping delays, or shutdowns, as occurred during the COVID-19 pandemic, they may be unable to produce, transport, and sell their products.

DOI: https://doi.org/10.17016/2380-7172.3257

A note on industry concentration measurement

Ryan Decker and Jacob Williams

Industry concentration—the share of sales or output accounted for by the largest firms within an industry—has received widespread attention recently, in part because concentration has generally risen in recent decades (figure 1). Measurement challenges are at the core of concentration-based inquiry: industry sales concentration is one of the lowest-frequency business statistics produced by the U.S. statistical agencies, with concentration data being released only twice per decade as part of the Economic Censuses.

DOI: https://doi.org/10.17016/2380-7172.3256

Balance Sheet Policies in an Evolving Economy: Some Modelling Advances and Illustrative Simulations

Hess Chung, Etienne Gagnon, James Hebden, Kyungmin Kim, Bernd Schlusche, Eric Till, James Trevino, and Diego Vilán

Once considered "unconventional," balance sheet policies have become an integral part of the toolkit of many central banks. Increased reliance on balance sheet policies reflects in part a decline in the neutral level of interest rates, which limits central banks' ability to cut their policy rates to support the economy during downturns, and many observers expect that neutral level to remain low relative to its historical average in the coming decades.

DOI: https://doi.org/10.17016/2380-7172.3246

New Insights from N-CEN: Liquidity Management at Open-End Funds and Primary Market Concentration of ETFs

Fang Cai, Grace Chuan, Kevin Henry, Chaehee Shin, and Tugkan Tuzun

Structural vulnerabilities associated with open-end funds have received increasing attention among academics and regulators over the past few years. Despite the effort by policymakers to enhance the liquidity risk management practices at these funds, evaluating the availability, use and effectiveness of liquidity management tools continues to be a challenging task in assessing vulnerabilities in open-end funds, largely because comprehensive data on open-end funds' access to liquidity management tools remain scarce.

DOI: https://doi.org/10.17016/2380-7172.3226

Drivers of Post-pandemic Inflation in Selected Advanced Economies and Implications for the Outlook

With the reopening of economies from strict COVID-19 lockdowns and the war-induced sharp increases in food, energy, and other commodity prices, headline inflation has surged globally, as shown for a few selected advanced economies by the black line in the left panel of figure 1. Core inflation (the dashed red line) has also risen sharply and has become increasingly persistent across these economies.

DOI: https://doi.org/10.17016/2380-7172.3232

The SNB-FRB-BIS High-Level Conference on Inflation Risk and Uncertainty

Uncertainty about inflation has risen considerably across the globe since the start of the COVID-19 pandemic. Lack of clarity about how far inflation might fall during the depths of the pandemic gave way to concerns about inflationary pressures as demand surged and supply was constrained throughout 2021.

DOI: https://doi.org/10.17016/2380-7172.3242

Disclaimer: FEDS Notes are articles in which Board staff offer their own views and present analysis on a range of topics in economics and finance. These articles are shorter and less technically oriented than FEDS Working Papers and IFDP papers.

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Last Update: May 15, 2024