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.

Who Buys Treasuries When the Fed Reduces its Holdings

Lucy Cordes and Erin Ferris

The Federal Reserve began to decrease the size of its balance sheet in June 2022, entering a phase of "balance sheet reduction" that continues today. In this note, we determine which sectors absorbed the resulting increased supply of Treasury coupon securities. We find that, during the first balance sheet reduction period between 2017 and 2019, dealers, households, and hedge funds bought significantly more Treasury coupons. However, during the post-pandemic balance sheet reduction period, it appears that dealers, private insurance, and the rest of the world purchased the Treasury coupon securities from the reduction in Federal Reserve purchases, not hedge funds.

DOI: https://doi.org/10.17016/2380-7172.3512

Mitigating Too Big to Fail

Wayne Passmore and Colleen Faherty

Financial institutions that are "Too-Big-to-Fail" impede proper market functioning in financial services. These firms can undermine the disciplining effects of capital markets should their failure have substantial "knock-on" effects on the real economy.

DOI: https://doi.org/10.17016/2380-7172.3521

A Note On Revolving Credit Estimates

Michael M. Chernousov, Jessica N. Flagg, Simona M. Hannon, Virginia L. Lewis, Suzanna M. Stephens, and Alice H. Volz

Revolving credit represents a notable share of consumer debt and is an important part of house- hold balance sheets. At the end of 2023, revolving credit was measured at over $1.3 trillion in the Z.1 Statistical Release, "Financial Accounts of the United States," and accounted for more than 25 per- cent of total consumer credit.

DOI: https://doi.org/10.17016/2380-7172.3526

Rural Employment Disparities by Race, Ethnicity, and Region

This FEDS Note explores racial and regional differences in metro-nonmetro employment disparities by looking at employment rates by age, sex, race and ethnicity, and region. It finds substantial differences in the metro-nonmetro employment gap across racial and ethnic groups, with Black or African American and American Indian and Alaska Native men and women having much lower employment rates in nonmetro areas relative to their metro peers.

DOI: https://doi.org/10.17016/2380-7172.3510

Lessons from Past Monetary Easing Cycles

Francois de Soyres and Zina Saijid

Many central banks are at a critical juncture in their current monetary policy cycles as they assess whether it would be appropriate to embark on an easing phase following one of the most aggressive episodes of monetary tightening in recent history. In this note, we highlight key aspects of past monetary policy easing episodes in selected advanced economies and what lessons we may learn from these past experiences.

DOI: https://doi.org/10.17016/2380-7172.3504

Unpacking the Effects of Bank Credit Supply Shocks on Economic Activity

In this note, we examine the effects of bank credit supply shocks on real economic activity. First, we estimate how GDP and various aggregate demand sectors respond to such shocks. Second, based on the estimated responses, we compute how much those sectors contribute to the overall response of aggregate demand to bank credit supply shocks.

DOI: https://doi.org/10.17016/2380-7172.3517

Measuring Bank Credit Supply Shocks Using the Senior Loan Officer Survey

Estimating the effects that bank credit supply has on macroeconomic activity has long been an area of active research. A key challenge in pursuing this goal is the ability to measure such shocks to banks' supply of credit separately from shocks to borrowers' demand for credit.

DOI: https://doi.org/10.17016/2380-7172.3516

Why is the U.S. GDP recovering faster than other advanced economies?

Francois de Soyres, Joaquin Garcia-Cabo Herrero, Nils Goernemann, Sharon Jeon, Grace Lofstrom, and Dylan Moore

Economic performance since the onset of the COVID-19 pandemic has been very heterogenous across countries. While real GDP in the U.S. has already returned to its pre-pandemic trend, advanced foreign economies (AFEs) experienced a much weaker recovery, both relative to the U.S. and to their own pre-pandemic trend.

DOI: https://doi.org/10.17016/2380-7172.3495

Monetary Policy and Exchange Rates during the Global Tightening

Most central banks tightened monetary policy considerably over the past few years as inflation surged globally. Though effects of the COVID pandemic on global supply chains and labor markets was a common factor driving inflation higher across economies, domestic factors led to notable variation in the timing and extent of monetary policy responses.

DOI: https://doi.org/10.17016/2380-7172.3489

Why Do Mutual Funds Invest in Treasury Futures?

Benjamin Iorio, Dan Li, and Lubomir Petrasek

Asset managers’ net long positions in Treasury futures have reached their historical highs in recent months, driven in part by mutual funds’ demand for short- and medium-term Treasury futures. Analyzing mutual fund portfolio holdings reports on SEC Form N-PORT, we find that the increase in mutual funds’ futures holdings since 2020 can be attributed to both increased demand for Treasury exposures during a higher interest rate environment and mutual funds’ preference for sourcing these exposures through futures rather than securities.

DOI: https://doi.org/10.17016/2380-7172.3488

Stress Testing the Corporate Debt Servicing Capacity: A Scenario Analysis

The total volume of outstanding debt issued by U.S. nonfinancial firms relative to GDP has increased by about 8 percentage points in the past decade. While a growing volume of debt was largely viewed as benign in the low interest rate environment of the 2010s, the rapid increase in both short- and long-term rates since early 2022 has raised concerns about the debt-servicing capacity of the corporate sector.

DOI: https://doi.org/10.17016/2380-7172.3481

Estimating the importance of monetary policy shocks for variation in the U.S. homeownership rate

Daniel Dias and Joao Duarte

Being a homeowner is one of the tenets of the American dream. In general, relative to renting, people see homeownership as a path to wealth through the usual appreciation of the house prices and the forced savings through mortgage payments but also a path to financial stability through more stable and predictable housing costs (Young et al., 2023).

DOI: https://doi.org/10.17016/2380-7172.3457

Firms' financing choice between short-term and long-term debts: Are they substitutes?

Sam Hempel, Yi Li, and Sean Tibay

When selecting debt to finance their operations and investments, companies face crucial decisions regarding the appropriate types of debt. Despite the classic Modigliani–Miller (1958) capital structure irrelevance result, real-world market frictions can significantly impact a firm's capital structure decisions. This reality means that one debt type is not a perfect substitute for another, due to differences in important factors including maturity structures, funding purposes, rollover risks, and funding costs.

DOI: https://doi.org/10.17016/2380-7172.3438

Inequality and financial sector vulnerabilities

In recent decades, income and wealth inequality have risen notably in the United States and other countries around the world. Importantly, such rises in inequality have been shown to predict financial crises.

DOI: https://doi.org/10.17016/2380-7172.3482

High tech business entry in the pandemic era

Ryan Decker and John Haltiwanger

The COVID-19 pandemic and its aftermath have featured a surge in business entry (Decker and Haltiwanger 2024). A natural question is whether the elevated entry seen in recent years will have positive implications for aggregate productivity growth given the historically important role of business entry for productivity dynamics (Decker et al. 2014, Alon et al. 2018).

DOI: https://doi.org/10.17016/2380-7172.3499

Introducing New Valuation Change Data for U.S. Cross-Border Portfolio Holdings

Andrew H. McCallum, Laura DeMane, Nyssa Kim, Emily Liu, Andrew Loucky

The most comprehensive data on cross-border capital holdings for the United States come from the Treasury International Capital (TIC) System. These data inform the official U.S. balance of payments statistics and are crucial for understanding U.S. capital flows, their causes, and their effects on the U.S. economy.

DOI: https://doi.org/10.17016/2380-7172.3493

Tapping the Brakes: The Effect of the 2023 United Auto Workers Strike on Economic Activity

The United Auto Workers (UAW) union tapped the brakes and called for a strike against all Detroit Three automakers—General Motors (GM), Ford, and Stellantis—on September 15, 2023, after having failed to reach an agreement with the automakers on a new four-year contract. The strike lasted for about six weeks and was the first strike in history targeting all Detroit Three automakers.

DOI: https://doi.org/10.17016/2380-7172.3477

Global trade patterns in the wake of the 2018-2019 U.S.-China tariff hikes

Flora Haberkorn, Trang Hoang, Gordon Lewis, Carter Mix, and Dylan Moore

In 2018, the U.S. government announced bilateral tariff increases on a number of Chinese goods. Thus began a tit-for-tat exchange of increasing bilateral tariffs between the U.S. and China until, by the end of 2019, most of the goods traded between the U.S. and China were subject to additional tariffs. In this note, we use Census and UN Comtrade data to study the effects of the 2018-19 U.S.-China tariff hikes on global trade patterns.

DOI: https://doi.org/10.17016/2380-7172.3464

Is This Time Different: How Are Banks Performing during the Recent Interest Rate Increases Compared to 2004-2006?

In 2022, the Federal Reserve began its latest monetary tightening cycle. Increases in interest rates are generally favorable for commercial bank net interest income (interest income minus interest expense). This relationship holds because many loan types have adjustable rates, and banks do not pass through all interest rate increases to depositors.

DOI: https://doi.org/10.17016/2380-7172.3466

Tokenized Assets on Public Blockchains: How Transparent is the Blockchain?

Cy Watsky, Matthew Liu, Nolan Ly, Kurtis Orr, Amber Seira, Zach Vida, Lawrence Wu

With the proliferation of programmable blockchains with smart contract capabilities, new blockchain technology use cases have emerged that involve the tokenization of conventional financial assets and related smart contract-based financial services. While early blockchains like Bitcoin introduced native cryptocurrencies as new asset classes, in recent years, market participants have noted the potential for blockchain and distributed ledger technologies (DLT) to be used to trade tokenized versions of bonds, money funds, and commodities, among other assets (GFMA, 2023, p. 6).

DOI: https://doi.org/10.17016/2380-7172.3444

Quantifying Treasury Cash-Futures Basis Trades

Jonathan Glicoes, Benjamin Iorio, Phillip Monin, and Lubomir Petrasek

The Treasury cash-futures basis trade exploits the difference in prices between a Treasury security and a related Treasury futures contract – the so-called cash-futures basis – by purchasing the asset that is relatively undervalued and selling the other in a bet that the prices will converge. Basis traders support Treasury market functioning by keeping the prices of Treasury futures near their fair value relative to Treasury securities and by serving as an important source of demand for Treasury securities, including during the 2017-2019 period of quantitative tightening when basis traders absorbed much of the increased Treasury supply.

DOI: https://doi.org/10.17016/2380-7172.3458

Rising Markups and Declining Business Dynamism: Evidence From the Industry Cross Section

Brian C. Albrecht and Ryan A. Decker

In recent decades, various measures of “business dynamism”—such as new business entry rates and gross job or worker flows—have seen significant declines in the U.S.. Over a similar time frame, there is evidence that an important measure of market power—the average markup—has risen significantly (figure 1, left panel; De Loecker, Eeckhout, and Unger 2020). A natural question is whether these patterns are related.

DOI: https://doi.org/10.17016/2380-7172.3471

Measuring Unemployment Risk

Brendan J. Chapuis and John Coglianese

In this note, we introduce a measure of unemployment risk, the likelihood of a worker becoming unemployed within the next twelve months. By using nonparametric machine learning applied to data on millions of workers in the US, we can estimate how unemployment risk varies across individuals and over time.

DOI: https://doi.org/10.17016/2380-7172.3453

Primary and Secondary Markets for Stablecoins

Cy Watsky, Jeffrey Allen, Hamzah Daud, Jochen Demuth, Daniel Little, Megan Rodden, Amber Seira

Stablecoins are increasingly important in decentralized finance (DeFi) and crypto asset markets, and their prominence has led to greater scrutiny of their unique role as expressions of the U.S. dollar running on blockchain networks. Stablecoins attempt to perform a mechanically complex function – to remain pegged to the dollar, even during periods of market volatility.

DOI: https://doi.org/10.17016/2380-7172.3447

Private Credit: Characteristics and Risks

Private credit or private debt investments are debt-like, non-publicly traded instruments provided by non-bank entities, such as private credit funds or business development companies (BDCs), to fund private businesses. Private credit is typically extended to middle-market firms with annual revenues between $10 million and $1 billion, but has grown rapidly in recent years to fund larger companies that were traditionally funded by leveraged loans.

DOI: https://doi.org/10.17016/2380-7172.3462

Supply vs Demand Factors Influencing Prices of Manufactured Goods

The strong surge and rapid retreat of U.S. goods price inflation during 2021-2023 has occupied the forefront of economic policy discussions, and debate on the primary causes continues. Some commentators point to widespread supply bottlenecks and adverse geo-political events that caused significant disruption to the production and availability of manufactured goods.

DOI: https://doi.org/10.17016/2380-7172.3465

Implications of a U.S. CBDC for International Payments and the Role of the Dollar

Technological advances in recent decades have brought about a wave of private-sector innovation in payments and have led central banks to explore a variety of improvements to their payment systems, including the possibility of issuing a central bank digital currency (CBDC). Survey evidence from the Bank for International Settlements (BIS) shows that over 90% of central banks are exploring CBDCs (Kosse & Mattei, 2022). The Federal Reserve is also exploring the implications of, and options for, introducing a CBDC.

DOI: https://doi.org/10.17016/2380-7172.3435

The Federal Reserve’s responses to the post-Covid period of high inflation

In the face of the COVID-19 pandemic in March 2020, the Federal Reserve committed to using its full range of tools to support the U.S. economy. Over the next year and a half, with progress on vaccinations and strong policy support, indicators of economic activity and employment strengthened while inflation moved higher. Faced with a tight labor market and elevated inflation, the Federal Open Market Committee (FOMC) began a process of unwinding the very accommodative stance of monetary policy and moving to a restrictive policy stance to address inflation pressures. Here we review the sequence of actions taken by the Committee between late 2020 and mid-2023 as well as discuss some issues it contemplated along the way; the table provides a chronological list of key events over this period.

DOI: https://doi.org/10.17016/2380-7172.3455

Governance of Permissionless Blockchain Networks

Amber Seira, Jeffrey Allen, Cy Watsky, and Richard Alley

A permissionless blockchain network is a system of physically distributed computers running a copy of a shared ledger and using the same software rules that enable all network participants to “read, submit, and validate transactions” (Beck, Müller-Bloch, and King, 2018, p. 1022). A permissionless system’s accessibility stands in contrast to that of permissioned systems, in which a central authority pre-selects validators and potentially restricts viewing and submission rights (Krause, Natarajan, and Gradstein, 2017; Beck, Müller-Bloch, and King, 2018).

DOI: https://doi.org/10.17016/2380-7172.3443

Assessing China's Efforts to Increase Self-Reliance

Francois de Soyres and Dylan Moore

Since the beginning of 2018, the United States and China have been increasing tariff rates on each other's imports, spurring debates about a possible fragmentation of trade into blocs of aligned countries (Pierce and Yu (2023), Alfaro and Chor (2023)). Later that year, in a November 2018 speech to workers at a state-owned enterprise, President Xi Jinping mentioned that current events were forcing China to "travel the road of self-reliance."

DOI: https://doi.org/10.17016/2380-7172.3436

Inflation Perceptions During the Covid Pandemic and Recovery

Since 2016, the Michigan Surveys of Consumers (MSC) have included questions on inflation perceptions—what people believe inflation to have been—that are worded symmetrically with their long-standing questions on inflation expectations. The questions on inflation perceptions are currently posed four times a year—in February, May, August, and November. Using available data at the time, Axelrod, Lebow, and Peneva (2018) concluded that inflation expectations and perceptions are very similar and that if perceptions were to change, expectations were likely to change as well.

DOI: https://doi.org/10.17016/2380-7172.3439

Does the Ability to Work Remotely Alter Labor Force Attachment? An Analysis of Female Labor Force Participation

At the onset of the COVID-19 pandemic, a large share of the employed switched to remote work. According to the Bureau of Labor Statistics (BLS)'s Current Population Survey (CPS), almost 40 percent of workers were working remotely in May 2020 because of the pandemic (figure 1, purple line), adding to the evidence from other individual- and firm-level surveys.

DOI: https://doi.org/10.17016/2380-7172.3433

Changes in the U.S. Economy and Rural-Urban Employment Disparities

In the United States, long-term changes in the nature of the economy – including advances in technological innovation and automation, declines in the extraction of certain energy resources, increases in globalization, and a shift to the "knowledge-based" economy – have coincided with disproportionately negative employment outcomes in many rural, or "nonmetro," communities, especially for prime working-age men and those with less than a high school degree.

DOI: https://doi.org/10.17016/2380-7172.3428

The Effects of Credit Score Migration on Subprime Auto Loan and Credit Card Delinquencies

John Driscoll, Jessica Flagg, Bradley Katcher, and Kamila Sommer

In the early stages of the pandemic, income support and forbearance programs led consumer loan delinquency rates to fall to near-record lows for borrowers across the credit score distribution. Since the second half of 2021, however, delinquency rates have risen, and by 2023:Q3, overall rates for auto and credit card loans had risen above their pre-pandemic levels.

DOI: https://doi.org/10.17016/2380-7172.3419

Question design and the gender gap in financial literacy

Many surveys have measured people's financial literacy with a standard set of questions covering interest, inflation, and investment diversification. Results from these surveys have consistently shown that women are less likely than men to answer the financial literacy questions correctly – the so-called financial literacy gender gap.

DOI: https://doi.org/10.17016/2380-7172.3415

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: September 04, 2020