en Sriya Anbil, Sebastian Infante, Zeynep Senyuz

In an ample-reserves framework, administered rates anchor money markets but suppress information from unsecured interbank trading. We recover that information by isolating the small interbank segment of the federal funds market. Using high-frequency bank-level data, we employ deposit shocks as an instrument for bank borrowing demand. Our analysis reveals that non-bank lenders, such as Federal Home Loan Banks, supply funds elastically, whereas bank lenders exhibit price inelasticity, which intensifies as their reserve balances decline, particularly for bankers’ banks. This interbank segment highlights distributional frictions in the federal funds market that emerge well before aggregate reserves become scarce and provides new evidence on monetary policy transmission in an ample-reserves regime.]]> FEDS Paper Celso Brunetti, Jeffery H. Harris, Ioannis Spyridopoulos

No, in the mortgage market. Using confidential micro-level data combining mortgage contracts with credit and repayment records for 44 million loans spanning 5,000 bank mergers over nearly three decades, we find no changes to mortgage rates, approval rates, or delinquency rates. Local mortgage markets remain remarkably competitive despite consolidation, averaging over 100 active lenders in each county every post-merger quarter. Our findings reveal significant merger selection motives: large acquiring banks target community banks with relationship-intensive, portfoliolending business models, whereas community banks appear to merge together to gain scale and compete. Overall, our study challenges the view that bank mergers increase market concentration and create market power that harms household borrowers.]]> FEDS Paper Eric Engstrom

In January 2012, the Federal Reserve began publishing the Summary of Economic Projections (SEP) "dot plot," revealing FOMC participants' projections for the federal funds rate. This paper documents a dual role for SEP projections in the formation of private interest-rate expectations. On one hand, SEP projections contain valuable information, achieving lower forecast errors than consensus surveys, VAR models, and several market-based measures at many horizons. Because the SEP is informative, some reliance on it by private forecasters is natural. On the other hand, because the SEP is updated only quarterly, SEP projections that are useful when released can become stale between updates. If private forecasts continue to place excessive weight on those earlier projections, they may respond too slowly to newly arriving information. Consistent with this prediction, survey forecast errors-and, to a weaker extent, market-based forecast errors-are systematically related to the gap between current expectations and lagged SEP projections, even after controlling for macroeconomic conditions, risk premia, and other predictors of forecast errors. The findings imply that official guidance can simultaneously improve average forecast accuracy while reducing the speed with which new information is incorporated into expectations.]]> FEDS Paper David Glancy

Loan modifications can either amplify or mitigate credit losses depending on the strategy lenders employ. Using detailed supervisory data and a model incorporating various frictions that could encourage modifications (liquidity constraints, foreclosure costs, and loss recognition costs), I assess why banks extend CRE loans. I find that extensions predominantly address temporary payment frictions, both in normal times and following the Spring 2023 bank stress episode. Contrary to concerns about banks “extending-and-pretending” following that episode, banks increased income and principal paydown requirements for extensions, contributing to strong ex-post performance for extended loans.]]> FEDS Paper Kabir Dasgupta, Jennifer Fernandez, and Alicia Lloro

This study examines financial challenges faced by justice-involved individuals using 2023-2024 Survey of Household Economics and Decisionmaking data. Individuals with justice system contact experience substantially worse financial outcomes than those without criminal records, with disparities widening by severity of involvement. Compared to individuals with no prior records, those arrested but not convicted are 4 percentage points less likely to report doing at least okay financially, while formerly convicted as well as incarcerated adults are 15 percentage points less likely. Formerly incarcerated individuals are also 21 percentage points less likely to have credit scores above 660 and 13 percentage points less likely to have credit cards. These disparities mirror patterns observed across education levels, where adults with lower educational attainment experience lower financial well-being and inclusion. Our findings document substantial barriers to financial stability among justice-involved populations and may inform policies promoting financial inclusion and improving economic outcomes for this group.]]> FEDS Paper Benjamin Knox and Annette Vissing-Jorgensen

We survey and extend work on the Federal Reserve’s effect on the stock market, focusing on three empirical findings: The effect of monetary policy surprises in a narrow window around announcements from the Federal Open Market Committee (FOMC), the pre-FOMC announcement drift, and the FOMC cycle in stock returns. We discuss the magnitude of the Fed’s impact (directional effects or effects on average stock returns), the types of shocks coming from the Fed (pure monetary policy shocks, reaction function news, or information about the Fed’s view of the economy), and the asset pricing channels through which effects emerge (an equity premia for news from the Fed, or changes to yields, equity premia, or expected dividends). We also consider the information transmission (communication) channels. The Fed’s effect on the stock market is large, even for average stock returns earned over periods of several decades. Fed-induced changes to both yields and equity premia play substantial roles, with less direct evidence available regarding cash flows. For stocks, reaction function news appears to be more important than Fed information effects. Communication flows outside announcements windows are important.]]> FEDS Paper Margaret M. Jacobson

This paper shows that expected capital gains in several MSAs were higher for relatively lower-priced, rather than higher-priced, houses during the U.S. boom of the 2000s. Because buyers of lower-priced houses tend to be more sensitive to credit conditions than buyers of higher-priced houses, this paper documents patterns that are consistent with an interaction of beliefs and credit conditions in a time period where direct evidence on house price beliefs is scarce. Documenting this interaction is important for unifying beliefs and credit conditions as joint, instead of competing, explanations for the U.S. housing boom of the 2000s.]]> FEDS Paper Ander Perez-Orive, Yannick Timmer, Alejandro van der Ghote

We revisit the credit channel of monetary policy when firms face multiple financing constraints. Our theory shows that the multiplicity of constraints dampens the transmission of expansionary policy to firm borrowing and investment notably but amplifies the transmission of policy tightening. This asymmetry arises because, when policy tightens (eases), the most (least) responsive constraint binds. Using U.S. firm-level data and exploiting a quasi-natural experiment, we find strong support for these predictions. Embedding the mechanism into a New Keynesian framework, we find that the drop in investment after contractionary shocks is twice as large as its increase following equally-sized expansionary shocks.]]> FEDS Paper
This paper proposes a validation framework for LLM-generated measurements when reliable benchmarks are unavailable. Validity is established by testing whether an LLM can reconstruct passages from annotated labels while maintaining semantic consistency with the original text. The framework avoids circular reasoning by establishing testable prerequisite properties that must be met for a validation to be considered successful. Application to news article data demonstrates that the framework serves as a practical alternative to human benchmarking, which offers advantages in objectivity, scalability, and cost-effectiveness while identifying cases where LLMs capture economic meaning that human evaluators miss.]]> FEDS Paper Alyssa G. Anderson, Alessandro Barbarino, Anthony M. Diercks, and Stephen Miran

]]> FEDS Paper Leland D. Crane and Paul E. Soto

We evaluate whether LLMs have had any discernible impact on the aggregate labor market so far. We focus on occupations that are computer programming-intensive, motivated by data showing that coding is one of the most LLM-exposed tasks. Linking O*NET to CPS we find that aggregate employment of coders has decelerated sharply since the introduction of ChatGPT. Using a novel control variable for industry-level shocks we show that the deceleration is not attributable to the exposure of coders to slowing industries, suggesting instead that coders experienced an occupation-specific shock around the introduction of ChatGPT. Coder employment has continued to grow in recent years, though much more slowly than it did pre-2022. We validate the industry-level control variable by examining historical examples of occupations that experienced either occupation-specific or industry-level shocks. We also provide statistics on the agreement rates between different measures of AI exposure.]]> FEDS Paper Akos Horvath and Benjamin S. Kay

Building on queuing theory, we develop and empirically validate a novel theoretical model of residential mortgage supply. Our model gives insight into how the stochastic arrival and sequential servicing of loan applications affect mortgage origination. The model provides closed-form predictions for lenders’ optimal response to changes in the level and price elasticity of mortgage demand. Using confidential HMDA data, we estimate that a one standard deviation increase in mortgage demand raises mortgage rate spreads by 3 to 8 basis points, loan quantities by 20 to 32 percent, and application processing times by 3 to 5 days. We also provide empirical evidence for the model prediction that a higher elasticity of mortgage demand moderates price increases due to demand shocks, which can limit lenders’ exploitation of their market power.]]> FEDS Paper Erik Heitfield

This paper examines how model uncertainty affects the price of catastrophe risk insurance. We use unique data on expected loss rate projections from seven hurricane risk models approved by regulators for use in Florida property insurance rate setting to quantify model uncertainty. By combining these data with newly published information on local property insurance markets, we are able to empirically test the relationship between model uncertainty and insurance premiums across Florida ZIP codes and over time. Controlling for confounding variables and time-invariant latent factors that may be correlated with observed variables, we find strong empirical support for the hypothesis that greater dispersion among model forecasts leads to higher homeowners insurance premiums. Our findings suggest that, had model dispersion been ten percent lower than that observed in 2021, a typical Florida homeowner would have saved $50 to $90 on her annual homeowners insurance premium.]]> FEDS Paper Jeff Larrimore

Circulation into and out of the top one percent is pronounced in the U.S. One third exit after a year and two-thirds exit after a decade. This mobility lowers top income shares when shifting from annual to multi-year income measures. Intragenerational mobility over two decades lowers recent top one percent fiscal income shares by over 10 percent. Two-decade mobility reduces top 0.1% shares by over 20 percent, top 0.01% shares by 30 percent, and top 0.001% shares by 40 percent. Effects of variability on wealth inequality are similar in magnitude, although more modest as a share of top wealth inequality.]]> FEDS Paper Edward Nelson

Central bank independence is a major area of study, but the economic literature has been characterized by numerous misstatements regarding how U.S. monetary policy independence has operated over time. Against this backdrop, this paper lays out major elements of the practice of central bank independence in the United States in the period from 1951 to 2006—a time span that encompasses the William McChesney Martin, Jr., through Alan Greenspan tenures as the head of the Federal Reserve. Many documentary materials and policymaker quotations not considered in previous research on U.S. monetary policy are highlighted. The analysis covers both institutional aspects (statutory objectives, formalities of Federal Reserve structure, and conventions followed in regularizing the central bank’s interactions with the legislative and executive branches) and the conceptual basis for independence, as expressed by leading Federal Reserve officials, particularly Chairs. It is shown—with heavy reliance on their own words—how Federal Reserve Chairs have characterized the position of the central bank within the governmental structure of the United States and how they have set out the case for monetary policy independence. What emerges is that successive Chairs over the decades made essentially the same, three-part, economic case for independence. This case does not rely on the arguments associated with economic research on time inconsistency.]]> FEDS Paper