The “Cadillac Tax”: Driving Firms to Change Their Plans?

Jason Bram, Nicole Dussault and Maxim Pinkovskiy



Since the 1940s, employers that provide health insurance for their employees can deduct the cost as a business expense, but the government does not treat the value of that coverage as taxable income. This exclusion of employer-provided health insurance from taxable income—$248 billion in 2013, according to the Congressional Budget Office—is a huge subsidy for health spending. Many economists cite the distortionary effects of this tax subsidy as an important reason for why U.S. health care spending accounts for such a large share of the economy and why spending historically has grown so rapidly. In this blog post, we focus on a provision of the Affordable Care Act (ACA) that is intended to chip away at this tax subsidy, the colloquially labelled “Cadillac Tax” on the priciest employer-provided health insurance plans.

From the Vault: The Path of Interest Rates

Anna Snider

In recent speeches, the Federal Reserve’s Janet Yellen and Lael Brainerd explained how policymakers are likely to take a cautious approach to normalizing monetary policy given historically low estimates for the natural rate of interest and expectations that the rate will rise only gradually over time.

Just Released: Five New Data Series on Consumer Expectations

Olivier Armantier, Giorgio Topa, Wilbert van der Klaauw, and Basit Zafar



Today, the New York Fed is introducing a number of new data series and interactive charts reporting findings from its Survey of Consumer Expectations (SCE). Since January 2014, we have been reporting findings from this monthly survey on U.S. households’ views on inflation, commodity prices, the labor market and household finances. In addition to interactive charts showing national trends (going back to June 2013), as well as trends by demographic groups (age, income, education, numeracy and geography), we also make the underlying micro data (with a nine-month lag) available for download for research purposes.

The Graying of American Debt

Meta Brown, Donghoon Lee, Joelle Scally, Katherine Strair, and Wilbert van der Klaauw



The U.S. population is aging and so are its debts. In this post, we use the New York Fed Consumer Credit Panel, which is based on Equifax credit data, to look at how debt is changing as baby boomers reach retirement age and millennials find their footing. We find that aggregate debt balances held by younger borrowers have declined modestly from 2003 to 2015, with a debt portfolio reallocation away from credit card, auto, and mortgage debt, toward student debt. Debt held by borrowers between the ages of 50 and 80, however, increased by roughly 60 percent over the same time period. This shifting of debt from younger to older borrowers is of obvious relevance to markets fueled by consumer credit. It is also relevant from a loan performance perspective as consumer debt payments are being made by older debtors than ever before.

Whither Mortgages?

Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klaauw



Our most recent Quarterly Report on Household Debt and Credit showed that although total household debt has increased somewhat since 2012, that growth has been driven almost entirely by nonhousing debt—credit cards, auto loans and student loans. The largest category of household debt—mortgages—has been essentially flat since 2012, in spite of a substantial rise in housing prices over that period. In this post, we explore the sources of the sluggish growth in mortgage debt using our New York Fed Consumer Credit Panel, which is based on Equifax credit data.

Did Third Avenue’s Liquidation Reduce Corporate Bond Market Liquidity?

Tobias Adrian, Michael Fleming, Erik Vogt, and Zachary Wojtowicz



The announced liquidation of Third Avenue’s high-yield Focused Credit Fund (FCF) on December 9, 2015, drew widespread attention and reportedly sent ripples through asset markets. Events of this kind have the potential to increase the demand for market liquidity, as investors revise expectations, reassess risk exposures, and fulfill the need to trade. Moreover, portfolio effects and general fears of contagion may increase the demand for liquidity in assets only remotely related to a liquidating firm’s direct holdings. In this post, we examine whether FCF’s announced liquidation affected liquidity and returns in broader corporate bond markets.

Quantifying Potential Spillovers from Runs on High-Yield Funds

Nicola Cetorelli, Fernando Duarte, Thomas Eisenbach, and Emily Eisner



On December 9, 2015, Third Avenue Focused Credit Fund (FCF) announced a “Plan of Liquidation,” effectively halting investor redemptions. This announcement followed a period of poor performance and large outflows. Assets at the fund had declined from a peak of $2.5 billion in May of 2015 to $942 million in November. Investors had redeemed more than $1.1 billion in shares since April 2015, and the fund’s year-to-date performance as of November had fallen below -21 percent. The FCF “run” highlights the need to quantify the potential for systemic risk among open-end mutual funds and the potential for contagion in the event of more widespread runs on other vulnerable funds. In this post, we first characterize open-end mutual funds that seem vulnerable to redemptions in much the same way as FCF. We then analyze the potential for fire-sale spillovers to other mutual funds if large redemptions in “at-risk” funds were to occur.

Are Asset Managers Vulnerable to Fire Sales?

Nicola Cetorelli, Fernando Duarte, and Thomas Eisenbach

Update: A technical appendix has been added to the post.



According to conventional wisdom, an open-ended investment fund that has a floating net asset value (NAV) and no leverage will never experience a run and hence never have to fire-sell assets. In that view, a decline in the value of the fund’s assets will just lead to a commensurate and automatic decline in the fund’s equity—end of story. In this post, we argue that the conventional wisdom is incomplete and then explore some of the systemic risk consequences of investment funds’ vulnerabilities to fire-sale spillovers.

High-Frequency Cross-Market Trading and Market Volatility

Dobrislav Dobrev and Ernst Schaumburg



The close relationship between market volatility and trading activity is a long-established fact in financial markets. In recent years, much of the trading in U.S. Treasury and equity markets has been associated with nearly simultaneous trading between the leading cash and futures platforms. The striking cross-activity patterns that arise in both high-frequency cross-market trading and related cross-market order book changes in U.S. Treasury markets are also witnessed in other asset classes and naturally lead to the question that we investigate in this post of how the cross-market component of overall trading activity is related to volatility.

The Workup, Technology, and Price Discovery in the Interdealer Market for U.S. Treasury Securities

Ernst Schaumburg and Ron Yang



The interdealer market for Treasury securities shares many features with other highly liquid markets that trade electronically using anonymous central limit order books. The interdealer Treasury market, however, contains a unique trading protocol, the so-called workup, that accounts for the majority of interdealer trading volume. While the workup is designed to enhance liquidity in a market with diverse participation, it may also delay certain price-improving order book adjustments and therefore affect price discovery. In this post, we exploit the tight relationship between the ten-year Treasury note traded on the BrokerTec platform and the corresponding Treasury futures contract to explore how the workup protocol affects trading in the interdealer market and to highlight the impact of technological changes on observed trading behaviors.