8 posts from "September 2024"
September 30, 2024
The Central Banking Beauty Contest
Expectations can play a significant role in driving economic outcomes, with central banks factoring market sentiment into policy decisions and market participants forming their own assumptions about monetary policy. But how well do central banks understand the expectations of market participants—and vice versa? Our model, developed in a recent paper, features a dynamic game between (i) a monetary authority that cannot commit to an inflation target and (ii) a set of market participants that understand the incentives created by that credibility problem. In this post, we describe the game, a type of Keynesian beauty contest: its main novelty is that each side attempts, with varying degrees of accuracy, to forecast the other’s beliefs, resulting in new findings regarding the levels and trajectories of inflation.
Posted at 7:00 am in Monetary Policy | Permalink
September 25, 2024
Flood Risk Outside Flood Zones — A Look at Mortgage Lending in Risky Areas
In support of the National Flood Insurance Program (NFIP), the Federal Emergency Management Agency (FEMA) creates flood maps that indicate areas with high flood risk, where mortgage applicants must buy flood insurance. The effects of flood insurance mandates were discussed in detail in a prior blog series. In 2021 alone, more than $200 billion worth of mortgages were originated in areas covered by a flood map. However, these maps are discrete, whereas the underlying flood risk may be continuous, and they are sometimes outdated. As a result, official flood maps may not fully capture the true flood risk an area faces. In this post, we make use of unique property-level mortgage data and find that in 2021, mortgages worth over $600 billion were originated in areas with high flood risk but no flood map. We examine what types of lenders are aware of this “unmapped” flood risk and how they adjust their lending practices. We find that—on average—lenders are more reluctant to lend in these unmapped yet risky regions. Those that do, such as nonbanks, are more aggressive at securitizing and selling off risky loans.
September 24, 2024
End‑of‑Month Liquidity in the Treasury Market
Trading activity in benchmark U.S. Treasury securities now concentrates on the last trading day of the month. Moreover, this stepped-up activity is associated with lower transaction costs, as shown by a smaller price impact of trades. We conjecture that increased turn-of-month portfolio rebalancing by passive investment funds that manage relative to fixed-income indices helps explain these patterns.
September 23, 2024
Has Treasury Market Liquidity Improved in 2024?
Standard metrics point to an improvement in Treasury market liquidity in 2024 to levels last seen before the start of the current monetary policy tightening cycle. Volatility has also trended down, consistent with the improved liquidity. While at least one market functioning metric has worsened in recent months, that measure is an indirect gauge of market liquidity and suggests a level of current functioning that is far better than at the peak seen during the global financial crisis (GFC).
September 20, 2024
The New York Fed DSGE Model Forecast—September 2024
This post presents an update of the economic forecasts generated by the Federal Reserve Bank of New York’s dynamic stochastic general equilibrium (DSGE) model. We describe very briefly our forecast and its change since June 2024. As usual, we wish to remind our readers that the DSGE model forecast is not an official New York Fed forecast, but only an input to the Research staff’s overall forecasting process. For more information about the model and variables discussed here, see our DSGE model Q & A.
September 4, 2024
AI and the Labor Market: Will Firms Hire, Fire, or Retrain?
The rapid rise in Artificial Intelligence (AI) has the potential to dramatically change the labor market, and indeed possibly even the nature of work itself. However, how firms are adjusting their workforces to accommodate this emerging technology is not yet clear. Our August regional business surveys asked manufacturing and service firms special topical questions about their use of AI, and how it is changing their workforces. Most firms that report expected AI use in the next six months plan to retrain their workforces, with far fewer reporting adjustments to planned headcounts.
Can Professional Forecasters Predict Uncertain Times?
Economic surveys are very popular these days and for a good reason. They tell us how the folks being surveyed—professional forecasters, households, firm managers—feel about the economy. So, for instance, the New York Fed’s Survey of Consumer Expectations (SCE) website displays an inflation uncertainty measure that tells us households are more uncertain about inflation than they were pre-COVID, but a bit less than they were a few months ago. The Philadelphia Fed’s Survey of Professional Forecasters (SPF) tells us that forecasters believed last May that there was a lower risk of negative 2024 real GDP growth than there was last February. The question addressed in this post is: Does this information actually have any predictive content? Specifically, I will focus on the SPF and ask: When professional forecasters indicate that their uncertainty about future output or inflation is higher, does that mean that output or inflation is actually becoming more uncertain, in the sense that the SPF will have a harder time predicting these variables?
September 3, 2024
Are Professional Forecasters Overconfident?
The post-COVID years have not been kind to professional forecasters, whether from the private sector or policy institutions: their forecast errors for both output growth and inflation have increased dramatically relative to pre-COVID (see Figure 1 in this paper). In this two-post series we ask: First, are forecasters aware of their own fallibility? That is, when they provide measures of the uncertainty around their forecasts, are such measures on average in line with the size of the prediction errors they make? Second, can forecasters predict uncertain times? That is, does their own assessment of uncertainty change on par with changes in their forecasting ability? As we will see, the answer to both questions sheds light of whether forecasters are rational. And the answer to both questions is “no” for horizons longer than one year but is perhaps surprisingly “yes” for shorter-run forecasts.
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