Liberty Street Economics

Liberty Street Economics

November 13, 2024

Income Growth Outpaces Household Borrowing 

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

Coins stack on wooden seesaw on the right side, a car and house model on the left, equally balanced.

U.S. household debt balances grew by $147 billion (0.8 percent) over the third quarter, according to the latest Quarterly Report on Household Debt and Credit from the New York Fed’s Center for Microeconomic Data. Balances on all loan products recorded moderate increases, led by mortgages (up $75 billion), credit cards (up $24 billion), and auto loans (up $18 billion). Meanwhile, delinquency rates have also risen over the past two years, returning to roughly pre-pandemic levels (and exceeding them in the case of credit cards and auto loans), though there are some signs of stabilization this quarter. Are rising aggregate debt burdens sustainable? Or is this expansion to be expected given increases in aggregate income and population size? In this post, we take a look at debt balances scaled by income, tracking the evolution of this ratio over the past twenty-five years.

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Posted at 11:00 am in Household Finance | Permalink | Comments (1)
November 12, 2024

Banking System Vulnerability: 2024 Update

Matteo Crosignani, Thomas Eisenbach, and Fulvia Fringuellotti

Photo of a caucasian male at Bank ATM machine.

After a period of relative stability, a series of bank failures in 2023 renewed questions about the fragility of the banking system. As in previous years, we provide in this post an update of four analytical models aimed at capturing different aspects of the vulnerability of the U.S. banking system using data through 2024:Q2 and discuss how these measures have changed since last year.

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Posted at 7:00 am in Financial Institutions | Permalink | Comments (2)
October 21, 2024

The Dueling Intraday Demands on Reserves

Adam Copeland and Sarah Yu Wang

Decorative photo: dark blue background with illustration of two banks with arrows going from one bank to another and dollar signs around a map of the U.S.

A central use of reserves held at Federal Reserve Banks (FRBs) is for the settlement of interbank obligations. These obligations are substantial—the average daily total reserves used on two main settlement systems, Fedwire Funds and Fedwire Securities, exceeds $6.5 trillion. The total amount of reserves needed to efficiently settle these obligations is an active area of debate, especially as the Federal Reserve’s current quantitative tightening (QT) policy seeks to drain reserves from the financial system. To better understand the use of reserves, in this post we examine the intraday flows of reserves over Fedwire Funds and Fedwire Securities and show that the mechanics of each settlement system result in starkly different intraday demands on reserves and differing sensitivities of those intraday demands to the total amount of reserves in the financial system.  

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Posted at 7:00 am in Financial Markets, Liquidity, Treasury | Permalink | Comments (0)
October 17, 2024

Tracking Reserve Ampleness in Real Time Using Reserve Demand Elasticity

Gara Afonso, Domenico Giannone, Gabriele La Spada, and John C. Williams

Decorative image: Man pulling an orange rubber band, holding a rubber band ball

As central banks shrink their balance sheets to restore price stability and phase out expansionary programs, gauging the ampleness of reserves has become a central topic to policymakers and academics alike. The reason is that the ampleness of reserves informs when to slow and then stop quantitative tightening (QT). The Federal Reserve, for example, implements monetary policy in a regime of ample reserves, whereby the quantity of reserves in the banking system needs to be large enough such that everyday changes in reserves do not cause large variations in short-term rates. The goal is therefore to implement QT while ensuring that reserves remain sufficiently ample. In this post, we review how to gauge the ampleness of reserves using the new Reserve Demand Elasticity (RDE) measure, which will be published monthly on the public website of the Federal Reserve Bank of New York as a standalone product.

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Posted at 10:00 am in Fed Funds, Federal Reserve, Monetary Policy | Permalink | Comments (1)
October 10, 2024

International Stock Markets’ Reactions to EU Climate Policy Shocks

Julian di Giovanni, Galina Hale, Neel Lahiri, and Anirban Sanyal

The launch of the EU ETS marks a significant step towards achieving Europe's climate goals and fostering a sustainable future.

While policies to combat climate change are designed to address a global problem, they are generally implemented at the national level. Nevertheless, the impact of domestic climate policies may spill over internationally given countries’ economic and financial interdependence. For example, a carbon tax charged to domestic firms for their use of fossil fuels may lead the firms to charge higher prices to their domestic and foreign customers; given the importance of global value chains in modern economies, the impact of that carbon tax may propagate across multiple layers of cross-border production linkages. In this post, we quantify the spillover effects of climate policies on forward-looking asset prices globally by estimating the impact of carbon price shocks in the European Union’s Emissions Trading System (EU ETS) on stock prices across a broad set of country-industry pairs. In other words, we measure how asset markets evaluate the impact of changes to the carbon price on growth and profitability prospects of the firms.

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Posted at 7:00 am in Climate Change, Financial Markets, Stocks | Permalink
October 9, 2024

A New Indicator of Labor Market Tightness for Predicting Wage Inflation

Sebastian Heise, Jeremy Pearce, and Jacob P. Weber

Job candidates standing in line, waiting for their turn to be interviewed for a new position at a corporate company. Shallow field of view.

A key question in economic policy is how labor market tightness affects wage inflation and ultimately prices. In this post, we highlight the importance of two measures of tightness in determining wage growth: the quits rate, and vacancies per searcher (V/S)—where searchers include both employed and non-employed job seekers. Amongst a broad set of indicators, we find that these two measures are independently the most strongly correlated with wage inflation. We construct a new index, called the Heise-Pearce-Weber (HPW) Tightness Index, which is a composite of quits and vacancies per searcher, and show that it performs best of all in explaining U.S. wage growth, including over the COVID pandemic and recovery. 

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Posted at 7:00 am in Inflation, Labor Market, Macroeconomics | Permalink | Comments (2)
October 7, 2024

What Do Climate Risk Indices Measure?

Hyeyoon Jung and Oliver Hannaoui

Photo of a melting iceberg with water trickling down splashing into a water body.

As interest in understanding the economic impacts of climate change grows, the climate economics and finance literature has developed a number of indices to quantify climate risks. Various approaches have been employed, utilizing firm-level emissions data, financial market data (from equity and derivatives markets), or textual data. Focusing on the latter approach, we conduct descriptive analyses of six text-based climate risk indices from published or well-cited papers. In this blog post, we highlight the differences and commonalities across these indices.

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Posted at 7:00 am in Climate Change | Permalink
October 2, 2024

Exposure to Generative AI and Expectations About Inequality

Natalia Emanuel and Emma Harrington

Photo: young woman with cell phone with illustration that has a chatbot logo that says can I help you?

With the rise of generative AI (genAI) tools such as ChatGPT, many worry about the tools’ potential displacement effects in the labor market and the implications for income inequality. In supplemental questions to the February 2024 Survey of Consumer Expectations (SCE), we asked a representative sample of U.S. residents about their experience with genAI tools. We find that relatively few people have used genAI, but that those who have used it have a bleaker outlook on its impacts on jobs and future inequality.

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Posted at 9:00 am in Employment, Expectations, Human Capital, Inequality | Permalink | Comments (1)
October 1, 2024

Are Nonbank Financial Institutions Systemic?

Andres Aradillas Fernandez, Martin Hiti, and Asani Sarkar

Photo: dominoes spilling on a blue background.

Recent events have heightened awareness of systemic risk stemming from nonbank financial sectors. For example, during the COVID-19 pandemic, liquidity demand from nonbank financial entities caused a “dash for cash” in financial markets that required government support. In this post, we provide a quantitative assessment of systemic risk in the nonbank sectors. Even though these sectors have heterogeneous business models, ranging from insurance to trading and asset management, we find that their systemic risk has common variation, and this commonality has increased over time. Moreover, nonbank sectors tend to become more systemic when banking sector systemic risk increases.

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Posted at 7:44 am in Financial Intermediation, Liquidity, Nonbank (NBFI), Systemic Risk | Permalink
September 30, 2024

The Central Banking Beauty Contest

Gonzalo Cisternas and Aaron Kolb

Photo: Wooden figurine pawn standing on wooden cube above other wooden figurines against minimal blue background. The concepts of competition, success, leadership, winning.

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.

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Posted at 7:00 am in Monetary Policy | Permalink
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Liberty Street Economics features insight and analysis from New York Fed economists working at the intersection of research and policy. Launched in 2011, the blog takes its name from the Bank’s headquarters at 33 Liberty Street in Manhattan’s Financial District.

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  3. What Was Up with Grocery Prices?
  4. Auto Loan Delinquency Revs Up as Car Prices Stress Budgets
  5. Taking Stock: Dollar Assets, Gold, and Official Foreign Exchange Reserves
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