Liberty Street Economics

April 12, 2023

Does Corporate Hedging of Foreign Exchange Risk Affect Real Economic Activity?

Hyeyoon Jung

Digitally Generated Image - World Currency Rates

Foreign exchange derivatives (FXD) are a key tool for firms to hedge FX risk and are particularly important for exporting or importing firms in emerging markets. This is because FX volatility can be quite high—up to 120 percent per annum for some emerging market currencies during stress episodes—yet the vast majority of international trades, almost 90 percent, are invoiced in U.S. dollars (USD) or euros (EUR). When such hedging instruments are in short supply, what happens to firms’ real economic activities? In this post, based on my related Staff Report, I use hand-collected FXD contract-level data and exploit a quasi-natural experiment in South Korea to measure the real effects of hedging using FXD.

Posted at 7:00 am in Financial Markets, Regulation | Permalink

April 11, 2023

Deposit Betas: Up, Up, and Away?

Alena Kang-Landsberg, Stephan Luck, and Matthew Plosser

decorative image: close up shot of bank deposit slip

Deposits make up an $18 trillion market that is simultaneously the main source of bank funding and a critical tool for households’ financial management. In a prior post, we explored how deposit pricing was changing slowly in response to higher interest rates as of 2022:Q2, as measured by a “deposit beta” capturing the pass-through of the federal funds rate to deposit rates. In this post, we extend our analysis through 2022:Q4 and observe a continued rise in deposit betas to levels not seen since prior to the global financial crisis. In addition, we explore variation across deposit categories to better understand banks’ funding strategies as well as depositors’ investment opportunities. We show that while regular deposit funding declines, banks substitute towards more rate-sensitive forms of finance such as time deposits and other forms of borrowing such as funding from Federal Home Loan Banks (FHLBs).

Posted at 10:00 am in Banks, Fed Funds | Permalink

April 10, 2023

The 2022 Spike in Corporate Security Settlement Fails

Michael J. Fleming, Or Shachar, and Peter Van Tassel

Decorative photo: stock market board with overlay of line and bar chart

Settlement fails in corporate securities increased sharply in 2022, reaching levels not seen since the 2007-09 financial crisis. As a fraction of trading volume, fails that involve primary dealers reached an all-time high in the week of March 23, 2022. In this post, we investigate the 2022 spike in settlement fails for corporate securities and discuss potential drivers for this increase, including trading volume, corporate issuance, fails in bond ETFs, and operational problems.

Posted at 7:00 am in Financial Markets | Permalink

April 7, 2023

How Do Interest Rates (and Depositors) Impact Measures of Bank Value?

Stephan Luck, Matthew Plosser, and Josh Younger

Decorative photo: magnifying glass with percentage signs.

The rapid rise in interest rates across the yield curve has increased the broader public’s interest in the exposure embedded in bank balance sheets and in depositor behavior more generally. In this post, we consider a simple illustration of the potential impact of higher interest rates on measures of bank franchise value.

Posted at 10:00 am in Bank Capital, Banks, Financial Institutions, Financial Intermediation | Permalink | Comments (1)

What’s New with Corporate Leverage?

Nina Boyarchenko and Or Shachar

Decorative: corporate buildings with bond market yields superimposed.

The Federal Open Market Committee (FOMC) started increasing rates on March 16, 2022, and after the January 31–February 1, 2023, FOMC meeting, the lower bound of the target range of the federal funds rate had reached 4.50 percent, a level last registered in November 2007. Such a rapid rates increase could pass through to higher funding costs for U.S. corporations. In this post, we examine how corporate leverage and bond market debt have evolved over the course of the current tightening cycle and compare the current experience to that during the previous three tightening cycles.

Posted at 7:00 am in Corporate Finance, Monetary Policy | Permalink

April 6, 2023

MCT Update: Inflation Persistence Declined Modestly in February

Martin Almuzara, Babur Kocaoglu, and Argia Sbordone

Decorative image: Closeup of sales receipt

This post presents an updated estimate of inflation persistence, following the release of personal consumption expenditure (PCE) price data for February 2023. The estimates are obtained by the Multivariate Core Trend (MCT), a model we introduced on Liberty Street Economics last year and covered most recently in a February post. The MCT is a dynamic factor model estimated on monthly data for the seventeen major sectors of the PCE price index. It decomposes each sector’s inflation as the sum of a common trend, a sector-specific trend, a common transitory shock, and a sector-specific transitory shock. The trend in PCE inflation is constructed as the sum of the common and the sector-specific trends weighted by the expenditure shares.

Posted at 7:00 am in Inflation, Macroeconomics | Permalink

April 3, 2023

Monetary Policy Transmission and the Size of the Money Market Fund Industry: An Update

Gara Afonso, Marco Cipriani, Catherine Huang, Abduelwahab Hussein, and Gabriele La Spada

photo: The Marriner S. Eccles Federal Reserve building in Washington, D.C. Photographer: Stefani Reynolds/Bloomberg

The size of the money market fund (MMF) industry co-moves with the monetary policy cycle. In a post published in 2019, we showed that this co-movement is likely due to the stronger response of MMF yields to monetary policy tightening relative to bank deposit rates, combined with MMF shares and bank deposits being close substitutes from an investor’s perspective. In this post, we update the analysis and zoom in to the current monetary policy tightening by the Federal Reserve.

Posted at 7:00 am in Federal Reserve, Financial Intermediation, Financial Markets, Monetary Policy | Permalink

March 30, 2023

What Has Driven the Labor Force Participation Gap since February 2020?

Mary Amiti, Sebastian Heise, Giorgio Topa, and Julia Wu

Decorative image: Man walking through a busy open plan office

The U.S. labor force participation rate (LFPR) currently stands at 62.5 percent, 0.8 percentage point below its level in February 2020. This “participation gap” translates into 2.1 million workers out of the labor force. In this post, we evaluate three potential drivers of the gap: First, population aging from the baby boomers reaching retirement age puts downward pressure on participation. Second, the share of individuals of retirement age that are actually retired has risen since the onset of the COVID-19 pandemic. Finally, long COVID and disability more generally may induce more people to leave the labor force. We find that nearly all of the participation gap can be explained by population aging, which caused a significant rise in the number of retirements. Higher retirement rates compared to pre-COVID have had only a modest effect, while disability has virtually no effect.

Posted at 7:00 am in Demographics, Employment, Labor Market, Unemployment | Permalink | Comments (10)

March 24, 2023

The New York Fed DSGE Model Forecast—March 2023

Marco Del Negro, Aidan Gleich, Donggyu Lee, Ramya Nallamotu, and Sikata Sengupta

decorative photo: chart and stock prices background.

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 December 2022. Note that this forecast was produced on February 27, and hence should be viewed as reflecting the state of the economy before the current banking sector turmoil.

Posted at 9:00 am in DSGE, Inflation, Macroeconomics | Permalink

March 10, 2023

Is Your Apartment Breaking because Your Landlord Is Broke?

Lee Seltzer

Decorative photo: Water dripping from ceiling into plastic bucket on floor in living room, space for text. Leaking roof

Thirty-one percent of housing units in the United States are rental units, and rental housing is unique because unlike in the case of homeownership, renters rely on the property owner for maintenance spending. From the property owner’s perspective, building maintenance is an important investment necessary to keep the asset in good condition. However, like all investments, it is only possible to maintain a building with sufficient financial resources. In a recent staff report, I examine the relationship between a building’s financing constraints and its maintenance. I find that financially constrained buildings, colloquially “broke,” tend to be less well maintained.

Posted at 7:00 am in Corporate Finance, Housing | Permalink

Markets & Policy Implementation

Liberty Street Economics

Does Corporate Hedging of Foreign Exchange Risk Affect Real Economic Activity?

Deposit Betas: Up, Up, and Away?

The 2022 Spike in Corporate Security Settlement Fails

How Do Interest Rates (and Depositors) Impact Measures of Bank Value?

What’s New with Corporate Leverage?

MCT Update: Inflation Persistence Declined Modestly in February

Monetary Policy Transmission and the Size of the Money Market Fund Industry: An Update

What Has Driven the Labor Force Participation Gap since February 2020?

The New York Fed DSGE Model Forecast—March 2023

Is Your Apartment Breaking because Your Landlord Is Broke?

Economic Inequality

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