Liberty Street Economics

February 14, 2023

Is the Green Transition Inflationary?

Marco Del Negro, Julian di Giovanni, and Keshav Dogra

one male engineer checking the solar panel with digital tools

Are policies aimed at fighting climate change inflationary? In a new staff report we use a simple model to argue that this does not have to be the case. The model suggests that climate policies do not force a central bank to tolerate higher inflation but may generate a trade-off between inflation and employment objectives. The presence and size of this trade-off depends on how flexible prices are in the “dirty” and “green” sectors relative to the rest of the economy, and on whether climate policies consist of taxes or subsidies.

Posted at 9:00 am in Central Bank, Climate Change, Inflation | Permalink | Comments (1)

February 13, 2023

How Much Can the Fed’s Tightening Contract Global Economic Activity?

Julian di Giovanni and Neel Lahiri

Decorative: illustration with the world map, infographics and numbers. International finance, trade and economy concept.

What types of foreign firms are most affected when the Federal Reserve raises its policy rate? Recent empirical research used cross-country firm level data and information on input-output linkages and finds that the impact on sales and investment spending is largest in sectors with exposure to trade in intermediate goods. The research also finds that financial factors drive differences, with U.S. monetary policy spillovers having a much smaller impact on firms that are less financially constrained.

Posted at 7:00 am in International Economics, Monetary Policy | Permalink

February 8, 2023

Is There a Bitcoin–Macro Disconnect?

Gianluca Benigno and Carlo Rosa

Decorative image: Bitcoin shape formed by binaries data of 0 and 1.

Cryptocurrencies’ market capitalization has grown rapidly in recent years. This blog post analyzes the role of macro factors as possible drivers of cryptocurrency prices. We take a high-frequency perspective, and we focus on Bitcoin since its market capitalization dwarfs that of all other cryptocurrencies combined. The key finding is that, unlike other asset classes, Bitcoin has not responded significantly to U.S. macro and monetary policy news. This disconnect is puzzling, as unexpected changes in discount rates should, in principle, affect the price of Bitcoin.

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

February 7, 2023

Inflation Persistence—An Update with December Data

Martin Almuzara and Argia Sbordone

Decorative image: Digital generated image of vertical bar graph made out of golden cubic blocks with shopping carts standing on them against light blue background. Inflation concept.

This post presents an updated estimate of inflation persistence, following the release of personal consumption expenditure (PCE) price data for December 2022. 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 January 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 | Permalink | Comments (1)

February 6, 2023

Understanding the “Inconvenience” of U.S. Treasury Bonds

Wenxin Du, Benjamin Hébert, and Wenhao Li

Editor’s note: Since this post was first published, a reference in the second paragraph to primary dealers switching positions was corrected to read "a net-short to a net-long position." February 6, 10:37 a.m.

Decorative: Coupons, rates, yields and other information are displayed. Interest rates concept. 3D illustration

The U.S. Treasury market is one of the most liquid financial markets in the world, and Treasury bonds have long been considered a safe haven for global investors. It is often believed that Treasury bonds earn a “convenience yield,” in the sense that investors are willing to accept a lower yield on them compared to other investments with the same cash flows owing to Treasury bonds’ safety and liquidity. However, since the global financial crisis (GFC), long-maturity U.S. Treasury bonds have traded at a yield consistently above the interest rate swap rate of the same maturity. The emergence of the “negative swap spread” appears to suggest that Treasury bonds are “inconvenient,” at least relative to interest rate swaps. This post dives into this Treasury “inconvenience” premium and highlights the role of dealers’ balance sheet constraints in explaining it.

Posted at 7:00 am in Financial Intermediation, Financial Markets, Treasury | Permalink | Comments (4)

February 3, 2023

How the LIBOR Transition Affects the Supply of Revolving Credit

Harry Cooperman, Darrell Duffie, Alena-Kang Landsberg, Stephan Luck, Zachry Wang, and Yilin (David) Yang

Photo of two sticky notes: one with LIbor crossed out, the other with SOFR checked. Concept of London Interbank Offered Rate being discontinued and succeeded by SOFR - Secured Overnight Financing Rate - as the base rate for loan and swap financial products.

In the United States, most commercial and industrial (C&I) lending takes the form of revolving lines of credit, known as revolvers or credit lines. For decades, like other U.S. C&I loans, credit lines were typically indexed to the London Interbank Offered Rate (LIBOR). However, since 2022, the U.S. and other developed-market economies have transitioned from credit-sensitive reference rates such as LIBOR to new risk-free rates, including the Secured Overnight Financing Rate (SOFR). This post, based on a recent New York Fed Staff Report, explores how the provision of revolving credit is likely to change as a result of the transition to a new reference rate.

Posted at 7:00 am in Banks, Credit, Financial Institutions, Financial Intermediation, Regulation | Permalink | Comments (2)

January 18, 2023

Rural Households Hit Hardest by Inflation in 2021‑22

Rajashri Chakrabarti, Dan Garcia, and Maxim Pinkovskiy

Illustration: Inflation: does location matter? A U.S. map with a pin dropped in the center.

To conclude our series, we present disparities in inflation rates by U.S. census region and rural status between June 2019 and the present. Notably, rural households were hit by inflation the hardest during the 2021-22 inflationary episode. This is intuitive, as rural households rely on transportation, and especially on motor fuel, to a much greater extent than urban households do. More generally, the recent rise in inflation has affected households in the South more than the national average, and households in the Northeast by less than the national average, though this difference has decreased in the last few months. Once again, these changes in inflation patterns can be explained by transportation inflation driving a large extent of price rises during 2021 and much of 2022, with housing and food inflation lately coming to the fore.

Posted at 11:02 am in Equitable Growth, Inequality, Inflation | Permalink

Young, Less Educated Faced Higher Inflation in 2021—But Gaps Now Closed

Rajashri Chakrabarti, Dan Garcia, and Maxim Pinkovskiy

Illustration: Inflation: what's changed? short arrow with college grad at the top; higher arrow with a non grad at the top.

We continue our series on inflation disparities by looking at disparities in inflation rates by educational attainment and age for the period June 2019 to the present. Remarkably, we find that disparities by age and education are considerably larger than those by income and are similar in size to those by race and ethnicity, both explored in our previous post. Specifically, during the inflationary period of 2021-22, younger people and people without a college degree faced the highest inflation, with steadily widening gaps relative to the overall average between early 2021 and June 2022, followed by a rapid narrowing of the gaps and a reversal of some of them by December 2022. This pattern arises primarily from a greater share of the expenditures of younger people and people without a college degree being devoted to transportation—particularly used cars and motor fuel—which led the 2021 inflationary episode but has since converged to general inflation.

Posted at 11:01 am in Education, Equitable Growth, Inequality, Inflation | Permalink

Inflation Disparities by Race and Income Narrow

Rajashri Chakrabarti, Dan Garcia, and Maxim Pinkovskiy

illustration: Inflation: who's more affected now? three races at different levels of a line chart.

As inflation has risen to forty-year highs, inflation inequality—disparities in the rates of inflation experienced by different demographic and economic groups– has become an increasingly important concern. In this three-part blog series, we revisit our main finding from June—that inflation inequality has increased across racial and ethnic groups—and provide estimates of differential inflation rates across groups based on income, education, age, and geographic location. We also use an updated methodology for computing inflation disparities by focusing on more disaggregated categories of spending, which corroborates our earlier findings and substantiates our conclusion that inflation inequality is a pronounced feature of the current inflationary episode.

Posted at 11:00 am in Equitable Growth, Inequality, Inflation | Permalink | Comments (1)

January 17, 2023

The Recent Rise in Discount Window Borrowing

Helene Lee and Asani Sarkar

Photo of Federal Reserve building in Washington DC

The Federal Reserve’s primary credit program—offered through its “discount window” (DW)—provides temporary short-term funding to fundamentally sound banks. Historically, loan activity has been low during normal times due to a variety of factors, including the DW’s status as a back-up source of liquidity with a relatively punitive interest rate, the stigma attached to DW borrowing from the central bank, and, since 2008, elevated levels of reserves in the banking system. However, beginning in 2022, DW borrowing under the primary credit program increased notably in comparison to past years. In this post, we examine the factors that may have contributed to this recent trend.

Posted at 7:00 am in Banks, Federal Reserve, Lender of Last Resort | Permalink

Markets & Policy Implementation

Liberty Street Economics

Is the Green Transition Inflationary?

How Much Can the Fed’s Tightening Contract Global Economic Activity?

Is There a Bitcoin–Macro Disconnect?

Inflation Persistence—An Update with December Data

Understanding the “Inconvenience” of U.S. Treasury Bonds

How the LIBOR Transition Affects the Supply of Revolving Credit

Rural Households Hit Hardest by Inflation in 2021‑22

Young, Less Educated Faced Higher Inflation in 2021—But Gaps Now Closed

Inflation Disparities by Race and Income Narrow

The Recent Rise in Discount Window Borrowing

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