Liberty Street Economics

The Disparate Outcomes of Bank‑ and Nonbank‑Financed Private Credit Expansions

Nina Boyarchenko and Leonardo Elias

Long-run trends in increased access to credit are thought to improve real activity. However, “rapid” credit expansions do not always end well and have been shown in the academic literature to predict adverse real outcomes such as lower GDP growth and an increased likelihood of crises. Given these financial stability considerations associated with rapid credit expansions, being able to distinguish in real time “good booms” from “bad booms” is of crucial interest for policymakers. While the recent literature has focused on understanding how the composition of borrowers helps distinguish good and bad booms, in this post we investigate how the composition of lending during a credit expansion matters for subsequent real outcomes.

Posted at 7:00 am in Credit, Financial Markets, Nonbank (NBFI) | Permalink | Comments (4)

An Update on the Reservation Wages in the SCE Labor Market Survey

Gizem Kosar, Davide Melcangi, and Sasha Thomas

The Federal Reserve Bank of New York’s July 2024 SCE Labor Market Survey shows a year-over-year increase in the average reservation wage—the lowest wage respondents would be willing to accept for a new job—to $81,147, but a decline from a series’ high of $81,822 in March 2024. In this post, we investigate how the recent dynamics of reservation wages differed across individuals and how reservation wages are related to individuals’ expectations about their future labor market movements.

Posted at 11:00 am in Employment, Expectations, Labor Market | Permalink

A New Set of Indicators of Reserve Ampleness

Gara Afonso, Kevin Clark, Brian Gowen, Gabriele La Spada, JC Martinez, Jason Miu, and Will Riordan

Decorative Photo: Image of the Board of Governors of the Federal Reserve System.

The Federal Reserve (Fed) implements monetary policy in a regime of ample reserves, where short-term interest rates are controlled mainly through the setting of administered rates, and active management of the reserve supply is not required. In yesterday’s post, we proposed a methodology to evaluate the ampleness of reserves in real time based on the slope of the reserve demand curve—the elasticity of the federal (fed) funds rate to reserve shocks. In this post, we propose a suite of complementary indicators of reserve ampleness that, jointly with our elasticity measure, can help policymakers ensure that reserves remain ample as the Fed shrinks its balance sheet.

Posted at 7:00 am in Federal Reserve, Monetary Policy, Repo | Permalink

When Are Central Bank Reserves Ample?

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

The Federal Reserve (Fed) implements monetary policy in a regime of ample reserves, whereby short-term interest rates are controlled mainly through the setting of administered rates. To do so, the quantity of reserves in the banking system needs to be large enough that everyday changes in reserves do not cause large variations in the policy rate, the so-called federal funds rate. As the Fed shrinks its balance sheet following the plan laid out by the Federal Open Market Committee (FOMC) in 2022, how can it assess when to stop so that the supply of reserves remains ample? In the first post of a two-part series, based on the methodology developed in our recent Staff Report, we propose to assess the ampleness of reserves in real time by estimating the slope of the reserve demand curve.

Posted at 7:00 am in Monetary Policy | Permalink

Reallocating Liquidity to Resolve a Crisis

Kinda Hachem

Decorative photo of silver spigot on blackboard with dollar signs chalked on the board coming out of the spigot.

Shortly after the collapse of Silicon Valley Bank (SVB) in March 2023, a consortium of eleven large U.S. financial institutions deposited $30 billion into First Republic Bank to bolster its liquidity and assuage panic among uninsured depositors. In the end, however, First Republic Bank did not survive, raising the question of whether a reallocation of liquidity among financial institutions can ever reduce the need for central bank balance sheet expansion in the fight against bank runs. We explore this question in this post, based on a recent working paper.

Posted at 7:00 am in Banks, Crisis, Liquidity | Permalink

The Anatomy of Labor Demand Pre‑ and Post‑COVID

Richard Audoly, Miles Guerin, Giorgio Topa, and Roshie Xing

Decorative photo: Nurse taking a women's blood pressure at home.

Has labor demand changed since the COVID-19 pandemic? In this post, we leverage detailed data on the universe of U.S. online job listings to study the dynamics of labor demand pre- and post-COVID. We find that there has been a significant shift in listings out of the central cities and into the “fringe” portion of large metro areas, smaller metro areas, and rural areas. We also find a substantial decline in job listings in computer and mathematical and business and financial operations occupations, and a corresponding increase in job openings in sales, office and administrative support, food preparation, and especially healthcare occupations. These patterns (by geography and by occupation) are interconnected: the biggest declines in job listings by occupation occurred in the largest and densest geographies, and the strongest increases in job listings by occupation occurred in the smaller and less populated geographies.

Posted at 7:00 am in Crisis, Employment, Labor Market, Pandemic | Permalink

Mortgage Lock‑In Spurs Recent HELOC Demand

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

Decorative Image: Boy and parents coming out of house. Family is spending leisure time in yard. Plants growing in lawn on sunny day.

Mortgage balances, the largest component of U.S. household debt, grew by only $77 billion (0.6 percent) in the second quarter of 2024, according to the latest Quarterly Report on Household Debt and Credit from the New York Fed’s Center for Microeconomic Data. This modest increase reflects a substantial slowdown in mortgage origination; only $374 billion was originated during the second quarter, compared to an average of about $1 trillion per quarter between 2021 and 2022. Meanwhile, after nearly thirteen years of decline, balances on home equity lines of credit (HELOC) have begun to rebound, gaining 20 percent since bottoming out at the end of 2021. In this post, we consider the factors behind this upswing, finding that HELOCs have likely become an attractive alternative to cash-out refinancings amid higher interest rates.

Posted at 11:00 am in Household Finance | Permalink

The DeFi Intermediation Chain

Pablo D. Azar, Adrian G. Casillas, and Maryam Farboodi

Digital photo illustration of block chain with 000s and 111s.

Decentralized Finance, or DeFi, is a rapidly growing ecosystem of financial applications built on blockchain technology, primarily on the Ethereum network. These applications aim to recreate traditional financial instruments and services, such as lending, borrowing, trading, and insurance. The DeFi intermediation chain connects a series of intermediaries who find arbitrage opportunities, aggregate transactions into blocks, validate these blocks, and ultimately append them to the blockchain. In this post, we summarize results from our staff report describing how arbitrage opportunities arise in the Ethereum blockchain, and how the need to keep these arbitrage opportunities private gives rise to the intermediation chain.

Posted at 7:00 am in Cryptocurrencies, Nonbank (NBFI) | Permalink

Wage Insurance: A Potential Policy for Displaced Workers

Ben Hyman, Brian Kovak, and Adam Leive

photo: Male industrial worker working with manufacturing equipment in a factory.

Despite the existing safety net, worker displacement continues to have severe consequences that motivate the consideration of new social insurance programs. Wage insurance is a novel policy that temporarily provides additional income to workers who lose their job and become re-employed at a lower wage. In this post, we draw on evidence from our recent working paper analyzing the effects of a U.S. wage insurance program on worker earnings and employment outcomes. Among workers displaced by international trade, we find that eligibility for wage insurance increased the probability of employment in the first two years following job loss and led to higher long-term earnings. The program resulted in net savings to the government because workers collected fewer benefits and paid taxes on their increased earnings. Together, these findings suggest that wage insurance could support displaced workers more effectively than traditional social insurance programs.

Posted at 7:00 am in Labor Market | Permalink

What Was Up with Grocery Prices?

Thomas Klitgaard

Photo of groceries including peppers, broccoli, lemons and eggs, on a kitchen table in a reusable shopping bag.

The consumer price index for groceries has risen more than the overall price index since the start of the pandemic, with a particularly large jump in 2022. In looking for explanations, a starting place is the behavior of raw commodity prices, which surged from early 2021 to mid-2022. In addition, wages for low-paid grocery workers have gone up faster than wages for the workforce as a whole. Finally, even though profit margins for grocery stores have gone up, the increase appears to be only a small contributor to the rise in food prices relative to the increase in their operating costs. This analysis suggests that the significant moderation in food inflation since the start of 2023 is due to still-high wage inflation for grocery workers being offset by the retreat in commodity prices.

Posted at 7:00 am in Inflation | Permalink | Comments (3)

Markets & Policy Implementation

Liberty Street Economics

The Disparate Outcomes of Bank‑ and Nonbank‑Financed Private Credit Expansions

An Update on the Reservation Wages in the SCE Labor Market Survey

A New Set of Indicators of Reserve Ampleness

When Are Central Bank Reserves Ample?

Reallocating Liquidity to Resolve a Crisis

The Anatomy of Labor Demand Pre‑ and Post‑COVID

Mortgage Lock‑In Spurs Recent HELOC Demand

The DeFi Intermediation Chain

What Was Up with Grocery Prices?

Economic Inequality

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