Liberty Street Economics

When Are Central Bank Reserves Ample?

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

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, 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)

The Mysterious Slowdown in U.S. Manufacturing Productivity

Danial Lashkari and Jeremy Pearce

Photo: assembly line with several men and women in blue overalls.

Throughout the twentieth century, steady technological and organizational innovations, along with the accumulation of productive capital, increased labor productivity at a steady rate of around 2 percent per year. However, the past two decades have witnessed a slowdown in labor productivity, measured as value added per hour worked or sectoral output per hour worked. This slowdown has been particularly stark in the manufacturing sector, which historically has been a leading sector in driving the productivity of the aggregate U.S. economy. What makes this slowdown particularly puzzling is the fact that manufacturing accounts for the majority of U.S. research and development (R&D) expenditure. Despite several recent studies (see, for example, Syverson [2016]), much remains to be uncovered about the nature of this slowdown. This post illustrates a key facet of the mystery: the productivity slowdown appears to be pervasive across industries and across firms of various sizes.

Posted at 7:00 am in Labor Market, Macroeconomics | Permalink | Comments (1)

On the Distributional Consequences of Responding Aggressively to Inflation

Marco Del Negro, Keshav Dogra, Pranay Gundam, Donggyu Lee, and Brian Pacula

decorative photo: curled up shopping receipt with the word price at that top.

This post discusses the distributional consequences of an aggressive policy response to inflation using a Heterogeneous Agent New Keynesian (HANK) model. We find that, when facing demand shocks, stabilizing inflation and real activity go hand in hand, with very large benefits for households at the bottom of the wealth distribution. The converse is true however when facing supply shocks: stabilizing inflation makes real outcomes more volatile, especially for poorer households. We conclude that distributional considerations make it much more important for policy to take into account the tradeoffs between stabilizing inflation and economic activity. This is because the optimal policy response depends very strongly on whether these tradeoffs are present (that is, when the economy is facing supply shocks) or absent (when the economy is facing demand shocks).

Posted at 7:00 am in Inequality, Inflation, Monetary Policy | Permalink

On the Distributional Effects of Inflation and Inflation Stabilization

Marco Del Negro, Keshav Dogra, Pranay Gundam, Donggyu Lee, and Brian Pacula

This post and the next discuss the distributional effects of inflation and inflation stabilization through the lenses of a theoretical model—a Heterogeneous Agent New Keynesian (HANK) model. This model combines the features of New Keynesian models that have been the workhorse for monetary policy analysis since the work of Woodford (2003) with inequality in wealth and income at the household level following the seminal contribution of Kaplan, Moll, and Violante (2018). We find that while inflation hurts everyone, it hurts the poor in particular. When the source of inflation is a supply shock, fighting inflation aggressively hurts the poor even more, however, while the opposite is true for demand shocks, as discussed in the companion post.

Posted at 7:00 am in Inequality, Inflation, Monetary Policy | Permalink

Markets & Policy Implementation

Liberty Street Economics

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?

The Mysterious Slowdown in U.S. Manufacturing Productivity

On the Distributional Consequences of Responding Aggressively to Inflation

On the Distributional Effects of Inflation and Inflation Stabilization

Economic Inequality

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