Liberty Street Economics

April 8, 2024

Internal Liquidity’s Value in a Financial Crisis

Cecilia Caglio and Adam Copeland

Decorative image of a drop of water hitting a pool of water with dollar bills under the water.

A classic question for U.S. financial firms is whether to organize themselves as entities that are affiliated with a bank-holding company (BHC). This affiliation brings benefits, such as access to liquidity from other affiliated entities, as well as costs, particularly a larger regulatory burden. This post highlights the results from a recent Staff Report that sheds light on this tradeoff. This work uses confidential data on the population of broker-dealers to study the benefits of being affiliated with a BHC, with a focus on the global financial crisis (GFC). The analysis reveals that affiliation with a BHC makes broker-dealers more resilient to the aggregate liquidity shocks that prevailed during the GFC. This results in these broker-dealers being more willing to hold riskier securities on their balance sheet relative to broker-dealers that are not affiliated with a BHC.

Posted at 7:00 am in Banks, Financial Institutions, Nonbank (NBFI) | Permalink

April 3, 2024

Physical Climate Risk and Insurers

Hyeyoon Jung, Robert Engle, Shan Ge, and Xuran Zeng

Photo: House destroyed by the passage of a hurricane in Florida.

As the frequency and severity of natural disasters increase with climate change, insurance—the main tool for households and businesses to hedge natural disaster risks—becomes increasingly important. Can the insurance sector withstand the stress of climate change? To answer this question, it is necessary to first understand insurers’ exposure to physical climate risk, that is, risks coming from physical manifestations of climate change, such as natural disasters. In this post, based on our recent staff report, we construct a novel factor to measure the aggregate physical climate risk in the financial market and discuss its applications, including the assessment of insurers’ exposure to climate risk and the expected capital shortfall of insurers under climate stress scenarios.

Posted at 7:00 am in Corporate Finance, Financial Institutions, Financial Markets | Permalink

April 1, 2024

Learning by Bouncing: Overdraft Experience and Salience

Donald P. Morgan and Wilbert van der Klaauw

Photo illustration: tennis ball bouncing with a dotted line showing the bounce on a blue background.

Overdraft credit, when banks and credit unions allow customers to spend more than their checking account holds, has many critics. One fundamental concern is whether overdrafts are salient—whether account holders know how often they overdraw and how much it costs them. To shed light on this question, we asked participants in the New York Fed’s Survey of Consumer Expectations about their experience with and knowledge of their banks’ overdraft programs. The large majority knew how often they overdrew their account and by how much. Their overdraft experience, we find, begets knowledge; of respondents who overdrew their account in the previous year, 84 percent knew the fee they were charged, roughly twice the share for other respondents. However, even experienced overdrafters were relatively unaware of other overdraft terms and practices, such as the maximum overdraft allowed or whether their financial institution processed larger transactions first.

Posted at 7:00 am in Banks, Credit, Financial Institutions, Household Finance | Permalink

March 27, 2024

Deposits and the March 2023 Banking Crisis—A Retrospective

Stephan Luck and Matthew Plosser

Photo: Man depositing check by phone while sitting at a table in a restaurant

In this post, we evaluate how deposits have evolved over the latter portion of the current monetary policy tightening cycle. We find that while deposit betas have continued to rise, they did not accelerate following the bank runs in March 2023. In addition, while overall deposit funding has remained stable, we find that the banks most affected by the March 2023 events are offering higher deposit rates and are growing their deposit funding relative to the broader banking industry.

Posted at 7:00 am in Banks | Permalink

March 26, 2024

What Happens to U.S. Activity and Inflation if China’s Property Sector Leads to a Crisis?

Ozge Akinci, Hunter Clark, Jeff Dawson, Matthew Higgins, Silvia Miranda-Agrippino, Ethan Nourbash, and Ramya Nallamotu

Photo: Construction site of three tall building towers with threes crane

A previous post explored the potential implications for U.S. growth and inflation of a manufacturing-led boom in China. This post considers spillovers to the U.S. from a downside scenario, one in which China’s ongoing property sector slump takes another leg down and precipitates an economic hard landing and financial crisis.

Posted at 7:00 am in Housing, International Economics, Macroeconomics | Permalink

March 25, 2024

What if China Manufactures a Sugar High?

Ozge Akinci, Hunter Clark, Jeff Dawson, Matthew Higgins, Silvia Miranda-Agrippino, Ethan Nourbash, and Ramya Nallamotu

Photo: workers sitting at machines at a factory in China

While the slump in China’s property sector has been steep, Chinese policymakers have responded to the falloff in property activity with policies designed to spur activity in the manufacturing sector. The apparent hope is that a pivot toward production-intensive growth can help lift the Chinese economy out of its current doldrums, which include weak household demand, high levels of debt, and demographic and political headwinds to growth. In a series of posts, we consider the implications of two alternative Chinese policy scenarios for the risks to the U.S. outlook for real activity and inflation over the next two years. Here, we consider the impact of a scenario in which a credit-fueled boom in manufacturing activity produces higher-than-expected economic growth in China. A key finding is that such a boom would put meaningful upward pressure on U.S. inflation.

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

March 22, 2024

The New York Fed DSGE Model Forecast—March 2024

Marco Del Negro, Pranay Gundam, Donggyu Lee, Ramya Nallamotu, and Brian Pacula

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 2023. As usual, we wish to remind our readers that the DSGE model forecast is not an official New York Fed forecast, but only an input to the Research staff’s overall forecasting process. For more information about the model and variables discussed here, see our DSGE model Q & A.

Posted at 9:00 am in DSGE | Permalink

March 8, 2024

Stablecoins and Crypto Shocks

Kenechukwu Anadu, Pablo D. Azar, Marco Cipriani, Thomas Eisenbach, Catherine Huang, Mattia Landoni, Gabriele La Spada, Marco Macchiavelli, Antoine Malfroy-Camine, and J. Christina Wang

Decorative photo of computer board with "stable coin" letters embedded.

In a previous post, we described the rapid growth of the stablecoin market over the past few years and then discussed the TerraUSD stablecoin run of May 2022. The TerraUSD run, however, is not the only episode of instability experienced by a stablecoin. Other noteworthy incidents include the June 2021 run on IRON and, more recently, the de-pegging of USD Coin’s secondary market price from $1.00 to $0.88 upon the failure of Silicon Valley Bank in March 2023. In this post, based on our recent staff report, we consider the following questions: Do stablecoin investors react to broad-based shocks in the crypto asset industry? Do the investors run from the entire stablecoin industry, or do they engage in a flight to safer stablecoins? We conclude with some high-level discussion points on potential regulations of stablecoins.

Posted at 8:00 am in Cryptocurrencies, Financial Markets, Liquidity | Permalink

March 7, 2024

Will the Moderation in Wage Growth Continue?

Martin Almuzara, Richard Audoly, Augustin Belin, and Davide Melcangi

Photo of women in an electronics Factory Worker in Blue Work Coat and Protective Glasses is Assembling Smartphones with Screwdriver. High Tech Factory Facility with more Employees in the Background.

Wage growth has moderated notably following its post-pandemic surge, but it remains strong compared to the wage growth prevailing during the low-inflation pre-COVID years. Will the moderation continue, or will it stall? And what does it say about the current state of the labor market? In this post, we use our own measure of wage growth persistence – called Trend Wage Inflation (TWIn in short) – to look at these questions. Our main finding is that, after a rapid decline from 7 percent at its peak in late 2021 to around 5 percent in early 2023, TWin has changed little in recent months, indicating that the moderation in nominal wage growth may have stalled. We also show that our measure of trend wage inflation and labor market tightness comove very closely. Hence, the recent behavior of TWIn is consistent with a still-tight labor market.

Posted at 12:00 pm in Employment, Inflation, Labor Market | Permalink

March 5, 2024

Expectations and the Final Mile of Disinflation

Richard K. Crump, Stefano Eusepi, and Ayşegül Şahin

Photo of a crowd of business people and others walking to work.

In the aftermath of the COVID-19 pandemic, the U.S. economy experienced a swift recovery accompanied by a sharp rise in inflation. Inflation has been gradually declining since 2022 without a notable slowdown in the labor market. Nonetheless, inflation remains above the Federal Reserve’s 2 percent target and the path of the so-called final mile remains uncertain, as emphasized by Chair Powell during his press conference in January. In this post, we examine the unemployment-inflation trade-off over the past few years through the lens of a New Keynesian Phillips curve, based on our recent paper. We also provide model-based forecasts for 2024 and 2025 under various labor market scenarios.

Posted at 9:00 am in Inflation | Permalink

Markets & Policy Implementation

Liberty Street Economics

Internal Liquidity’s Value in a Financial Crisis

Physical Climate Risk and Insurers

Learning by Bouncing: Overdraft Experience and Salience

Deposits and the March 2023 Banking Crisis—A Retrospective

What Happens to U.S. Activity and Inflation if China’s Property Sector Leads to a Crisis?

What if China Manufactures a Sugar High?

The New York Fed DSGE Model Forecast—March 2024

Stablecoins and Crypto Shocks

Will the Moderation in Wage Growth Continue?

Expectations and the Final Mile of Disinflation

Economic Inequality

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