Federal Reserve Research Articles

Continuity and Change in the Federal Reserve’s Perspective on Price Stability

Continuity and Change in the Federal Reserve’s Perspective on Price Stability

Who Buys Treasuries When the Fed Reduces its Holdings

The Federal Reserve began to decrease the size of its balance sheet in June 2022, entering a phase of "balance sheet reduction" that continues today. In this note, we determine which sectors absorbed the resulting increased supply of Treasury coupon securities. We find that, during the first balance sheet reduction period between 2017 and 2019, dealers, households, and hedge funds bought significantly more Treasury coupons. However, during the post-pandemic balance sheet reduction period, it appears that dealers, private insurance, and the rest of the world purchased the Treasury coupon securities from the reduction in Federal Reserve purchases, not hedge funds.

Estimating Retail Credit in the U.S.

In this note, we estimate the size of an understudied segment of the consumer credit market—retail credit. Retail credit consists of the amounts owed to retail stores by their customers for purchases made on credit extended in partnership with a financial institution. Although retail credit is included in the consumer credit totals in Federal Reserve Statistical Release G.19, "Consumer Credit," a principal economic indicator providing the official estimate for consumer credit holdings in the U.S., it is not separately categorized on the release.

Consumer inflation expectations: Daily dynamics

We use high frequency identification methods to study the response of consumer inflation expectations to many different types of events using data from the Federal Reserve Bank of New York’s Survey of Consumer Expectations. We identify the response of expectations to a large set of shocks, including FOMC meetings and macroeconomic data releases. We find that macroeconomic news and FOMC meetings with a press conference or rate cuts jointly move expectations.

A Study of the Impact of Monetary Policies on Financial Crisis

Monetary policy stands as a pivotal instrument for macroeconomic management, pivotal in stabilizing economies, fostering growth, and mitigating inflationary pressures. In the wake of global financial upheavals, the efficacy and adaptability of monetary policy have garnered heightened scrutiny. The United States, boasting the world's largest economy, and the Federal Reserve, a stalwart among central banks, wield profound influence on global financial dynamics via their policy decisions. Each action taken by the Federal Reserve reverberates across borders, profoundly impacting numerous nations. Amidst global financial turmoil, the Federal Reserve's role assumes paramount significance. These crises inflict profound repercussions on both national economies and individual livelihoods. This paper endeavors to delve into the historical influence of United States monetary policy and the Federal Reserve on global financial crises, scrutinizing their interventions and assessing their efficacy. By tracing their impact across different epochs, this study aims to provide insights into the mechanisms through which monetary policy shapes the trajectory of global financial crises, shedding light on avenues for improvement and resilience-building measures.

Research on RMB Depreciation and Its Impact on Chinese Corporate and Society

Raising interest rates by the Federal Reserve forces global capital flows to the US market, which in turn causes other countries economic growth to slow or currency to depreciate. China has been inevitably affected by the Feds higher interest rates, which have led to the devaluation of the RMB and have had a negative impact on the normal operation of Chinese corporations and society. Therefore, this paper analyzes the impact of RMB depreciation caused by the Federal Reserve interest rate hike on China through literature review and case analysis. Through research, the Federal Reserve adopted the policy of interest rate increases to force the Chinese government to tighten its internal monetary policy while continuing to promote the internationalization of the RMB, which in turn caused the depreciation of the RMB. Export-oriented enterprises can avoid interest rate risk caused by RMB depreciation through financial means, and the overall advantages outweigh the disadvantages. However, the depreciation of the RMB has increased the costs of cross-border e-commerce, Chinese tourists traveling overseas, and studying abroad, and the overall disadvantages outweigh the advantages.

Risk Assessment of Banks under Fed Rate Hikes

The global economy was hit after the start of the COVID-19 pandemic. Economic stagnation and high volatility in commodity prices also had a negative impact on global supply chains. The Federal Reserve, in an effort to prevent a repeat of the 2008 financial crisis, slow down inflation, increase the liquidity of money, prevent asset value bubbles, and further revive and stabilize the economy, adopted a policy of raising interest rates, gradually increasing the federal funds rate to between 5.25 and 5.5 per cent over a two-year period. This change, however, also led to many changes in the banking sector. Commercial banks are trying to find ways to avoid risks while maintaining their returns in the face of financial market changes. This paper analyzes the systemic risk of commercial banks through liquidity risk, credit risk and market risk with the cases of Silicon Valley Bank, Signature Bank and Credit Suisse Bank. Through the analysis, this paper finds that commercial banks suffer from systemic risk, often reflecting their own operational problems, which ultimately led to bankruptcy or acquisition of the end.

Shadow Banking in the United States: Emerging Factors, Operation Modes and the Current Situation of Supervision - Based on the Comparison with Chinese Shadow Banking System and Market

In 2009, Ben Bernanke, chairman of the Federal Reserve, described shadow banking as a financial intermediary that converts savings into investments in addition to regulated deposit-taking institutions. To put it simply, the essence of shadow banking is a financial innovation that breaks through traditional financial institutions in order to maximize profits in the financial market environment. In this paper, we compare the U.S. and Chinese shadow banking system and their market system. From that, we analyze their similarities and differences from the aspects of emerging factors, classification and scale, and operation mode. Based on the above analysis, we then discuss the current situation of supervision of shadow banking in the United States and find that the U.S. shadow banking is negligent in institutional constraints and has practical difficulties in legal supervision. Finally, we put forward some suggestions on the future development and financial structure optimization of shadow banking.

A Study of the Financial Crisis and Relevant Monetary Policies

This essay examines several pivotal moments in recent economic history in order to demonstrate the significant influence of monetary policy on global financial crises. Exploring the complex relationship between central banks, particularly the Federal Reserve, and the various crises that occurred, the study navigates through the consequences of monetary policy interventions. Beginning with an overview of the Federal Reserve's roles and mechanisms, the narrative unfolds into critical periods, including the stagflation of the 1970s, the subprime crisis in the 2000s, and the unprecedented challenges posed by the COVID-19 pandemic. Each crisis serves as a crucible for evaluating how well monetary policies can stabilize the economy in turbulent times. The examination centers on the application of diverse financial tools, encompassing interest rate modifications, open market operations, and non-traditional actions like asset acquisitions. Through meticulous examination, this paper seeks to explain how monetary policies, often evolving in response to economic paradigms, have shaped and reshaped the global financial landscape during times of crisis. By identifying the commonalities across these different crises, the study highlights the evolution of the Federal Reserve's strategies, underscoring its adaptability and resilience. These monetary interventions have broad implications for global financial stability, emphasizing the critical role of central banks in navigating the complexities of a rapidly evolving economic environment.

Silicon Valley Bank Collapse: Causes & Consequences

This paper discusses the concept of bank bankruptcy and highlights the recent failure of Silicon Valley Bank (SVB) as a significant case similar to the Lehman Brothers' collapse in 2008. Lehman's failure was attributed to the U.S. housing market collapse and internal risk management issues. SVB's failure, occurring in 2023, resulted from both internal factors (improper decisions, high-risk strategies, and poor financial management) and external factors (economic recession, Federal Reserve interest rate hikes, regulatory challenges, and changes in the tech industry). The bankruptcy of SVB has far-reaching economic impacts on depositors, borrowers, entrepreneurs, investors, and the banking industry. It triggers a crisis of confidence, liquidity pressure, and systemic risks. The Federal Reserve implements emergency measures to address the fallout, reflecting on regulatory approaches to mitigate threats to the banking system. The comparison with Lehman Brothers underscores similarities in improper development strategies, asset structures, risk management, and regulatory oversight, leading to systemic risks and undermining financial market confidence.

The Effect of the Fed Interest Rate Hikes on the Financial Crisis Evidence from Emerging Market Economices

The purpose of this paper is to systematically study the economic consequences of this policy adjustment by analysing in depth the five interest rate hike actions of the Federal Reserve and their chain reactions in emerging market economies, applying economic principles and methods. In particular, the central question of concern is whether the Fed's interest rate hiking policy constitutes an important trigger of the financial crisis in emerging markets. In order to shed light on this complex phenomenon in a comprehensive manner, this paper not only analyses in depth the macroeconomic logic behind the Fed's interest rate hike, but also explores its transmission mechanism in emerging market economies, as well as the economic vulnerability of these countries in the face of external shocks. The results of the study show that the collapse of emerging countries as a result of the Fed's interest rate hikes seems to be inevitable, but we can draw insights from it: actively promoting the reform of the international monetary system and supporting the inclusion of more types of currencies in the international trade and investment settlement system has become a common choice, including for some Western countries, as well as the need to continue to optimise the economic structure of the domestic economy and to strengthen the ability to manage and control the comprehensive risks.

The Credit Council in the US Context

Abstract The proper role of central banks – in the US the Federal Reserve – is again up for scrutiny and criticism as the consequences of the monetary policies of the Great Financial Crisis (GFC) are fully revealed. Into the debate comes the proposal of an updated version of the Credit Council, an institution that worked alongside central banks in many European countries in the adjustment from a wartime to a peacetime economy post WWII. The renovated and reconstituted European Credit Council, as conceived by Eric Monnet of the Paris School of Economics, would participate as an aid to both the legislature and central banks in developing and monitoring monetary policy. Monnet sees additional institutional oversight to be essential as central banks confront the multifaceted challenges of escaping from GFC experimental policies and dealing with emerging challenges such as the Green Transition and social inequality. Monnet’s idea has its supporters and critics in the European context. This paper attempts to assess the utility and efficacy of the Credit Council in the US context, using: (i) the EU criticisms to anticipate and respond to likely objections from US critics; and (ii) the current Fed reform debate in the US to gauge potential fit and acceptance. The conclusion, in brief, is that the Monnet CC concept could fit well within the US context and is a potentially useful mechanism for enhancing democratic responsiveness and adding to policy legitimacy as the Fed deals with existing and imminent monetary arena challenges.

From Craftsmanship to Connectivity

Apprenticeship is a long-valued form of workforce learning. Historical models of craft apprentices learning a trade from a master have prevailed for centuries. In more recent eras, apprenticeship programs have proliferated in industrial sectors and are now facing a revival in corporate settings (Fuller & Sigelman, 2017; Federal Reserve Bank, 2019). However, corporate programs today face different challenges than earlier renditions. Specifically, programs today must enable learning outcomes in a digital context, as professional work today increasingly involves digital or hybrid working environments. Much of the existing literature on apprenticeship focuses on the nature of the craft apprenticeship or the specific features of cognitive apprenticeship within a developmental relationship. Given the rapidly growing number of modern corporate apprenticeship programs, it is essential to understand how learning happens in these dynamic environments. This paper analyzes interview data and five participant case studies to examine a modern corporate apprenticeship program at a multinational consulting firm. The program is a full-time and fully paid learning and working experience for non-degree candidates. It operates in 40 cities across the United States and has enrolled over 2,000 apprentices. Apprentices have formal and informal learning experiences throughout the program, including on-the-job learning. They also work in geographically dispersed teams via a hybrid workplace that is predominantly virtual. Emic themes reveal that digital tools afford apprentices access to a broader networking environment, level up independently, engage in informal betterment with experienced others, and participate in shared discovery and problem-solving with peers. However, situated learning in a project context and strong relationships with various experienced others are equally essential to the digital tools. Drawing upon epistemic lenses of learning that consider how technologies enable learning across multiple activities, environments, and relationships, these findings paint a picture of how apprentices collaboratively engage in value-generating activities as mediated by technology and engage in networked learning.

Macroeconomic news, senior officials' speeches, and emerging currency markets: An intraday analysis of price jump reaction

We examine intraday emerging currency jumps in response to domestic and foreign macroeconomic news announcements, as well as US senior officials' speeches. We use the robust-to-jump volatility estimator to estimate currency jumps. We provide evidence that both emerging currency jumps and cojumps exhibit significant and pronounced responses to US monetary policy and real activity news releases. Moreover, we find that domestic monetary policy and economic real activity data, and senior Federal Reserve officials' speeches, trigger significant jumps in emerging currencies, leading to large currency fluctuations that would disrupt market stability, undermining economic resilience and potentially diminishing ESG ratings.

A Historical Perspective on US Treasuries Risk Premia

The uncontrolled growth of US public debt is causing some anxiety among investors in US Treasuries. It is therefore useful to estimate the current risk premia embedded in the US yield curve and assess the extent to which investors are pricing in potential future financing difficulties for the US government.In this paper, we provide both a theoretical and empirical explanation of the factors driving the US Treasuries yield curve and how it is possible to extract what market participants are currently pricing in.It is widely acknowledged that expectations about future US monetary policy play a crucial role in this market. However, there is a notable underestimation — even within academic literature — of the symmetrical role played by expectations regarding future risk premia. Through our original modeling of the US Treasuries yield curve, we document the history of these expected risk premia. Our findings indicate that from 2000 to 2022, investors consistently underestimated the strength of demandfor US Treasuries, which may explain the somewhat unusual behavior of this key market during that period.Since 2022, however, a new paradigm has emerged. Demand for longterm US treasuries has declined due to the resurgence of inflation, while debt issuance has surged, driven by substantial deficits and the Federal Reserve’s Quantitative Tightening policies. Consequently, risk premia have increased sharply.The future remains highly uncertain as lower inflation could once again bolster demand for US Treasuries while public debt is expected to continue its rapid expansion. In this volatile environment, our model will help investors manage their positions by enabling real-time comparisons between their own expectations and the actual market pricing.

Trends and predictors of inflation-adjusted costs in transcatheter and surgical aortic valve replacement in a nationally representative sample

BackgroundTranscatheter aortic valve replacement has become an accepted alternative to surgical aortic valve replacement. We examined the trends and predictors in inflation-adjusted costs of transcatheter aortic valve replacement and surgical aortic valve replacement. MethodsNational Inpatient Sample identified patients who underwent aortic valve replacement for severe aortic stenosis by International Classification of Diseases, Ninth and Tenth Revisions, codes. Hospitalization costs were inflation-adjusted using the Federal Reserve’s consumer price index to reflect current valuation. Outcomes of interest were unadjusted trend in annual cost for each procedure and predictors of in-patient cost. Generalized linear models with a log link function identified predictors of adjusted costs. Interaction terms determined where cost predictors were different by operation type. ResultsBetween 2011 and 2019, the mean annual inflation-adjusted cost of surgical aortic valve replacement increased from $62,853 to $63,743, in contrast to decreasing cost of transcatheter aortic valve replacement from $64,913 to $56,042 ($1,854 per year; P = .004). Significant independent predictors of patient-level cost included operation type (transcatheter aortic valve replacement associated with $9,625 increase; P < .001), incidence of in-hospital mortality ($28,836 increase; P < .001), elective status ($2,410 decrease; P < .001), Elixhauser Index ($995 increase; P < .001), and postoperative length of stay ($2,014 per day increase; P < .001). Compared to discharges with Medicare, discharges with private insurance and Medicaid paid $736 less (P = .004) and $1,863 less (P = .01), respectively. Increasing hospital volume was a significant predictor of decreasing patient level cost (P < .001). ConclusionAnnual cost of transcatheter aortic valve replacement has decreased significantly and has been a more cost-effective modality compared to surgical aortic valve replacement since 2017. Predictors of patient-level costs allow for mindful preparation of healthcare systems for aortic valve replacement.

Households' Preferences Over Inflation and Monetary Policy Tradeoffs

We document novel facts about U.S. household preferences over inflation and monetary policy. Many households are highly attentive to news about monetary policy and to interest rates. The median household perceives the Federal Reserve's inflation target to be three percent, but would prefer it to be lower. Quantifying the tradeoff between inflation and unemployment, we find an average acceptable sacrifice ratio of 0.6, implying that households are likely to find disinflation costly. Average preferences are well represented by a non-linear loss function with near equal weights on inflation and unemployment. These preferences also exhibit sizable demographic heterogeneity.

Do central banks respond to house price movements? A Bayesian DSGE approach

AbstractThis thesis explores whether monetary policy reacts to house price movements, by employing a New Keynesian model with a housing factor and estimated using Bayesian estimation techniques. The primary emphasis of this study is on the United States, with supplementary analyses on central banks in several advanced economies. The principal finding of this thesis reveals that the Federal Reserve responded substantially but episodically to house prices. Furthermore, my investigation indicates that the Reserve Bank of Australia, the Reserve Bank of New Zealand, Bank of England, and the European Central Bank did not incorporate house prices into their policy framework, whereas the Bank of Canada did so episodically. The baseline results remain robust across a range of sensitivity checks.

The Measures to Solve the US Subprime Crisis and Inspirations

This paper focuses on the subprime mortgage crisis in the United States at the beginning of the 21st century, and analyzes how this crisis was formed through chain transmission from the perspective of financial bonds in the real estate industry. The paper focuses on the Federal Reserve's policy adjustments and the collapse of the banking system, in order to elucidate the severe impacts of the subprime crisis on the US financial system. Through data collection and attribution analysis, it intends to provide methods for preventing similar crises from happening again, including diversifying policy tools, strengthening supervision, foreign exchange risk management, etc., and provide certain suggestions for the stable operation and resilience of the national financial system.

The Impact of Unexpected FOMC Actions on Corporate Earnings Expectations

This paper fills a gap in the literature by examining the impact of unexpected Federal Open Market Committee (FOMC) actions on the markets expectations of U.S. corporate earnings by examining the sell-side analysts' quarterly earnings forecasts from 1989 to 2022. This paper reveals a significant negative correlation between analysts' earnings forecasts and unexpected changes in the target interest rate. This correlation weakened after the Federal Reserves implementation of Forward Guidance as a monetary tool in 2004, which appears to enhance the market's ability to predict target rate adjustments. In addition, this paper shows that with a given amount of unexpected target rate changes, value firms display greater earnings forecast revisions from analysts than growth firms. Debt levels or profitability factors cannot fully explain this phenomenon. The findings of this paper contribute to the knowledge of how FOMC actions exert influence on equity valuations and the transmission mechanisms of monetary policies.