Search Results
Journal Article
The rising gap between primary and secondary mortgage rates
While mortgage rates reached historic lows during 2012, the spread between primary and secondary rates rose to very high levels. This trend reflected a number of factors that potentially affected mortgage originator costs and profits and restrained the pass-through from lower secondary rates to borrowers? funding costs. This article describes the mortgage origination and securitization process and the way in which originator profits are determined. The authors calculate a series of originator profits and unmeasured costs (OPUCs) for the period 1994 to 2012, and show that these OPUCs increased ...
Journal Article
Supervising large, complex financial institutions: what do supervisors do?
The supervision of large, complex financial institutions is one of the most important, but least understood, activities of the Federal Reserve. Supervision entails monitoring and oversight to assess whether firms are engaged in unsafe or unsound practices, and to ensure that firms take appropriate action to correct such practices. It is distinct from regulation, which involves the development and promulgation of the rules under which firms operate. This article brings greater transparency to the Federal Reserve?s supervisory activities by considering how they are structured, staffed, and ...
Discussion Paper
What to Make of Market Measures of Inflation Expectations?
Central banks and investors around the world closely monitor developments in financial markets to gauge expectations of future interest rates and inflation. In this post, we argue that two of the most commonly used market-based inflation expectations measures—TIPS breakevens and inflation swaps—are noisy. Although movements in both measures provide policymakers with valuable information, readings should always be interpreted with care.
Discussion Paper
The Puzzling Pre-FOMC Announcement “Drift”
For many years, economists have struggled to explain the ?equity premium puzzle??the fact that the average return on stocks is larger than what would be expected to compensate for their riskiness. In this post, which draws on our recent New York Fed staff report, we deepen the puzzle further. We show that since 1994, more than 80 percent of the equity premium on U.S. stocks has been earned over the twenty-four hours preceding scheduled Federal Open Market Committee (FOMC) announcements (which occur only eight times a year)?a phenomenon we call the pre-FOMC announcement ?drift.?
Discussion Paper
Is U.S. Monetary Policy Seasonal?
Many economic time series display periodic and predictable patterns within each calendar year, generally referred to as seasonal effects. For example, retail sales tend to be higher in December than in other months. These patterns are well-known to economists, who apply statistical filters to remove seasonal effects so that the resulting series are more easily comparable across months. Because policy decisions are based on seasonally adjusted series, we wouldn’t expect the decisions to exhibit any seasonal behavior. Yet, in this post we find that the Federal Reserve has been much more ...
Discussion Paper
In a Relationship: Evidence of Underwriters’ Efforts to Stabilize the Share Price in the Facebook IPO
Stocks are usually offered in initial public offerings (IPOs) at a discount, leading to large first-day IPO returns. When there is a risk of a negative initial return, underwriters are known to actively support the aftermarket price of a stock through buying activities. In this post, we look at the trading book for Facebook stock on May 18, 2012, the day of its highly anticipated IPO. Using what we call a ?large integer?price bid? identification assumption to indirectly infer which investors are bidding, we find evidence of significant trading by underwriters seeking to stabilize the stock?s ...
Discussion Paper
Why Isn’t the Thirty-Year Fixed-Rate Mortgage at 2.6 Percent?
As of mid-December, the average thirty-year fixed-rate mortgage was near its historic low of about 3.3 percent, or half its level in August 2007 when financial turmoil began. However, yield declines in the mortgage-backed-securities (MBS) market, where bundles of mortgage loans are sold to investors, have been even more dramatic. In fact, all else equal, had these declines passed through to loan rates one-for-one, the average mortgage rate would now be around 2.6 percent. In this post, we summarize some of the findings from a workshop held at the New York Fed in early December aimed at better ...
Discussion Paper
Lunch Anyone? Volatility on the Tokyo Stock Exchange around the Lunch Break on May 23, 2013, and Stock Market Circuit Breakers
Stock market circuit breakers halt trading activity on a single stock or an entire exchange if a sudden large price move occurs. Their purpose is to forestall cascading trading activity caused by gaps in liquidity or order errors. Whether circuit breakers achieve this goal is contentious. This post adds to the debate by analyzing intraday price formation on the Tokyo Stock Exchange (TSE) on May 23, 2013?the pinnacle of this past year?s volatility in Japanese stock markets. While no circuit breakers were triggered on the TSE, we focus on trading conditions before and after the daily lunch ...
Discussion Paper
Data Insight: Which Growth Rate? It’s a Weighty Subject
The growth rate in real gross domestic product (GDP) is a conventional indicator of the economy’s health. But the two ways of measuring annual GDP growth can give very different answers. In 2013, GDP grew 2.2 percent on a year-over-year basis, but at a faster 3.1 percent rate on a Q4-over-Q4 basis. So, which measure is more meaningful? We show in this post that the Q4/Q4 metric is better since it only considers quarterly growth rates during the current year, while the Year/Year measure depends on quarterly growth rates in both the current and previous year and puts considerable weight on ...
Discussion Paper
Worker Flows in Banking Regulation
In the aftermath of the 2008 financial crisis, job transitions of personnel in banking supervision and regulation between the public and private sectors?often labeled the revolving door?have come under intense scrutiny and have been blamed by certain economists (Johnson and Kwak), legal scholars (John Coffee in the Financial Times), and policymakers (Dodd-Frank Act of 2010, Section 968) for distorting regulators? actions in favor of banks. However, other commentators have downplayed these distortions and presented a more benign viewpoint of these worker flows?as a means for regulatory ...