Search Results
Newsletter
COVID-19’s Effects on the Economy and the Fed’s Response
The U.S. economy started strong in 2020, but then the COVID-19 pandemic brought about the most abrupt economic slowdown in U.S. history. This Page One Economics describes Federal Reserve actions that stabilized financial markets and bolstered the economy.
Working Paper
Currency ratios and U.S. underground economic activity
Cagan's classic currency ratio suggests that underground economic activity in the U.S. surged starting in 1994. In contrast, we show that a ratio adjusted to take care of two distorting developments -- retail sweep programs and overseas demand for U.S. currency -- did not surge, and that movements in the adjusted ratio owe primarily to the differential effects of interest rates on currency and checkable deposits. As a result, we are skeptical of monetary-based claims that the underground economy has expanded significantly in recent years and believe that any claims that is has must rely on ...
Newsletter
Teaching the Linkage Between Banks and the Fed: R.I.P. Money Multiplier
The money multiplier has been a standard concept in introductory economics classes for decades, but changes in the way the Fed implements monetary policy has made the model obsolete. This issue provides information about the linkages between the Fed and the banking system and provides teaching suggestions.
Journal Article
How Have Banks Been Managing the Composition of High-Quality Liquid Assets?
Banks? liquidity management practices are fundamental to understanding the implementation and transmission of monetary policy. Since the Global Financial Crisis of 2007-09, these practices have been shaped importantly by the liquidity coverage ratio requirement. Given the lack of public data on how banks have been meeting this requirement, we construct estimates of U.S. banks? high-quality liquid assets (HQLA) and examine how banks have managed these assets since the crisis. We find that banks have adopted a wide range of HQLA compositions and show that this empirical finding is consistent ...
Journal Article
Profits and balance sheet developments at U.S. commercial banks in 2006
The U.S. commercial banking industry continued to be quite profitable in 2006, and industry assets grew considerably. The strength in profitability and growth of bank balance sheets last year reflected favorable U.S. financial market conditions and the generally solid economic expansion. Industry return on equity advanced from its 2005 level, and the return on assets edged up to match its highest annual level in recent decades. Profitability was supported by brisk growth in non-interest income and generally strong asset quality; the flattening of the yield curve and competitive pressures, ...
Working Paper
The Fed’s “Ample-Reserves” Approach to Implementing Monetary Policy
We describe the Federal Reserve’s (the Fed’s) approach to implementing monetary policy in an ample-reserves regime. We use a stylized model to explain the factors the Fed considers and the tools it uses to ensure interest rate control when the quantity of reserves is ample. Then, we take a close look at the Fed’s experience operating in this regime in the post-crisis period, both as it has raised and lowered its policy rate. Looking ahead, we highlight some considerations relevant for maintaining a level of reserves consistent with the efficient and effective implementation of ...
Working Paper
How Have Banks Been Managing the Composition of High-Quality Liquid Assets?
We study banks' post-crisis liquidity management. We construct time series of U.S. banks' holdings of high-quality liquid assets (HQLA) and examine how these assets have been managed in recent years to comply with the Liquidity Coverage Ratio (LCR) requirement. We find that, in becoming LCR compliant, banks initially ramped up their stock of reserve balances. However, once the requirement was met, some banks subsequently shifted the compositions of their liquid portfolios significantly. This raises the question: What drives the compositions of banks? HQLA? We show that a risk-return framework ...
Discussion Paper
How Dynamic is Bank Liquidity, Including when the COVID-19 Pandemic First Set In?
Banks need sufficient liquidity—cash and other assets that may be easily and immediately converted into cash—to meet their financial obligations, such as when households withdraw deposits or businesses tap credit lines. One key takeaway from the Global Financial Crisis of 2007–09 was that continuity of bank intermediation is particularly important in times of stress to limit pressure on the financial system, and that banks need to consistently maintain sufficient liquidity to achieve that outcome.