Should the Fed Have a Financial Stability Mandate? Lessons from the Fed's first 100 Years
President Jeffrey Lacker and Research Publications Content Manager Renee Haltom explore the Fed's role in financial stability. Following the global financial crisis of 2007-08, the Fed has been given enhanced regulatory responsibilities to prevent future crises. However, most of the Fed's actions in pursuit of financial stability have historically come through emergency lending once crises are underway. The authors conclude that arguments in favor of emergency lending are based on erroneous readings of history. Instead, emergency lending may undermine financial stability, as well as the Fed's core mission of providing monetary stability.
AUTHORS: Haltom, Renee Courtois; Lacker, Jeffrey M.
Unsustainable fiscal policy : implications for monetary policy
The debt of the U.S. government is at historically high levels, but how do we know whether debt levels are worrisome? This Economic Brief argues that the current fiscal position is not sustainable. Though financial markets seem unconcerned, for the time being, about U.S. fiscal health, as evidenced by low rates on Treasury securities, lawmakers should not be complacent. Expectations are liable to change as large fiscal imbalances persist, with potentially devastating consequences for the U.S. economy and monetary policy.
AUTHORS: Haltom, Renee Courtois; Weinberg, John A.
The First Time the Fed Bought GSE Debt
In 1966, Congress gave the Federal Reserve authority to purchase the debt of agencies guaranteed or owned by the federal government. This same authority has enabled the Fed's purchases of mortgage-backed securities (MBS) and debt of government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac since 2008 in support of the housing market. In a little-known episode, the Fed shied away from exercising this authority in the 1960s but eventually conceded under political pressure and perceived threats to its independence.
AUTHORS: Haltom, Renee Courtois; Sharp, Robert
Is Fiscal Austerity Good for the Economy?
Concerns about fiscal imbalances in Europe and the United States have led to intense debates about whether governments should dramatically cut spending or increase taxes to reduce government debt ? a course of action often called fiscal "austerity." But is austerity likely to hurt economic growth? That question has not been definitively answered ? but even if austerity is costly in the short run, it may provide long-run benefits.
AUTHORS: Haltom, Renee Courtois; Lubik, Thomas A.
Is stimulative fiscal policy more effective at the zero lower bound?
Several recent research efforts have found that stimulative fiscal policy ? government spending or tax cuts ? can have unusual effects when nominal interest rates are as low as they are today. In particular, some studies have found that the government spending "multiplier" can be much larger at the zero lower bound. Despite these results, some caution is due when interpreting the size of the fiscal multiplier.
AUTHORS: Haltom, Renee Courtois; Sarte, Pierre-Daniel G.
Should the Fed Do Emergency Lending?
In its 100-year history, many of the Federal Reserve's actions in the name of financial stability have come through emergency lending once financial crises are underway. It is not obvious that the Fed should be involved in emergency lending, however, since expectations of such lending can increase the likelihood of crises. Arguments in favor of this role often misread history. Instead, history and experience suggest that the Fed's balance sheet activities should be restricted to the conduct of monetary policy.
AUTHORS: Haltom, Renee Courtois; Lacker, Jeffrey M.
Have Yield Curve Inversions Become More Likely?
The recent flattening of the yield curve has raised concerns that a recession is around the corner. Such concerns stem partly from the fact that yield curve inversions have preceded each of the past seven recessions. However, other factors affect the yield curve's shape besides the expected future health of the economy. In particular, a low term premium ? as has been observed in recent years ? makes yield curve inversions more likely even if the risk of recession has not increased at all.
AUTHORS: Haltom, Renee Courtois; Wissuchek, Elaine; Wolman, Alexander L.
Assessing Large Financial Firm Resolvability
A large financial institution may be said to be "resolvable" if, in the event of failure, policymakers would allow it to go through bankruptcy without financial assistance from the government. The choice between bankruptcy or bailout trades off different sets of costs on the economy. This Economic Brief presents a new tool that could assist policymakers with this evaluation, potentially helping to curb the "too big to fail" problem, serving as a useful complement to the "living wills" process, and making the resolution process more transparent.
AUTHORS: Haltom, Renee Courtois; Jarque, Arantxa; Walter, John R.
The role of interchange fees on debit and credit card transactions in the payments system
When consumers use debit or credit cards to make purchases, merchants are assessed fees for processing the transactions, the largest of which is called an "interchange" fee. Rising interchange fees, along with the growing dominance of card transactions in the payments system, have brought increasing scrutiny from regulators on the appropriate level of interchange fees and the competitive aspects of card networks. A look at the trends, mechanics, and economic role of interchange fees indicates that the issue is more complicated than it may initially appear.
AUTHORS: Mead, Tim; Haltom, Renee Courtois; Blackwell, Margaretta
Preventing Bank Runs
Banking can be defined as the business of maturity transformation, or "borrowing short to lend long." Economists and policymakers have long viewed banking as inherently unstable, that is, prone to runs. This Economic Brief reviews the intuition and theory behind bank runs and the most popular proposed solutions. It also explores new research suggesting that runs might be prevented by creating a new, low-cost type of deposit contract that eliminates the incentive to run.
AUTHORS: Haltom, Renee Courtois; Sultanum, Bruno