The Global Pandemic and Run on Shadow Banks
In March, the global coronavirus pandemic led to a period of financial stress in which credit conditions tightened at an unprecedented pace. Elements of this stress period can be explained as a classic run on “shadow banks”—nonbank financial institutions that fund long-term assets with short-term debt. Although timely Federal Reserve interventions restored some calm to markets, shadow banks remain vulnerable to future runs because they lack the safeguards available to regulated depository institutions.
Inflation Expectations Limit the Power of Negative Interest Rates
Both the federal funds rate and longer-run yields have dropped to near zero, renewing discussion of negative interest rate policy. Although negative rates would allow for additional cuts in the United States, negative policy rates in line with what other countries have implemented would not be able to achieve the nominal rate reduction of previous easing cycles. Moreover, inflation expectations remained flat or fell after negative rates were introduced in most countries, limiting the expansionary power of these additional rate cuts.
The G-Spread Suggests Federal Reserve Restored Calm to Treasury Markets
In March, the coronavirus pandemic led to a sell-off in Treasury markets and a subsequent period of financial stress. I use one measure of Treasury market pressure, the G-spread, to gauge how liquidity in Treasury markets changed in response to the pandemic and the Federal Reserve’s interventions. I find that timely Federal Reserve interventions restored calm to the Treasury market, and that these interventions stand out in speed and scale compared with interventions in the early days of the 2007–08 financial crisis.
Understanding the Recent Rise in Municipal Bond Yields
In late March, investors sold off municipal bonds at a rapid pace, depressing municipal bond prices and driving up their yields relative to U.S. Treasuries. We find that this initial investor run on the municipal bond market was likely due to increased liquidity demand rather than credit concerns, making the Federal Reserve’s early actions to relieve liquidity stress effective. Going forward, however, municipal bond prices will likely reflect increased credit concerns.
Why Are Americans Saving So Much of Their Income?
For much of 2020, Americans have saved a greater share of their income than ever before. This increase in savings appears to be predominantly driven by precautionary motives. Therefore, consumers may be reluctant to draw down these savings in the future to support spending.
COVID-19 Poses Risks for State and Local Public Pensions
If the coronavirus pandemic leads to a protracted recession, public pension funding could weaken further in the years to come. During the 2001 and 2007–09 recessions, investment returns failed to reach pension plans’ longer-term assumed returns, and shortfalls in state and local government budgets led some employers to temporarily reduce contributions. If pension funding falls during the current crisis, state and local governments may choose to adjust plan structures as they did after the Great Recession.
Rainy Day Funds Have Grown as State Tax Revenue Strengthens
Many state governments have seen solid growth in their tax revenues over the past couple of years. We show that recent changes in the federal tax code contributed to the uptick in state revenues. In addition, we show that states have used the recent revenue windfall to build up rainy day funds at a much faster pace than they did before the Great Recession.
U.S. Business Applications Surge in the Face of COVID-19
Business formation in the United States has been on a decline for several decades. Most prior economic recessions have accelerated this trend. However, the recent economic downturn associated with COVID-19 appears to have had the opposite effect: business formation, as measured by business applications, has actually surged since late May.
Were Teleworkable Jobs Pandemic-Proof?
While the majority of pandemic-related job losses have been in occupations where working from home was not possible, work-from-home or “teleworkable” jobs were not pandemic-proof. In addition, the number of teleworkable jobs lost and recovered differed by workers’ sex and education status. Both college-educated and non-college-educated women experienced larger employment losses and slower recoveries in teleworkable jobs than their male counterparts.
Escaping the Housing Shortage
Despite the continuing economic expansion, home construction remains extremely low by historical benchmarks, constrained by the scarcity of undeveloped land in desired locations and land use regulations. Escaping the resulting housing shortage will take many years and likely require a shift toward multifamily construction, the freeing up of single-family homes by downsizing baby boomers, and the faster relative growth of medium-sized metropolitan areas.