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This edition was written by Chase Parry, Andrew Rosin, Jack Spira, and David Wessel.
Nicholas Bloom of Stanford University and co-authors find that Brexit—approved by referendum in 2016—has been more costly than anticipated, reducing UK GDP by 6% to 8% by 2025. Using both macro comparisons with other developed economies and firm-level data in the UK, the authors show that the economic effects began after the 2016 referendum and intensified following the UK’s formal exit in 2020, accumulating gradually rather than as a single shock. They identify four main channels through which Brexit damaged the UK economy: elevated uncertainty depressing investment, lower demand for goods and services reducing hiring, within-firm productivity losses, and between-firm productivity losses as innovative and internationally integrated firms were hit the hardest. The damage also spread beyond directly exposed firms—UK businesses with no prior exposure to the European Union were still likely to be negatively affected by Brexit as supply chains were disrupted and consumers curtailed spending. The authors distinguish these effects from those of the COVID-19 pandemic, noting that firms negatively affected by the COVID pandemic were not necessarily those hit heavily by Brexit. The protracted nature of negotiations contributed to forecasting errors: while medium-term damage projections were correct, continued market uncertainty led to underestimation of long-term losses.
Following the failures of Silicon Valley Bank and Signature Bank in March 2023, the Federal Reserve established the Bank Term Funding Program (BTFP)—an emergency lending facility designed to provide funding to at-risk depository institutions and prevent further runs on uninsured deposits. David M. Arseneau of the Federal Reserve Board and co-authors argue that the BTFP, alongside other emergency measures, successfully helped “avert a potentially systemic banking crisis and aided in normalizing conditions in the banking sector.” On average, the program let banks borrow at terms roughly 0.6 percentage points better than the Fed’s usual discount window—mainly because it allowed them to borrow against the full value of their securities rather than their depressed market prices, and partly because its loan rate was moderately lower. The authors also note that, as designed, institutions with higher unrealized losses and greater reliance on uninsured deposits were most likely to borrow from the BTFP.
Given the chip market dominance of Nvidia and the prominence of three large artificial intelligence (AI) model developers—Anthropic, Google, and OpenAI—concentration of market power in the AI supply chain could play a large part in determining the technology's social benefits. In three models that treat AI as an internationally-traded production factor distinct from capital and labor, Susan Athey of Stanford and Fiona Scott Morton of Yale allow suppliers to set the price of AI strategically, enabling the models to distinguish between the downstream effects of technological efficiency and of monopolistic price-setting. Looking at the implications of various market structures and policy instruments, such as anti-trust regulations or tariffs, they identify several scenarios that can produce declining real wages despite increases in aggregate income. Though many of their findings depend on particular features of each model—such as whether a country can produce AI services domestically or must import them, or whether export or non-export industries are bolstered by AI—the authors find in each model support for their assertion [emphasis their own] that "broad welfare gains require that AI prices fall with productivity [...] and that displaced labor be absorbed productively in sectors less affected by AI."
"Looking forward, the next step in our balance sheet strategy will be to assess when the level of reserves has reached ample. It will then be time to begin the process of gradual purchases of assets that will maintain an ample level of reserves as the Fed’s other liabilities grow and underlying demand for reserves increases over time. Such reserve management purchases will represent the natural next stage of the implementation of the FOMC’s ample reserves strategy and in no way represent a change in the underlying stance of monetary policy," says John Williams, President of the Federal Reserve Bank of New York.
"Determining when we are at ample reserves is an inexact science. I am closely monitoring a variety of market indicators related to the fed funds market, repo market, and payments to help assess the state of reserve demand conditions. Based on recent sustained repo market pressures and other growing signs of reserves moving from abundant to ample, I expect that it will not be long before we reach ample reserves."
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