April 4, 2024

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This edition was written by Elijah Asdourian, Alex Conner, Lorae Stojanovic, and David Wessel.

Tailoring large asset purchases

Stefania D’Amico of the Federal Reserve Bank of Chicago and co-authors use security-level data to assess how effectively the Fed tailored Treasury purchases to their stated goals during the pandemic. The authors distinguish between two periods: March to September 2020 when the Fed was trying to restore market functioning and September 2020 to March 2022 when the Fed was trying to provide stimulus. During the earlier period, the Fed conducted daily Treasury purchases and frequently adjusted the size and maturity of its operations, making it more difficult for market participants to form expectations about Fed actions and reallocate holdings accordingly. Therefore, the authors argue, the effects of Fed purchases were very localized on the yield curve, allowing the Fed to correct price distortions at certain maturities. In particular, the authors estimate that Fed purchases during the market functioning period reduced the 20-to-30-year end of the Treasury yield curve by 75bp without affecting the short end of the curve. By contrast, the Fed began releasing monthly auction calendars and slowing the pace of purchases during the second period. This approach gave market participants time to adjust their holdings in anticipation of Fed purchases, spreading the stimulative effect across the yield curve. Although total purchases during both periods were broadly similar, the authors estimate that over the course of the intervention, the purchases during the QE period reduced Treasury yields 10 times more.

When rates rose, banks avoided book value losses through accounting measures

The rise in interest rates in 2022 decreased the value of long-term assets held by U.S. banks, exposing them to risk of insolvency and runs. How did they respond? João Granja of the University of Chicago and co-authors find that only a small share of banks purchased derivatives to hedge interest rate risk. Instead, they predominantly relied on an accounting maneuver – reclassifying their assets from Available-for-Sale (AFS) to Held-to-Maturity (HTM) – to bolster their book values. Book values of HTM assets, unlike those of AFS assets, don’t fluctuate with the market. This reclassification allowed banks to avoid recording unrealized losses in their balance sheets and income statements. Vulnerable banks were more likely to reclassify securities in this way; federally regulated banks were less likely. The authors conclude that “a more robust enforcement of the existing HTM accounting rules may be necessary to prevent banks from utilizing the HTM classification to obscure the true state of their balance sheets.”

African Americans’ housing searches were disadvantaged by eviction moratoria

Eviction moratoria were enacted across the U.S. during the COVID-19 pandemic to protect renters. Using data on eviction moratorium policies and bot-generated housing inquiries to test for discrimination, Alina Arefeva of the University of Wisconsin and co-authors find that these moratoria “significantly disadvantaged African Americans in the housing search process.” African Americans with the same characteristics as white rental applicants were 11% less likely to receive responses from landlords while the moratoria were active, but only 4% less likely to receive responses after the moratoria were lifted. The authors conclude that landlords discriminate more in the search process when they can’t evict tenants, leading to increased discrimination against African Americans.

US homes are getting smaller

Chart courtesy of Apollo Global Management

Quote of the week

"In my view, the inflation picture has not changed very much since the start of the year, because I had already thought that the pace of disinflation would slow down this year. I continue to think that the most likely scenario is that inflation will continue on its downward trajectory to 2% over time. But I need to see more data to raise my confidence. Some further monthly readings will give us a better sense of whether the disinflation process is stalling out or whether the start-of-the-year readings reflect a temporary detour on the downward path back to price stability. I do not expect I will have enough information by the time of the FOMC’s next meeting to make that determination," says Loretta Mester, President and CEO of the Federal Reserve Bank of Cleveland.

"A remarkable thing about the disinflation is that it has occurred in the midst of strong labor markets and economic growth. While the broader tightening in financial conditions over time has led to some moderation in the growth of output and employment, both have remained stronger than expected. That relatively strong demand confronts a supply side of the economy that is healing. Supply chain disruptions and bottlenecks have improved over the past three years and the labor market is normalizing. People have returned to the labor force over time, and immigration has also increased the supply of labor. With imbalances between supply and demand in both product markets and labor markets easing, inflation has been easing as well. Now that pressures on supply chains are approaching normal and the labor market is coming into better balance, we are not likely to get as much help on inflation from the supply side as we saw last year."

Learn about the labor market

In January 2024, the Hutchins Center on Fiscal and Monetary Policy at Brookings convened about 40 leading labor economists from academia, think tanks, and the Federal Reserve to discuss recent developments in the labor market. Read a summary of that conversation.