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This edition was written by Adriana Adames Acosta, Chesapeake Dowdy, Zixun Tan, and David Wessel
Since the 2008 Global Financial Crisis, advanced economies have seen a surge in government debt-to-GDP ratios, but not a corresponding surge in government bond yields. J. Scott Davis and Lillian Derr of the Federal Reserve Bank of Dallas find that there is no simple positive relationship between government debt levels and interest rates across 19 OECD countries. From 2007 onward, interest rates inthose countries continued the decline that had begun in the 1980s, rising only with the post-pandemic inflation surge in 2022. Japan, in particular, has the highest government debt among advanced economies but among the lowest government bond yields. The authors argue that the source of financing matters. Government borrowing has a smaller effect on yields when it is financed by domestic saving instead of foreign saving, and when the country is a net international creditor instead of a net international debtor. In their benchmark estimates, a 1-percentage-point increase in the deficit-to-GDP ratio raises 10-year yields by about 9 basis points when the borrowing country runs a current account surplus and the deficit is financed domestically, compared with about 16 basis points when the borrowing country runs a current account deficit and the deficit is financed by foreign saving. This helps explain why large crisis-era deficits after 2008 and 2020 did not automatically translate into higher yields, as increased private saving offset some of the effect of government borrowing.
Using quarterly data from the Understanding America Study through the second quarter of 2026, Rebecca Diamond of Harvard compares women who start GLP-1s for weight loss with similar women who would like to start them but have not. Among women who were single when they started treatment, marriage or cohabitation rose by 18.3 percentage points on average and by 28.6 percentage points after six or more quarters, as weight loss accumulated. Among women not employed at initiation, employment rose by 13.2 percentage points on average and by 26.9 percentage points after six or more quarters. The employment gains were larger than the decline in reported work-limiting health problems, suggesting that improved work capacity explains only part of the response. Nor did self-rated health, depression, loneliness, or life satisfaction improve, suggesting that visible weight loss—not a general improvement in health or motivation—was an important channel.By contrast, existing relationships and jobs changed little: partnered women were no more likely to separate, and employed women showed no upward job mobility. Because women who started GLP-1s were more financially advantaged than women who wanted the drugs but had not started them, Diamond argues that these nonmedical benefits raise distributional concerns.
The Federal Reserve uses its balance sheet to keep reserves ample enough that the federal funds rate can be controlled primarily through administered rates, rather than through active management of the supply of reserves. Sriya Anbil of the Federal Reserve Board and co-authors argue that bank demand for reserves may not be the binding constraint on how small the balance sheet can get; repo market capacity may require a larger balance sheet to maintain interest rate control. They build a structural model of how deposits move through the financial system as Treasuries roll off the Fed’s balance sheet, calibrated to the 2022 to 2024 quantitative tightening (QT) cycle. Their model predicts that a larger supply of Treasuries available to markets due to QT will increase primary dealers’ demand for repo financing, putting upward pressure on repo rates once take-up at the Fed’s overnight reverse repo facility falls to zero. Repo rate pressures can spill over into the fed funds market, compromising interest rate control even if bank demand for reserves is satisfied. The authors also find complementarity between balance sheet and interest rate policy. During a rate-hiking cycle, households shift more deposits into money market funds, allowing those funds to lend more in repo markets. This, in turn, relieves the pressure on repo funding from QT and lowers the level of reserves required for interest rate control.
"Expectations of inflation over the first four months, first four weeks of this period, they've come down. Inflation risks have come down. Again, in our business, we don't want to overdetermine things. But if there were people in households or the business sector in the financial markets who thought that this central bank was going to be comfortable with an inflation objective above 2%, well, I guess they'd be disappointed. We're going to deliver price stability in the U.S. That's what this committee has signed up to do and our objective is to do that. The tactics, the strategy and the rest, that's still to come," Federal Reserve Chair Kevin Warsh said at the European Central Bank's Sintra conference.
Q: "No matter what the President wants?"
"We've been an independent central bank for a very long time," Warsh said. "We're going to be an independent central bank at this moment and you're going to see no changes on that."
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