October 31, 2024

The Hutchins Roundup brings the latest thinking in fiscal and monetary policy to your inbox. Have something you'd like us to include in the next Roundup? Email us and we'll take a look.

This edition was written by Sarah Ahmad, Tristan Loa, Georgia Nabors, and Louise Sheiner.

Political affiliations shape perceptions on Fed’s political bias

Pei Kuang of the University of Birmingham, Michael Weber of the University of Chicago, and Shihan Xie of the University of Illinois Urbana-Champaign survey 5,205 U.S. consumers to examine public perceptions of the Federal Reserve’s political bias. They find that political views strongly influence how individuals view the Fed’s political leanings: most Republican-leaning participants believe that the Fed favors Democrats whereas most Democrat-leaning participants believe that the Fed favors Republicans. In addition, those who perceive the Fed to be aligned with their political affiliations report a higher trust in the institution, have a more positive outlook on economic conditions, and expect lower inflation and unemployment in the year ahead. In a hypothetical scenario where Trump is elected president, trust in the Fed would rise among Republicans, but fall among Democrats.

Medicare price cuts reduced innovation

From 1996 to 2016, the federal government enacted several Medicare reforms that reduced the price of durable medical equipment. Yunan Ji of Georgetown and Parker Rogers of Indiana University find that during this period, firms exposed to price cuts experienced a 44% decline in revenue relative to unexposed firms. In affected product categories, new device submissions to the Food and Drug Administration fell by 25% and patent filings fell 75%, suggesting a large decline in innovative activity. Device manufacturers with greater exposure to price cuts reduced research and development expenditures by 53%. The authors also find that repair and replacement rates for durable equipment rose significantly, indicating a reduction in product quality. They conclude that losses in patent market value for affected devices totaled $46 billion annually, far surpassing the Medicare savings from the price cuts.

Regulatory constraints unlikely to result in decreased intermediation activities in fixed income markets this year

Expected increases in Treasury issuance as a result of rising budget deficits have raised concerns about the capacity and willingness of Wall Street dealers to provide essential intermediation services at a time when the Federal Reserve is shrinking its holdings. Paul Cochran from the Federal Reserve Board and co-authors find that dealers have become more active in the Treasury and mortgage-backed security markets since the Fed began reducing its balance sheet in June 2022 and that regulatory constraints, specifically the Supplementary Leverage Ratio (SLR), have become less binding because capital has increased faster than leverage. Based on the regulatory capital ratios as of June 2024, dealer balance sheets appear to have ample headroom under the SLR to absorb the projected increase of $115 billion in their holdings of Treasury debt through year-end, they find. But at times of market stress and volatility, the authors caution, dealers’ internal risk limits may constrain their ability to support market functioning by supplying liquidity.

New business applications remain above pre-pandemic levels

Chart courtesy of the U.S. Census Bureau via FRED

Quote of the week

“Q: We have talked about the kind of regulatory tsunami—all these independent agency regulations. Each one is not a mortal wound for a bank but in aggregate, the cumulative impact is a lot. And don’t you think that's something we should study? And if there was a government agency that could do that and look at the cumulative impact of all that regulation, particularly on our nation’s economic prospects going forward, would that be a valid exercise?

A: Well, I think it's something that's important for the bank regulators to be doing, and certainly, we've been hearing loud and clear from the banking community that the burdens of compliance have become quite extraordinary. I think one principle that's helpful is tailoring—trying to make sure that the complexity and severity of the regulations fit the footprint of the activities of banks of different sizes and complexity," says Janet Yellen, U.S. Secretary of the Treasury (video). 

"But there are so many areas that are important. To my mind, no longer being directly a bank regulator but worrying about financial stability and the strength of the economy, knowing how important it is to have a healthy banking system in order to have a healthy and resilient economy, I guess my predilection is very much toward robust capital liquidity to make sure that we do have a banking system that can support the economy, that’s safe and sound.

And I think a lot of people worried in the aftermath of the financial crisis, Dodd-Frank was passed, and regulation really ramped up at that point, that the United States' banks wouldn't be able to compete, that the regulatory burden was so severe it would make our banks non-competitive. I think if you actually study what’s happened, you'd see that wasn’t the case. I mean, I’m not denying that there are significant burdens on banks, but I think we have a strong, sound banking system that’s very well placed to compete. And when the pandemic struck, and we saw a huge amount of financial turbulence, I think we were really fortunate, and it aided our recovery, that we had a banking system that was able, in an emergency like that, to provide business and households with the credit they needed to survive what was just an incredible stress." 

About the Hutchins Center on Fiscal and Monetary Policy at Brookings

The mission of the Hutchins Center on Fiscal and Monetary Policy is to improve the quality and efficacy of fiscal and monetary policies and public understanding of them.