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This edition was written by Sarah Ahmad, Chase Parry, Jack Spira, and Louise Sheiner
Quantitative easing (QE) has been criticized for contributing to the inflation surge and large central bank losses in the post-COVID era. Tobias Adrian and co-authors at the International Monetary Fund argue that QE should be evaluated mainly on whether it achieves its macroeconomic objectives, rather than on central bank losses. Their model finds that QE provides a sizable boost to output and inflation in a deep liquidity trap, when policy rates are constrained by the effective lower bound for a prolonged period. Compared to fiscal expansion, QE also significantly reduces public debt: a central bank asset purchase program equal to 10% of GDP lowers the debt-to-GDP ratio by about seven percentage points after 30 quarters, while government spending scaled to produce the same output increase raises debt by about three percentage points over the same period. However, the authors caution against the use of QE in a shallow liquidity trap where a faster-than-expected economic recovery can lead to overheating and large central bank losses.
Since the 1974 Safe Drinking Water Act, the U.S. has spent more than $2 trillion on improving drinking water quality, yet water serving 10-20% of Americans still violates federal pollutant standards. Compiling hundreds of millions of water-quality reading results on 1,250 pollutants with Medicare data on older Americans’ health outcomes, David A. Keiser of UMass Amherst and co-authors find that the share of readings exceeding federal standards fell by half between 2003 and 2019, with unregulated pollutants falling more slowly. They show that subsidized loans offered under the Act—which help local water systems finance infrastructure improvements—lowered the share of readings above health standards by almost 10% over this period, with effects rising to 36% for loans targeting specific pollutants. The loans also reduced the mortality rate of Americans older than 65 by 0.5% relative to baseline. The authors estimate that scaling up these loans to eliminate every regulated pollutant violation nationwide would cost $46 per person per year, about a 20% increase in the average annual household water bill.
When tariffs drive up prices, how do consumers respond? Analyzing transaction-level data on spending by more than 125,000 U.S. households from 2024 and 2025, Sinem Hacıoğlu Hoke and Leo Feler of the Federal Reserve find that the 2025 tariffs generated a large spending response. Comparing product categories with higher and lower tariff exposure, they estimate that the tariffs raised prices in affected categories by 1% to 2% while real spending fell about 4%. Low-income households responded the least to price changes and experienced the greatest welfare losses. Using survey responses from a subset of 21,000 households in the dataset, the authors identify two main channels behind the spending decline: consumers across the income distribution traded down to less expensive varieties within categories identified as affected by tariffs, while middle-income consumers also reduced purchases of non-essential products more broadly.
"Achieving appropriate bank regulation and supervision is a balancing act. Banks need room to grow so that their lending can support innovation and aspiration throughout the economy. At the same time, long experience has shown that without proper safeguards, banks striving to innovate in pursuit of higher profits may take excessive risks. When banks get in trouble, their downfall threatens businesses and households, putting the viability of communities, and sometimes even the entire economy, at risk..." says Michael Barr, Member of the Federal Reserve Board.
"For regulators, the challenge lies in striking the right balance—supporting growth and innovation while maintaining the safeguards that keep the banking system resilient. I am concerned that we're losing that balance. I believe that recent steps by the Federal Reserve and other agencies will undermine the safety and soundness of banks and increase financial stability risks. Vulnerabilities that result from deregulation may not be apparent today, but they will result in problems that will build over the coming years and could threaten serious harm to the economy...
"Taking into account the lessons from history and research, it is clear that while deregulation may provide a short-run boost to growth, the benefit is outweighed by increased longer-term risks of devastating financial crises, lower growth, lost jobs and businesses, and disrupted lives. Unfortunately, bank regulators are moving in this direction. Given the tradeoffs involved, especially the large costs of crises, I view the cumulative relaxation of capital requirements, other regulations, and supervision as unwise. I am concerned that a relaxation of liquidity regulations is coming next. These changes will result in harm to the resilience of banks and the U.S. financial system."
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