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This edition was written by Alex Conner, Georgia Nabors, Lorae Stojanovic, and David Wessel.
In 2021, the Treasury limited the exposure of Government Sponsored Enterprises (GSEs) like Fannie Mae and Freddie Mac to speculative mortgages—mortgages on second homes or investment properties. Natee Amornsiripanitch of the Federal Reserve of Philadelphia and co-authors find that following the policy’s enactment, speculative mortgage sales to GSEs fell sharply and interest rates on speculative mortgages increased modestly. The decline in GSE purchases of speculative mortgages was offset by increased purchases by corporate investors, but local banks also held more of these loans on their balance sheets. Banks offset some of the elevated exposure to local risks from speculative mortgages by making fewer jumbo mortgages and small business loans.
Jules H. van Binsbergen of Wharton and co-authors construct indices of news-based economic sentiment at the state and national level using natural language processing on an extensive dataset of newspaper articles starting in 1850. The authors show that their sentiment measure predicts GDP, consumption, and employment growth, even after controlling for the stance of monetary policy and past economic performance. Their national sentiment index predicts GDP significantly better than the Survey of Professional Forecasters alone, suggesting that the index contains important information not present in consensus forecasts. Their results are driven almost exclusively by the parts of sentiment that focus on the future. They find that variation in national sentiment explains about one-third of the variation in state-level sentiment. The authors also document that news coverage has become increasingly negative since the 1970s.
The Export-Import Bank of the United States (EXIM) offers trade financing to exporting firms. Poorya Kabir of the National University of Singapore and co-authors find that when EXIM’s lending was suspended from 2015 to 2019, global sales among EXIM-reliant firms fell by 18% on average, primarily due to a decline in exports. These firms also laid off employees and lowered investment. The effects were particularly pronounced for companies that previously had experienced large revenue gains from investment and those with more export opportunities. The authors conclude that EXIM promotes exports and the efficient allocation of capital rather than merely offering funds to companies that could have financed trade activities without it.
“[M]y view has evolved to consider the possibility that the rate of inflation could decline further with the policy rate held at the current level for some time. Should inflation continue to fall closer to our 2% goal over time, it will eventually become appropriate to begin the process of lowering our policy rate to prevent policy from becoming overly restrictive. In my view, we are not yet at that point," says Michelle Bowman, member of the Federal Reserve Board of Governors.
"And important upside inflation risks remain. To the extent that both food and energy markets remain exposed to geopolitical influences, they present upside risks to inflation. There is also the risk that the recent easing in financial conditions encourages a reacceleration of growth, stalling the progress in lowering inflation, or even causing inflation to reaccelerate. Finally, there is a risk that continued labor market tightness could lead to persistently high core services inflation. While I do not tend to take too much signal from one report, last Friday’s employment report showed continued strength in job gains and wage growth, and the labor force participation rate declined. I will remain cautious in my approach to considering future changes in the stance of policy… While the current stance of monetary policy appears to be sufficiently restrictive to bring inflation down to a 2% over time, I remain willing to raise the federal funds rate further at future meetings should the incoming data indicate that progress on inflation has stalled or reversed.”
