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This edition was written by Sarah Ahmad, Emily Araujo, Andrew Rosin, Jack Spira, and Louise Sheiner.
Nicolò Gnocato, Carlos Montes-Galdón, and Giovanni Stamato of the European Central Bank show that tariffs on intermediate goods have more severe economic effects than tariffs on final consumer goods. Because households can more easily substitute relatively expensive foreign goods with cheaper domestic options, the macroeconomic impact of tariffs imposed on final goods is muted. But because it is harder to substitute away from imported raw materials and other inputs, tariffs on intermediate goods raise production costs throughout the supply chain, leading to larger declines in output and more pronounced and persistent inflation. The authors’ quantitative model suggests that a country’s best response to tariffs levied against its exports would be targeted tariffs on final goods, as these taxes have a less damaging effect on domestic producers, output, and prices.
Xuesong Huang of Sun Yat-sen University and Todd Keister of the Federal Reserve Bank of New York develop a model of money market mutual funds to evaluate the design of redemption fees as a tool to prevent investor runs. They find that fees are more effective when applied even in normal times and adjusted dynamically in response to withdrawal patterns—rising when redemption patterns resemble typical runs, but falling when redemptions become more widespread, suggesting genuine liquidity needs. They show that the SEC’s 2014 reform—which imposed fees only when liquidity fell below a threshold—was counterproductive because it gave investors an incentive to redeem preemptively. While the 2023 reform linked fees to real-time outflows, the authors argue that it still leaves funds vulnerable because it’s not forward looking.
Much as a consumer's marginal propensity to consume using windfall income indicates how much their finances constrain their desired consumption, a bank's marginal propensity to lend out of unsolicited deposit inflows gives an indication of a bank's financing and liquidity constraints. Matching IRS dividend income data with FDIC deposit data at the county level as a proxy for unsolicited deposit inflows, Felix Corell of VU Amsterdam finds significant differences over time and across banks in banks' marginal propensities to lend out of deposits (MPLDs). Before 2008, most banks operated "hand-to-mouth" with high MPLDs, lending every dollar of newly received deposits. Since the onset of quantitative easing, higher reserve balances have reduced the average MPLD to $0.35 per dollar, suggesting banks are on average less liquidity-constrained than before. Banks with greater deposit market shares and cash-to-asset ratios have lower MPLDs. This heterogeneity matters for monetary policy, which relies on the lending behavior of banks to respond to changes in reserves, and for the possible consequences of a central bank digital currency, which could draw down bank deposits.
"If you look at the data in the first half, and I’ll put an asterisk on that because the first half has been a period of a lot of volatility in economic data related to tariffs and trade policy and things... demand in the U.S. economy clearly has slowed from the pace of last year. That’s probably not entirely surprising. I [and] many have expected growth to slow over time, but definitely, we’ve seen a step-down in the pace of growth, which I actually expect to continue in the second half of this year," says New York Fed President John Williams.
"So I expect GDP growth to be around 1% this year, which is—it was about 1.2% in the first half of the year. So I expect that to continue. I think it reflects a number of factors. One is a slowdown in growth of labor supply, which I think is just a big part of the story.
I think it is the effects of policy uncertainty, some of the short-term effects of some of the policy changes and also just the slower growth that perhaps we were expecting. But I actually am more optimistic about how we come out of this. I do expect growth to rebound next year as some of those factors maybe recede. Also, there’s some positive developments that suggest growth will get closer to trend next year."
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