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This edition was written by Elijah Asdourian, Sam Boocker, Lorae Stojanovic, and Louise Sheiner.
Measured productivity growth per worker in advanced economies increased sharply at the beginning of the COVID-19 pandemic and then dropped sharply. Using data on productivity since 1950, John Fernald of INSEAD and Huiyu Li of the San Francisco Federal Reserve find that productivity post-COVID followed predictable trends and that the rise of telework since 2020 has not notably impacted worker productivity. They argue that the surge in productivity growth and subsequent decline in 2020 and 2021 was not a sign of faulty productivity measures, but instead in line with the general pattern since the mid-1980s of productivity growth increasing in downturns and falling in recoveries. Comparing productivity growth across U.S. industries, they find no correlation between productivity growth and “teleworkability,” suggesting that the pandemic did little to alter the long-term, slow productivity trajectory in advanced economies.
Dong Beom Choi of Seoul National University, Paul Goldsmith-Pinkham of Yale, and Tanju Yorulmazer of Koç University identify vulnerabilities that predicted individual banks’ stock price declines after Silicon Valley Bank’s (SVB) collapse in March 2023. Banks with a high concentration of uninsured deposits faced larger declines, particularly if they also had significant unrealized losses in held-to-maturity assets, like long-term Treasuries, that depreciated when the Federal Reserve raised interest rates. Banks facing a run can be forced to realize these losses in order to meet depositor withdrawals. Banks with at least $1 trillion in assets outperformed smaller banks after SVB’s collapse, which the authors suggest was a sign of investors pricing in greater “too big to fail” benefits. Unlike during the global financial crisis of the mid-2000s, the quality of a bank’s loans and the amount of liquid holdings didn’t predict stock performance. In fact, Silicon Valley Bank was highly liquid before its collapse, with more than 60% of its assets in cash and securities. Stock market participants appeared to have anticipated banks’ vulnerabilities to some extent, as the banks that suffered more after the SVB failure had also underperformed in the previous year.
The natural rate of interest – the one estimated to prevail when the economy is at full employment and inflation is stable – has long been of central importance to monetary policymakers. However, the natural rate cannot be observed directly and has to date mostly been estimated with models. Verónica Bäcker-Peral and Atif Mian of Princeton and Jonathon Hazell from the London School of Economics measure the natural rate directly using the resetting of interest rates on 90-year leases on U.K. property from 2003 until the present. They find the natural rate of return in the U.K. housing market declined from 4.8% in 2006 to a low of 2.3% in 2022.
"While the FOMC controls the overnight fed funds rate, households and businesses usually borrow at longer tenors. Longer-term rates therefore influence economic activity more directly than does the fed funds rate. Yet the relationship between the fed funds rate and longer-term rates is not fixed. So, in setting the stance of monetary policy, the FOMC needs to account for how that stance will translate to the broader financial conditions, including long-term rates as well as credit spreads and other factors, that influence economic activity. In addition, broader financial conditions can contain important information about how market participants are seeing the economic outlook. Financial conditions tightened substantially in recent months. Much of the tightening came from movements in longer-term interest rates. Higher long-term interest rates have also contributed to equity price declines and dollar appreciation over recent months," says Lorie Logan, President of the Dallas Federal Reserve.
"...Since the July meeting, the yield curve has steepened notably. The market-implied peak fed funds rate is little changed, and policy-sensitive rates through 2025 are 60 basis points higher. But the 10-year Treasury yield is up roughly 90 basis points, and the five-year yield, five years forward, is almost 130 basis points higher. Importantly, the rise in rates has come almost entirely in real interest rates. Inflation compensation has hardly moved. Market participants remain confident, as they should, that the FOMC will achieve the inflation target."
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