interest rates

Ask the Fed

“The Fed is trying to achieve price stability and maximum employment,” said Sylvain Leduc, Executive Vice President and Director of Research of the U.S. Federal Reserve Bank of San Francisco (FRBSF), known informally as “the Fed.” In terms of employment levels, “we are back to where we were pre-pandemic.” He was speaking on February 7, 2023, at a public briefing in which he outlined the FRBSF’s thinking on economic matters. He showed a graph of unemployment, which reached a peak at the start of the pandemic in early 2020. The monthly change in nonfarm payroll employment had a downward arc. “Job […]

Drivers of Inflation

What is causing the current inflationary environment? How are financial risk managers (FRMs) coping with escalating prices and renewed demand? What are the best strategies for addressing unanticipated inflation—what should a risk manager recommend to hedge against inflation? These and related questions led to a recent survey by the Global Association of Risk Professionals (GARP). “In June 2022, we surveyed 350 FRMs and found that most respondents expected inflation to remain high over the next year, followed by a significant reduction in the next five years,” said William May, Senior VP, Global Head of Certifications and Educational Programs, GARP. The survey […]

The Future of Crypto

What’s been happening in the cryptocurrencies market? Is it all merely speculation or is crypto here to stay? What is the future of broader blockchain technologies? What could regulation mean for the world of decentralized finance (DeFi)? On February 24, 2022, Helen Joyce, Britain editor of the weekly magazine the Economist, posed questions to her colleagues: Alice Fulwood, Wall Street correspondent at the Economist, and Matthieu Favas, finance editor at the Economist, in order to explore the rise of cryptocurrency  and its potential consequences. “Blockchain can be thought of as a database distributed across many nodes,” Alice Fulwood said, “one […]

From brown energy to green

How will climate change affect the financial sector and the broader economy? What policy responses will mitigate climate change risks? Recently, the US Federal Reserve Bank (FRB) sponsored the first conference dedicated to exploring the economic and financial risks associated with climate change. “Climate change will have sweeping effects on our economy and financial system,” says the report summarizing the main themes of the conference. The report, released on December 16, 2019, was co-authored by Galina B. Hale, Òscar Jordà, and Glenn D. Rudebusch. Hale is a research advisor and Jordà and Rudebusch are both senior policy advisors at the Federal […]

Finding a New Balance

How can monetary policy achieve price stability and full employment objectives in the midst of a changing economic environment? Lately, the US Federal Reserve Bank (FRB) has been thinking hard about new ways to control inflation, given the new economic headwinds. “Persistently low inflation presents a new problem for monetary policymakers,” said Mary C. Daly, president and CEO of the Federal Reserve Bank of San Francisco (FRBSF). On August 29, 2019, she gave a speech to a conference of economists and policymakers in Wellington, NZ. This was a significant venue, because inflation targeting was pioneered in New Zealand in 1990, […]

“The Death of the Soul”

Do you long for the good old days? What, exactly, were “the good old days”? Depends on your time horizon. Today’s excerpt comes from page 11 of Economic Thought: A Brief History by Heinz D. Kurz, translated by Jeremiah Riemer (Columbia University Press, 2016). “According to Scholastic economic thought, the answer to the material hardship experienced by large segments of the [medieval European] population was not higher production and economic growth but self-restraint and the repression of needs. “The heart of Scholasticism was the doctrine concerning usury. A core argument was that money is sterile—it cannot “breed offspring.” Another argument […]

“Skin in the Game”

What safeguards should be in place, to minimize the risks posed by financial derivatives? CME Group requires that its Clearing Members support the risk of their portfolios by “putting some skin in the game,” said Jason Silverstein, Executive Director and Associate General Counsel of CME Group, a body that includes the Chicago Mercantile Exchange and the New York Mercantile Exchange among its subsidiaries. “It’s a story of balancing incentives, in order to stabilize losses. Our belief is that it should be significant and risk-based.” Silverstein was the second of four presenters at a webinar titled Derivatives Regulatory Update held on […]

Stress Testing Mortgages. Part 2

The team of Scott L. Smith, Jesse Weiher, and Debra Fuller at the Federal Housing Finance Agency (FHFA) use specialized financial models to estimate potential losses. They carried out empirical tests of countercyclical shocks using four different models of mortgage credit risk. This posting continues a February 4, 2015, presentation by Scott L. Smith to an audience of financial risk managers at Global Association of Risk Professionals (GARP). Two models were devised at FHFA, and two are commercially available credit models: one, called Black Knight (formerly LPS-AA), and the other called ADCO Loan Dynamics. The estimated losses were converted to a capital […]

Stress Testing Mortgages. Part 1

“One needs to be careful and not over-reliant on any one model,” said Scott L. Smith, Associate Director for Capital Policy at the Federal Housing Finance Agency (FHFA). He was referring to the financial models used by major financial institutions to estimate potential losses. On February 4, 2015, he was presenting a GARP-sponsored webinar on countercyclical stress tests to set capital requirements. Smith explained how credit risk is measured for mortgages, and described a way to embed stress testing that uses countercyclical concepts. He and colleague Jesse Weiher, Senior Economist at FHFA, performed dynamic stress testing that was adjusted to […]

Stressed Interest Rates: Battle of the Models

For generating shocked interest rate curves, such as a sudden economic stress might engender, “a three-factor parameterization solves many problems—but issues remain,” said Alexander Bogin, Senior Economist at the Federal Housing Finance Agency, and the second presenter at a webinar on modelling interest rate shocks held October 28, 2014, and sponsored by the Global Association of Risk Professionals. To develop an improved yield curve approximation, Bogin showed three variants of non-linear Laguerre functions of time to maturity.  These were the Nelson-Siegel model (which has 3 factors); the Svensson model (4 factors); and the Björk-Christensen model (5 factors). Over a two-year […]