Today, we present a guest post written by Charles Engel, Donald D. Hester Distinguished Chair in Economics at UW Madison.
Category Archives: financial markets
Financial Deregulation: Thanks, Trump
On banking regulation, from Forbes:
Thanks to Trump and his supporters this [Dodd-Frank capital and liquidity measures] all changed. Some of the key changes that EGRRCPA made were:
- Increasing the asset threshold for “systemically important financial institutions” or, “SIFIs,” from $50 billion to $250 billion.
- Immediately exempting bank holding companies with less than $100 billion in assets from enhanced prudential standards imposed on SIFIs under Section 165 of the Dodd-Frank Act (including but not limited to resolution planning and enhanced liquidity and risk management requirements)
- Exempting bank holding companies with between $100 billion and $250 billion in assets from the enhanced prudential standards.
- Limiting stress testing conducted by the Federal Reserve to banks and bank holding companies with $100 billion or more in assets.
SVB – No One Should be Surprised
SVB was a collapse waiting to happen. One indicator is the increasing reliance on debt acquired on the capital markets (as opposed to deposits).
One Year In: What Did Putin’s Gambit Do to Spreads, Uncertainty, and Activity?
Bluntly put, term spreads moved toward inversion, and inflation expectations adjusted for premia increased. VIX has been elevated since February 2022, and GeoPolitical Risk rose in the period right after the invasion. Growth, which had been accelerating according to weekly indicators, then decelerated. In other words, “Thanks, Putin”.
Revisiting Exchange Market Pressure
Linda Goldberg and Signe Krogstrup have a revised version of a paper entitled “International Capital Flow Pressures and Global Factors”. They write:
Recession Probabilities Incorporating Foreign Term Spreads
Foreign term spreads in several major financial centers have inverted (you can see the yield curves here). What is the probability of a recession 12 months ahead, using the 10yr-3mo term spread, the foreign (Germany, UK, Japan, Canada) 10yr-3mo term spread, and the national Financial Conditions Index (FCI), as suggested by Ahmed and Chinn (2022)? Answer: High
Term Spread Recession Forecasts for January 2024
Plain vanilla probit models indicate a high probability of recession, especially using the 10yr-3mo spread:
Market Expectations on Fed funds, Spreads, Inflation post-CPI Release
Lower on Fed funds at February meeting. Don’t see much movement on spreads, despite talk of a pivot, and the possibility of a soft landing.
Maximum AUROC Spreads as of 12/25/2022: Recession Ahead, and If So, When?
In 2019, Fed economist David Miller undertook a comprehensive assessment of term spread predictive power for recessions (There is No Single Best Predictor of Recessions). For the 1984-2018 period, he found the following:
The Chinn-Ito Financial Openness Index Updated to 2020
We first constructed the index 20 years ago (Chinn and Ito, NBER WP No. 8967)! See the website for the data.