Overview

Overview of Special Issue: Federal Reserve Policy Responses to the Financial Crisis.Financial crises ; Federal Reserve System ; Bank liquidity

The effect of interest rate options hedging on term-structure dynamics

Market participants and policymakers closely monitor movements in the yield curve for information about future economic fundamentals. In several recent episodes, however, disruptions to market liquidity have affected the short-term dynamics of the curve independently of fundamentals. This article provides evidence that the short-run dynamics in the intermediate maturities of the yield curve changed around 1990, with the appearance of positive feedback in weekly interest rate changes. The feedback is consistent with the effects of options dealers’ hedging activity and it is found only in the 1990s, after the interest rate options market grew to significant size. The authors also show that the market liquidity/positive-feedback effects are concentrated in the weeks after the largest interest rate changes. Their results suggest that the times when market participants and policymakers are most interested in extracting from the yield curve a signal about economic fundamentals are precisely the times when changes in the curve may be distorted by liquidity effects.Interest rates ; Options (Finance) ; Hedging (Finance) ; Rate of return ; Liquidity (Economics)

The monetary transmission mechanism: some answers and further questions

Overview of the proceedings of a conference sponsored by the Federal Reserve Bank of New York entitled Financial Innovation and Monetary TransmissionMonetary policy ; Financial modernization ; Bank reserves ; Interest rates

Mortgage refinancing and the concentration of mortgage coupons

Because of the concentrated distribution of interest rates on outstanding mortgages, modest interest rate declines in 1997 and 1998 made refinancing a smart choice for a record number of homeowners. In addition, the strong economy and the age of mortgage loans likely contributed to the surge in refinancing activity.Mortgages ; Housing - Finance ; Interest rates

An international survey of stress tests

In the summer of 2000, central banks from the Group of Ten countries surveyed large international banks about their use of stress tests_a risk management tool that measures a firm's exposure to extreme movements in asset prices. The survey findings highlight the risks that most concern financial institutions and clarify how these institutions use stress tests in their overall risk management programs.Risk management ; Risk assessment ; Financial services industry

A decomposition of the increased stability of GDP growth

Since 1984, the U.S. economy has grown at a remarkably steady pace. An analysis of this increased stability shows that every major component of GDP has exhibited smoother growth. However, two components--inventory investment and consumer spending--are responsible for the bulk of the decline in overall volatility.Gross domestic product ; Capital investments ; Inventories ; Consumption (Economics)

The Federal Reserve’s Financial Crisis Response B: Lending & Credit Programs For Primary Dealers

Beginning in the summer 2007 the Federal Reserve (the Fed) deployed numerous conventional and innovative programs to address the credit crisis occurring in the wholesale lending markets that was beginning to affect the broader financial markets and threaten the economy at large. Two of those programs, the Term Securities Lending Facility (TSLF) and the Primary Dealer Credit Facility (PDCF) were aimed at providing liquidity to primary dealers and required the Fed to rely on its authority under Section 13(3) of the Federal Reserve Act. Section 13(3) is a Depression Era amendment that permits the Fed expanded powers in “unusual and exigent” circumstances, which it had not invoked in 76 years. We discuss the TSLF and the PDCF and the impact that these programs had on the Fed’s efforts to combat the brewing crisis, to provide much needed liquidity to the primary dealers, and to help revive the wholesale lending markets

Mortgage security hedging and the yield curve

The authors find that the use of Treasury securities to hedge mortgage-backed security extension risk may have magnified increases in long-term interest rates after the tightening of monetary policy in early 1994. Substantial increases in the duration of mortgage securities appear to have caused realignments of hedges and portfolios that, in turn, had a significant impact on the short-run movements of the Treasury market, particularly for ten-year securities. This phenomenon may have altered the short-run dynamics of the yield curve and thus changed the transmission of monetary policy.Hedging (Finance) ; Mortgages ; Interest rates

Changes in monetary policy effectiveness: evidence from large macroeconomic models

This article evaluates changes in the aggregate effectiveness of monetary policy and changes in monetary policy transmission mechanisms by examining how traditional large-scale macroeconometric models have evolved in the last ten to fifteen years. The article analyzes shifts in model structure and sheds some light on the changing relationship between policy and the real economy by reporting simulations that use different historical versions of the models.Econometric models ; Monetary policy ; Macroeconomics

Interleukin-10 Promotes Pathological Angiogenesis by Regulating Macrophage Response to Hypoxia during Development

Aberrant angiogenesis in the eye is the most common cause of blindness. The current study examined the role of interleukin-10 (IL-10) in ischemia-induced pathological angiogenesis called neovascularization during postnatal development. IL-10 deficiency resulted in significantly reduced pathological retinal angiogenesis. In contrast to the choroicapillaris where IL-10 interferes with macrophage influx, IL-10 did not prevent anti-angiogenic macrophages from migrating to the retina in response to hypoxia. Instead, IL-10 promoted retinal angiogenesis by altering macrophage angiogenic function, as macrophages from wild-type mice demonstrated increased vascular endothelial growth factor (VEGF) and nitric oxide (NO) compared to IL-10 deficient macrophages. IL-10 appears to directly affect macrophage responsiveness to hypoxia, as macrophages responded to hypoxia with increased levels of IL-10 and STAT3 phosphorylation as opposed to IL-10 deficient macrophages. Also, IL-10 deficient macrophages inhibited the proliferation of vascular endothelial cells in response to hypoxia while wild-type macrophages failed to do so. These findings suggest that hypoxia guides macrophage behavior to a pro-angiogenic phenotype via IL-10 activated pathways