Federal Reserve Economic Data

The federal funds rate (FFR) is a key instrument through which the Federal Reserve conducts monetary policy in the US. When inflation is high, the Federal Reserve typically raises the FFR to mitigate aggregate demand, easing pressure on prices.

One channel through which monetary policy achieves these goals is by increasing borrowing costs for banks and, in turn, the cost of borrowing for firms. As firms find it costlier to borrow, this mitigates their demand for factors of production, easing pressure on prices.

We use FRED data to help us investigate the extent to which monetary policy indeed tightens financial access for firms in the US economy. The graph above plots the time series of the FFR (in red) along with two measures of financial access by US firms: One of these series measures the proportion of domestic banks tightening their lending standards for large and medium-sized firms (in blue). The other measures the same statistic for small firms (in green).

These series are proxies for the financial environment in the US and, more specifically, for the ability of firms to gain access to credit. Increases in these series indicate that a greater amount of banks in the country are tightening their lending standards and restricting access to credit, while a decrease indicates the opposite.

The graph shows four periods of monetary policy tightening (that is, increases in the FFR): from 1993 to 1995, from 1999 to 2001, from 2004 to 2007, and from 2016 to 2019. In all these episodes, the share of banks tightening lending standards increases a few quarters following the monetary policy tightening, which suggests that financial conditions get tighter following monetary policy tightening and that these policy actions take effect with a lag.

In our second FRED graph, we look at the more-recent period since the COVID-19 pandemic. We plot the same series, but starting in January 2020. We first observe a tightening of financial conditions at the outset of the pandemic. We next see a gradual rise in the FFR since March 2022.

The tightening standards of banks (of all sizes) have been steadily rising, even prior to the change in the FFR, perhaps because of policies to reduce the size of the Fed’s balance sheet. Given the long-run link between monetary policy and financial conditions, we may expect credit access to continue to tighten in the coming quarters, enabling the Federal Reserve to reduce inflationary pressures to achieve its mandate of price stability.

How these graphs were created: Search FRED for and select “Net Percentage of Domestic Banks Tightening Standards for Commercial and Industrial Loans to Large and Middle-Market Firms.” From the graph, click on “Edit Graph,” open the “Add Line” tab, and search for and select “Federal Funds Effective Rate” and “Net Percentage of Domestic Banks Tightening Standards for Commercial and Industrial Loans to Small Firms.” Use the “Format” tab to change the y-axis position of the federal funds effective rate to the right-hand side. Set the earliest date in the window to “1990-01-01”.

Suggested by Jason Dunn and Fernando Leibovici.

The COVID-19 pandemic shed light on challenges that have long plagued the US childcare industry. State legislatures have recently intervened by enacting bills to address the scarcity of childcare services. For example, in April 2022, the Iowa state legislature passed a bill allowing 16-year-olds to work without adult supervision and adult workers to watch more children at one time.

The FRED graph above shows the number of employed women (25 to 54 years old) and the number of childcare workers, indexed to 100 in February 2020. Because women are more likely to be responsible for childcare in the household, the comparison between female employment and childcare employment proves interesting.

The level of employment in childcare declined much more than the level of employment of women in March and April 2020 due to the closure of childcare centers. While employment in childcare still has not recovered from its decline, women’s employment has surpassed its February 2020 level.

But the graph shows us something more: The slope of the recovery of childcare employment is slightly steeper than the slope of women’s employment; thus, the gap between women’s and childcare services employment is narrowing. Will the remaining recovery of childcare services be associated with further increases in women’s employment? As more state and federal legislation on the childcare industry is enacted, it will be interesting to track how these employment levels interact.

How this graph was created: Search FRED for “Employment Level – 25-54 Yrs., Women.” Next, click the “Edit Graph” button and use the “Add Line” tab to add “All Employees, Child Care Services.” Select “Edit Lines” and change “Units” to “Index (Scale value to 100 for chosen date).” Next, select “2020-02-01” as the date to equal 100 for your custom index and “Copy to all.” Finally, enter “2020-01-01” to “2023-02-01” above the figure on the right to adjust the time period.

Suggested by Victoria Gregory and Elisabeth Harding.

The H.8 Release from the Federal Reserve’s Board of Governors details aggregate balance sheet data (assets and liabilities) for all US commercial banks, and the data can be found in FRED. Our previous post on this topic covered total bank assets for large versus small commercial banks. Neither of these posts provides a comprehensive examination of the US banking sector, but we’re continuing to highlight a few key trends in light of recent developments.

This post (the 2nd of 3) examines recent trends in the securities held by large and small domestically chartered commercial banks: Securities comprise the second-largest category on the asset side of the balance sheet, with two subcategories.

• Treasury and agency securities are obligations issued by the federal government (Treasury securities), US government agencies such as the Federal Housing Administration, and US government-sponsored enterprises such as the Federal National Mortgage Association (“Fannie Mae”).
• “Other securities” are mortgage-backed securities not issued or guaranteed by the US government or other entities, such as those issued by states or political subdivisions.

In the latest reporting week (March 22, 2023), the value of Treasury and agency securities for US commercial banks totaled $4.15 trillion and Other securities totaled $1 trillion.

The FRED graph above plots Treasury and agency securities as a percent of total bank assets for (i) large and (ii) small commercial banks from the week ending January 7, 2015, to the week ending March 22, 2023. This 8-year period encompasses the previous FOMC tightening cycle (2015-2018), the pandemic recession in early 2020, and the current economic recovery and current FOMC tightening period since March 2022. The graph also includes the yield on 10-year Treasury notes, which is a common benchmark yield for longer-term loans such as 30-year fixed-rate residential mortgages.

At the beginning of 2015, large and small commercial banks held a roughly equivalent percentage of their assets in the form of Treasury and agency securities—about 15.5%. Since then, large banks have increased their holding of Treasury and agency securities to a little less than 24% of their total assets—though that percentage is down modestly from its peak of 26.3% on February 16, 2022.

Small banks, however, were reducing their holdings of Treasury and agency securities until just after the recession ended: Government securities as a percentage of assets fell to 12% in late May 2020. Thereafter, small banks began to increase their holdings of securities, which reached 17.1% in late August 2022. Since then, small banks, like large banks, have begun to reduce their holdings of government securities, so that the percentage of assets as of March 22 (15%) is now slightly less than the percentage that prevailed in January 2015 (15.5%). The recent reduction in securities holdings by banks is not surprising, given the recent rise in interest rates.

So, how do movements in interest rates affect bank holdings of securities? One of the fundamental relationships in finance is the inverse relationship between bond prices and interest rates. The price of a bond, and thus its yield (interest rate), is determined by a myriad of factors that influence both the supply of and the demand for bonds. One determinant of the demand for bonds is investors’ expectations of future inflation. All else equal, an increase in expected inflation means that the fixed payments promised by a bond’s issuer (e.g., the US government) will have a lower value than originally expected. In that case, the price of the bond will fall and the interest rate will increase. Similarly, if bond investors expect interest rates to rise—perhaps because of higher inflation and future actions by the Federal Reserve to tamp down inflation—bond prices are expected to fall, leading to the expectation of a capital loss. This also makes bonds less attractive. (See this On the Economy blog post.)

As the FRED graph above shows, small and large commercial banks were adding to their holdings of government securities during a period of rising interest rates (and higher inflation). In essence, banks were adding securities that were paying more in interest, which increased their interest earnings. However, the trade-off is that the market value of their bond portfolio was declining. This is not necessarily a problem if the bank intends to hold the security to maturity.

The peak in government securities holdings for large banks (as a percent of total assets) occurred in the week ending February 16, 2022 (26.3%), roughly a month before the FOMC increased its federal funds target rate, which commenced the current rate-tightening period. By contrast, small banks continued to add to their holdings of government securities; the peak (17%) did not occur until roughly six months later, the week ending August 24, 2022. Since then, as noted, securities as a percentage of assets have declined at large and small banks as interest rates have risen. Thus, there were realized or unrealized losses on commercial banks’ securities portfolios during the period of rising interest rates. According to the FDIC, total unrealized losses on securities that are available for sale and those held to maturity was about $620 billion at the end of 2022.

The third related post on this topic will examine recent trends in loans and leases and deposits. FRED users who are interested in monitoring the US commercial banking sector can do so by analyzing weekly trends in commercial banks’ balance sheets found in the H.8 data.

How this graph was created: Search FRED for “10-year market yield.” Click on “Edit graph, open the “Add Line,” and search for “Treasury securities large banks.” To that new line, add a series searching for “Total assets large banks” and apply formula a/b. Repeat for small banks. Open the “Format” tab and set the y-axis position to the right for the last two lines. Finally, restrict the sample period to start on 2019-01-01.

Suggested by Kevin Kliesen and Cassie Marks.