Car loans, tightening labor market, etc.

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Default rates in most consumer credit markets have remained low during the pandemic downturn and subsequent recovery. Vitaly M. Bord and Lucas M. Nathe of the Federal Reserve Board find that a decline in the number of new loans made to subprime borrowers has contributed to low default rates. Using loan-level data, they find that originations fell among borrowers with the lowest credit scores at the start of the pandemic and remained low, while originations for borrowers with higher credit scores recovered. Consistent with lenders not originating the riskiest loans, delinquency rates among new loans declined more than delinquency rates on existing loans. The authors calculate that these “missing origins” — low-credit car loans, many of which would have become delinquent had they originated — may explain up to 30% of the decline in delinquency rates in December 2019. to June 2021. Additionally, they show that while auto borrowing has declined for low-credit borrowers during the pandemic, credit applications from these borrowers have increased, suggesting that the supply of credit, rather than demand, was the source of the missing loans.

Throughout the pandemic, economic indicators have sent mixed signals about the level of labor market downturn. Harvard’s Alex Domash and Lawrence H. Summers find that the aggregate unemployment rate is more effective in predicting wage inflation than the prime-age employment-to-population ratio, but that job vacancy rates and resignations hold almost all the explanatory power in predicting wages. inflation. They also show that current vacancy and quit rates predict a labor market as tight as typically seen in the United States with unemployment rates below 2%. They conclude that the tight labor market is likely a strong contributor to current inflationary pressures, which are unlikely to ease any time soon.

The Paycheck Protection Program (PPP) has provided businesses with repayable loans through banks and fintech companies. Purdue’s Sergey Chernenko and Harvard’s David S. Scharfstein find that Black-owned restaurants in Florida were 25% less likely than white-owned restaurants to receive PPP loans. About 60% of the loan take-up disparity reflects borrower characteristics such as size, age, number of reviews, and location. Existing relationships with banks had very little bearing on the disparity, they find, nor did differences in knowledge of or demand for PPP loans. They attribute the remaining gap to racial bias, partially substantiated using county-level measures of explicit and implicit racial bias. Banks seemed to be much more biased than fintech and other non-bank lenders. They find no racial disparity in the distribution of economic disaster loans that were administered directly by the Small Business Administration and are not intermediated by banks.

Treasury yield curve in February 2020, February 2021 and February 2022

Graphic courtesy of focus guru

“I think we need to accelerate our planned housing removal more than we would have done before. We were surprised by the rise in inflation; that’s a lot of inflation in the US economy: 7.5% on the CPI. These are numbers that Alan Greenspan has never seen. They haven’t happened in four years, so our credibility is on the line here. We have to react to the data. However, I think we can do it in an organized way and without disrupting the markets. We only remove [some] housing, so it is still an accommodating policy. The big picture is that inflation is much higher than what we expected six or nine months ago. Certainly 12 months ago. If you look at the Atlanta Fed inflation tracker, everything turned red. So no matter how you measure inflation, they are all above their standards,” says James Bullard, president of the Federal Reserve Bank of St. Louis.

“There is already withdrawal of housing on the market, so it’s great. But the Fed has yet to act on and ratify these expectations which have been priced in within two years. And if we don’t, it gives the impression that we’re not defending our 2% inflation target and trying to make sure inflation is under control. I think the inflation we’re seeing is very bad for low- and middle-income households; real wages go down, people are unhappy, consumer confidence goes down. It’s not a good situation. We need to reassure people that we are going to defend our inflation target and that we are going to bring our inflation down to 2%.

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