This week’s FOMC decision was not an easy choice. Our goals are in conflict. Inflation is above target, the labor market is softening, and there are risks to both sides of our mandate—maximum employment and price stability.
Two charts explain why I ultimately favored a rate cut.
The first shows the damaging cost of high inflation. It has chipped away at real earnings and weakened household purchasing power. Many Americans are still trying to catch up.
So, the FOMC must continue to bring inflation down. Anything other than 2% is not an option. But it matters how you get there. This means we cannot let the labor market falter.
Real wage gains come from long and durable expansions. And the current expansion is still relatively young, as shown in the second chart. Holding policy too tight can cause undue harm to American families and leave them with two problems: above-target inflation and a weak labor market.
Congress gave us two goals. And our job is to meet both of them. The recent policy decision puts us in a good place to achieve that.
This macro variable will tell us when the music is about to stop.
High interest rates are supposed to break something because an overly indebted economy will have to service a mountain of debt at expensive rates and it will have less money for income and spending.
The problem is that people are looking at the ''wrong'' debt.
Private sector debt levels and trends are far more important than governmment debt.
Contrary to the government, the private sector doesn't have the luxury to print money: if you get indebted to your eyeballs and you lose your ability to generate income, the pain is real.
As Dario Perkins' left chart shows, the biggest financial crisis happened as a result of high and growing private sector debt.
The Japanese or Spanish house bubble bursting, the Asian Tigers, or China today are clear examples.
So, where does the US stand on this important macro metric?
The chart on the right shows how US private sector debt as a % of GDP sits well below the ~200% dangerous line, and it has rapidly declined since 2008.
In the US, government fiscal stimulus are supporting income and consumption while households and corporates are reducing leverage from their balance sheet.
The AI debt-driven capex cycle will reverse this dynamics, as corporates lever up to spend big and position themselves in the AI race.
It's only when private sector debt increases rapidly that one should begin to really worry about a bubble burst.
What do you think?
👉 If you enjoyed this post, follow me (Alfonso Peccatiello) to make sure you don't miss my daily dose of macro analysis.
Why narratives matter in policymaking - and what researchers can learn from them
As a qualitative researcher, I’ve always believed in the power of storytelling to make sense of complexity. In Narratives as tools for influencing policy change, Crow and Jones offer a useful framework for understanding the power of narratives for policymaking.
The article outlines two common traps in policy communication:
🔷 The knowledge fallacy – the assumption that facts alone persuade
🔷 The empathy fallacy – the belief that authentic stories naturally evoke universal empathy
Both overlook a crucial truth: people interpret information through the lens of their values, beliefs, and emotions.
The authors propose a practical alternative: the Narrative Policy Framework (NPF). Rather than relying on instinct or anecdote, the NPF offers a systematic approach to understanding and constructing policy narratives. It identifies the key ingredients that appear across effective storytelling:
👉 Setting: the policy environment, including the social, legal, and institutional context
👉 Characters: heroes, villains, and victims who give the narrative moral texture
👉 Plot: the sequence of events linking causes and consequences, explaining how problems emerged
👉 Moral: the point of the story, often conveyed as a policy recommendation or call to action
The strength of this framework lies in its applicability. It can be used by:
🔶 Researchers aiming to study how narratives shape policy debates
🔶 Practitioners seeking to frame issues in a way that resonates with specific audiences
Crow and Jones also highlight where narratives can be used to influence policy: from defining problems and engaging with media, to shaping policy briefings and public consultations.
This piece is a useful reminder that effective communication isn’t just about evidence or emotion- it’s about how we tell the story.
#Policy#Storytelling#PublicPolicy#ResearchImpact
The recent RBI monetary policy announcement didn’t deliver the anticipated 0.50 bps repo rate cut, raising significant concerns about India's economic growth trajectory.
A rate cut in CRR will augment the credit lending capacity of banks, making more funding available in the market to enhance business growth. This adjustment retains confidence in India's economic landscape.
While the RBI argues that high interest rates help curb food inflation, this view neglects the pivotal supply-side constraints affecting food prices. Though monetary policy influences demand, it is supply-side factors that substantially drive food inflation. A strategic reduction in interest rates could have stimulated sustainable GDP growth while addressing inflation through supply-side measures.
Lower interest rates would have made home loans more affordable, propelling demand in the real estate sector, particularly for affordable housing. Despite stable macroeconomic conditions and a robust domestic economy, the absence of a rate cut threatens the growth of affordable housing. '
The Indian real estate sector is currently experiencing strong momentum, driven by increased banking and foreign institutional investor exposure to retail home loans, record-high property registrations, and historically low non-performing assets.
However, with the expected repo rate cut not materializing, industry concerns regarding affordable housing are sounding a loud alarm. A long-overdue rate cut is deemed essential to sustain steady economic and real estate growth, imperative for maintaining India's fastest-growing GDP status. Hence, addressing these concerns head-on and pushing for strategic interest rate adjustments can solidify the real estate sector's role as a key driver of national economic advancement.
How does the long pause interest rate impact your sector? What measures do you recommend?
Image- from online sources.
➡️ The Swiss National Bank #snb lowered its key policy rate by 25bp to 0.25% today, as it was widely expected.
This rate cut follows the slowdown in inflation observed in the recent months, down to +0.3% in February. Low ongoing inflationary pressures, and the fact that inflation is now at the very bottom of the 0-to-2% target range of the SNB, warranted this additional decline in short-term interest rates.
Indeed, with the SNB key rate at 0.25%, short-term real rates are brought down a marginally negative level that will help alleviate deflationary pressures and upward pressures on the Swiss franc.
As such, monetary policy can be described as moderately accommodative, a stance appropriate to the combination of low inflationary pressures and moderate economic growth in #Switzerland.
➡️ Looking ahead, expected developments on inflation and economic activity suggest that the rate cut cycle initiated a year ago is now completed.
The 150bp decline in CHF short term-rates over 12 months, in parallel of the decline in inflation, has helped supporting economic activity and stabilizing the level of the Swiss franc.
Inflation is now expected to stabilize in the coming months and even slightly pickup at the end of the year (toward +0.6%) and in 2026 (+0.8%). In the meantime, economic activity is projected to gradually improve, supported by higher real income for households due to the low level of inflation, and by more accommodative financing conditions.
The stabilization and even slight pullback of the Swiss franc also removes a headwind for Swiss exporters.
➡️ However, the outlook is currently extremely uncertain for Switzerland and for the global economy: Potential tariffs on US imports from Switzerland and other European countries could significantly impact economic activity and confidence. They could also possibly revive upward pressures on the Swiss franc. Such scenario would eventually lead the SNB to further lower its key rate down to zero.
The possibility of a return to negative interest rates cannot be ruled out in case of pronounced downward pressures on growth, along with upward pressures on the currency. However, such possibility would in our view require a significant deterioration in the economic environment. Moreover, the SNB is more likely to resort to interventions on the Forex market as a first option in case of unwarranted upward pressures on the CHF.
Conversely, ongoing developments in the neighbouring Eurozone, and more specifically the prospect of a huge fiscal stimulus in Germany, could have a significant positive impact for Switzerland. and fuel firmer inflationary pressures, possibly paving the way for the SNB to adjust its key rate upward in consequence in 2026.
➡️ Our take >>> Today’s rate cut is likely to be the last of this monetary policy easing cycle for the SNB. However, we will continue to monitor both downside and upside risks to this scenario.
Adrien Pichoud
Interest Rate Risk: Why It Matters Even When Rates Are Stable
Interest rate risk often hides in plain sight. When rates are volatile, it is top of mind. But when they stabilise — or appear to — many assume the worst is over. This assumption can be costly.
Understanding interest rate risk requires more than tracking central bank decisions. It requires recognising that repricing mismatches on the balance sheet do not disappear just because the market quietens. In fact, those mismatches often deepen during calm periods, masked by stable net interest margins or temporary accounting gains.
There are two main types of interest rate risk that every bank must manage:
Repricing Risk (or Gap Risk):
This arises when assets and liabilities reprice at different times or on different terms. For example, fixed-rate mortgages funded by short-term customer deposits create exposure if rates rise — the funding cost increases, but the asset yield does not.
Basis Risk:
This emerges when two instruments reprice from different benchmarks. For instance, a bank might hedge SONIA-based assets with 3M LIBOR derivatives (historically) or hedge variable-rate loans using swaps indexed to a different benchmark than the underlying cashflows.
These risks are rarely symmetrical. A bank might be positioned to benefit in one scenario but be significantly exposed in another. And while earnings-at-risk models can show the short-term impact, economic value measures often reveal the longer-term story — particularly for banks with large maturity mismatches.
So why does this matter today?
Because balance sheet positioning over the past five years has shifted dramatically. In the ultra-low rate environment, many institutions leaned into fixed-rate lending, chasing margin through duration. Now, as central banks hold at higher levels or begin to ease, the embedded rate sensitivity in those positions becomes more apparent.
Here are three reasons interest rate risk still deserves attention:
1. Lagged Effects:
Interest rate risk is often slow to materialise. Hedging costs roll off, floors expire, and behavioural assumptions (like early repayments) shift when rates stay high for longer than expected.
2. Policy Uncertainty:
Central banks are not done yet. Rate cuts may not come as quickly or deeply as markets expect. Any surprises — especially on inflation or employment — can quickly change the path and catch institutions off guard.
3. Capital and Liquidity Impact:
Earnings volatility affects capital. Rate risk also interacts with liquidity risk, as seen in 2023 when deposit outflows coincided with unrealised losses on securities portfolios. These are not isolated risks. They compound.
Managing interest rate risk is not about predicting rates. It is about being prepared for multiple scenarios. This includes regularly stress testing key assumptions, assessing both short-term and long-term exposures, and ensuring risk appetite aligns with strategy, even when rates are steady.
🇺🇸🌎💵 Central banks worldwide are quietly preparing contingency plans as doubts grow over the reliability of dollar swap lines, the financial lifelines that have stabilised global markets since 2008. With Fed Chair Jay Powell set to leave in 2026 and Trump pushing the Fed to cut rates despite early inflation signals, these once-sacred agreements face unprecedented uncertainty.
During the 2008 crisis, the Fed activated $583B in swap lines for non-US central banks. Another $450B flowed during Covid-19, preventing global financial contagion. These arrangements let foreign central banks access dollars when their commercial banks face funding shortages, addressing the core issue that only the Fed can print the world's reserve currency.
Since then, US Vice President JD Vance has said he "hate[s] bailing Europe out," while Treasury Secretary Scott Bessent views finance, military, trade, and technology as deeply linked. As a result, future swap line access may come with political conditions. Would Denmark get dollar support without concessions on Greenland? Does the Pentagon's review of the submarine pact with Britain and Australia suggest allied agreements no longer enjoy automatic protection?
European Central Bank officials remain publicly confident, yet the ECB recently asked banks to report dollar exposure vulnerabilities. Think tank CEPR has proposed a mutual pact in which 14 central banks use their combined $1.9T in dollar holdings to support each other if Fed swap lines vanish. Central banks are already taking defensive measures, increasing gold purchases and negotiating alternative arrangements with China.
Bruno Colmant notes that stablecoins represent a further fundamental shift in dollar creation, bypassing traditional central bank swaps. Private American companies now issue dollar-backed tokens by buying US Treasury bills, effectively forcing foreign holders to finance US debt directly rather than through central bank channels.
This ties to Izabella Kaminska's multilateral vision fund idea, which Sec. Bessent publicly supports. In his and Trump’s view, Japan, Korea, and European allies should invest their capital surplus in US manufacturing while America provides military protection and technology transfers. As Izabella notes, the setup resembles a reverse Marshall Plan, turning decades of trade surpluses into equity stakes in American industry.
Weakening swap line reliability and rising stablecoin adoption could accelerate dollar system fragmentation. Treasury-backed stablecoins may prove safer than traditional bank deposits tied to central bank swaps, creating incentives for systemic change.
Nixon’s 1971 exit from Bretton Woods caused monetary chaos but ultimately strengthened the dollar. Today’s shifts could prove equally disruptive, forcing central banks to choose between dollar dependence and monetary sovereignty.
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More analysis on monetary transformation in the NL Euro Stable Watch, which I co-edit with Marieke Flament 💶
All eyes are on the Fed’s anticipated rate cut this month, the most significant event shaping market sentiment. We’ve been hearing a lot of concerns that rate cuts signal an economic slowdown and could turn into a negative event for the markets. But is that really the case?
In fact, the impact of rate cuts is highly contextual.
According to a recent report by the Franklin Templeton Institute, history shows that the effect of rate cuts varies greatly depending on the economic conditions at the time.
📉 𝐑𝐚𝐭𝐞 𝐂𝐮𝐭𝐬 𝐢𝐧 𝐑𝐞𝐜𝐞𝐬𝐬𝐢𝐨𝐧𝐬 𝐯𝐬. 𝐄𝐱𝐩𝐚𝐧𝐬𝐢𝐨𝐧𝐬:
• 𝐑𝐞𝐜𝐞𝐬𝐬𝐢𝐨𝐧𝐚𝐫𝐲 𝐑𝐚𝐭𝐞 𝐂𝐮𝐭𝐬: During recessions, rate cuts can initially cause a dip in equity markets. In these periods, equities have historically seen short-term declines, with Treasuries often outperforming as a safe haven. It’s a defensive play, indicating the markets brace for further economic deterioration.
• 𝐄𝐱𝐩𝐚𝐧𝐬𝐢𝐨𝐧𝐚𝐫𝐲 𝐑𝐚𝐭𝐞 𝐂𝐮𝐭𝐬: However, when rate cuts occur during economic expansions, the story is entirely different. The report shows that equities tend to rally significantly after rate cuts in expansions, with growth and small-cap stocks leading the way. Historically, the S&P 500, Nasdaq, and Russell indices have all performed exceptionally well following expansionary cuts, with minimal drawdowns.
📊 𝐊𝐞𝐲 𝐒𝐭𝐚𝐭𝐬:
• During recessions, equities declined by an average of 4.96% in the first three months post-rate cut, but then rebounded over the next 6-12 months.
• During expansions, equities often surged, with the Nasdaq gaining 25.33% over the year following the first rate cut, while the S&P 500 rose 16.66%.
So the big question becomes: Has the recent rate hike cycle slowed growth enough to push us toward a recession, or do we still have room for economic expansion? This is the critical factor that will determine whether the upcoming rate cut will spark a bull run or trigger a market pullback.
📈 𝐖𝐡𝐚𝐭 𝐇𝐚𝐩𝐩𝐞𝐧𝐬 𝐍𝐞𝐱𝐭?
Historically, during rate-cutting cycles, value stocks perform well initially, but growth stocks take over as the market gains momentum. That’s exactly what we’re seeing right now—growth stocks have been outperforming, a positive sign that the economy could still have room to grow.
More than anything, what will truly define the trajectory of the markets is how well the Fed manages to navigate the “soft landing”—balancing the slowing inflation without stalling economic growth. This delicate balance will be crucial in determining whether the upcoming rate cut sparks growth or reinforces recession fears.
#MarketInsights#RateCuts#Investing#FedPolicy#GrowthStocks#EconomicExpansion#StockMarket#Treasuries
So the RBI has cut repo rate by 50 bps to 5.5%. What does this really mean for you? This affects us all, from EMIs, saving for the future, running a business, or just managing household expenses. Here’s how it plays out,
- Loan EMIs get easier
When the repo rate drops, banks can borrow money from the RBI at a cheaper rate. This usually means banks will reduce the interest rates on home, car, and personal loans. For you, this could mean your monthly EMIs go down. For example, if you have a ₹50 lakh home loan, even a small rate cut can save you a bunch. New borrowers will also find it easier to get loans at lower rates, making big purchases like homes or cars more affordable.
- Fixed Deposit returns may drop
While borrowers celebrate, savers or depositors will feel the pinch. As banks lower lending rates, they also tend to reduce the interest rates on FDs and savings accounts. If you rely on interest income, your returns could decrease. It might be a good idea to lock in current FD rates before they fall further.
- Boost for businesses and jobs
Cheaper loans aren’t just for individuals. Small businesses and startups also benefit, as they can borrow at lower rates to expand, buy equipment, or hire more people. This can help create jobs and support local economies, especially in sectors like real estate, auto, and small businesses.
- Encourages spending
Lower interest rates mean people and businesses are more likely to borrow and spend, rather than save. This increased spending helps boost demand for goods and services, which is good for the overall economy. Sectors like housing and automobiles often see a pick-up in demand after a repo rate cut, as more people can afford to buy homes or vehicles.
- Inflation and Rupee impact
The RBI usually cuts rates when inflation is under control, aiming to support growth. However, lower rates can sometimes weaken the rupee slightly, as foreign investors might look for better returns elsewhere.
So this is more like RBI's gentle push to the economy, making it easier for people to borrow, spend, and invest, while savers might need to look for better ways to grow their money.
For anyone tracking the equity markets, it is good news (Nifty is up 0.75% since this was announced). This increased spending and investment can spur economic growth. As a result, equity markets often react positively, especially in the short term, due to improved business prospects and higher expected earnings. (Caveat being the banks passing on lower rates to borrowers)
Comment la politique monétaire peut jouer sur la distribution de crédit aux ménages, et derrière jouer sur les inégalités? Les politiques monétaires expansionnistes jouent normalement sur la quantité de crédit et les taux d'intérêt payés par les ménages. Dans ce papier co-écrit avec Salima Ouerk (National Bank of Belgium), nous montrons que l'impact de la politique monétaire sur le volume de crédit des ménages en France est NUL pour les classes populaires et les classes moyennes. Seuls les ménages les plus aisés en profitent, et surtout pour de l'investissement locatif. Cela témoigne de l'importance de la distribution de crédit dans la dynamique des richesses, et doit nous inviter à agir sur la régulation du crédit et de l'immobilier.
Je vais avoir le plaisir de présenter ce papier demain au laboratoire Centre for Economics at Paris-Saclay à l'Université d'Evry (Université Paris-Saclay).
Title: The unequal distribution of credit: Is there any role for monetary policy?
Abstract: Is current monetary policy making the distribution of credit more unequal? Using french household-level data, we document credit volumes along the income distribution. Our analysis centers on assessing the impact of surprises in monetary policy on credit volumes at different income levels. Expansionary monetary policy surprises lead to a surge in mortgage credit exclusively for households within the top 20% income bracket. Monetary policy then does not impact mortgage credit volume for 80% of households, whereas its effect on consumer credit exists and remains consistent across the income distribution. This result is notably associated with the engagement of this particular income group in rental investments. Controlling for bank decision factors and city dynamics, we attribute these results to individual demand factors. Mechanisms related to intertemporal substitution and affordability drive the impact of monetary policy surprises. They manifest through the policy's influence on collaterals and a larger down payment.
The link to the seminar web page:
https://lnkd.in/ej_kqTyt