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COVID-19 Triggers Transformation into a New Economy – Part 2

COVID-19 Triggers Transformation into a New Economy – Part 2

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Note: This is Part 2 of a two-part article including sections 4 – and 5 – please read Part 1 for sections 1) COVID-19 Unique Event, 2) Virus Drives the Economy, and 3) Outlook for the U.S. Economy

Introduction

The economy was a very nice photo, than the pandemic turned it into a jigsaws puzzle that’s all messed up, now we’re trying to put it together and figure out if all the pieces are still here or not.

Mohammed A. El-Arian, Chief Economist, Allianz

The novel COVID-19 virus has driven the world economy into the deepest recession since the Great Depression while shattering the linkages that previously held it together. Two months into the crisis and economists are still trying to figure out what has happened to supply chains and demand channels. As El-Arian, notes key components of the economy may be missing.

Some components will need to be created. Then all these components will need to realign into a “New Economy.” The challenge of rebuilding the economy will be influencing consumer behavior. Consumer spending is 70% of GDP.  Thus, growing employment is crucial toward increasing consumer confidence and recovery.  The central question is: how will the economy shift a growth track? We’ll look at crucial signposts along the way in building a new growth track by presenting the following topics: (The first three are from Part 1)

  1. COVID-19 – Unique Event – Examines the unique characteristics of the pandemic and how they set up certain economic trends.  Part 1
  2. Virus Drives the Economy – Looks at how the virus is driving the economy, how it is out of control and what strategies are working toward containment – Part 1
  3. Outlook For U.S. Economy – Takes a new perspective by overlaying the virus cycle with a deep U shaped economic cycle and how economic activity changes during each stage.  – Part 1
  4. New Economy – Describes the transformation of our society and how these changes will create losing and winning new businesses and how consumers will likely have conservative spending and saving habits – Part 2
  5. What We Need To Do To Create a New Economy – Recommends a federal team of scientific experts to be authorized to lead virus containment, investment in self-renewing innovation centers in hard hit pandemic areas and focus employment development on climate change solutions – Part 2

New Economy

The New Economy will feel different, much more virtually driven by software, the Internet, and be home centric. All major aspects of consumer behavior will be affected by the panipression (combination of panic, recession, and depression) experience opening new opportunities for products and services. In contrast, others will see reduced demand and be forced to close. Investors will want to watch these social trends as they cluster into a set of needs where businesses can flourish and become profitable.

Similar to the deep psychological scars of the 1930s, it will take time to repair the emotional, social, and mental damage of the pandemic. Today, a social trend called the Ameri-Can spirit is helping to heal people in a wave of unifying, uplifting virtual programs. Celebrities, social groups, and crowdsourced teams are using Internet hashtags links to raise funding for charities to provide financial assistance to restaurant workers, hotel workers, farmworkers, meat processing staff, entertainment crews, and thousands of others that have been furloughed or laid off. This Ameri-Can spirit plus our culture of entrepreneurship will create a new economy that will be robust.

Businesses will provide new services or products targeted at a cluster of behaviors related to values, social styles, and desires. Social distancing will change our behaviors so groups of behaviors will disappear, be sustained, or begin to emerge. Socially people will have to be encouraged to take a trip, get on a plane, or have an experience outside of their home when they have so many alternatives.

Let’s look at key consumer and business segments and how they may be transformed:

Hospitality

Consumers will be seeking experiences they cannot get at home.  We expect to see more experience-based travel packages that include hotel, meals, and an experience like a Costa Rica eco tour as a destination. For sought after destinations like Hawaii, Europe or Disneyland, the attractiveness will still be there. However, for small resorts, villages, or towns with a singular appeal, they will have to differentiate and create traffic in innovative ways to hold out during the contraction and trough stages of the recession.  Airlines are already making ‘pandemic cleanliness promises’ and will continue to build on making passengers feel safe.  Hotels will need to make guests feel safe as well and focus on the destination appeal, amenities, and service to a far greater degree than they needed to in the past. Local restaurants that shifted to take out during the pandemic and survived will be able to go back to their usual food fare if it has new appeal.  The foodservice industry is likely to be even more competitive than before, with the major chains surviving and the local community restaurants failing during the lockdowns. The rental car industry has many choices with some firms with high debt levels, so we may see industry consolidation.

Work At Home

Home will become a central focus for new services.  More services will come to the home than ever before with added twists and features for:  meal delivery and pickup, car servicing, pet grooming, mobile dentistry, and laundry delivery.  As workers are likely to have little savings and limited credit, so car sales will likely drop, replaced by even more ride-sharing.  The auto industry will be faced with declining auto sales yet, there will be increased demand for cars by ride-sharing drivers and new autonomous car services.   Personal fitness or yoga training will be offered online, along with many personal development classes held virtually. The number of car trips to work will decline causing gasoline demand to drop lower than pre-pandemic levels. Car rentals for out-of-region trips will be in even higher demand as fewer consumers will own a car.   E-Commerce will continue to grow as people have become accustomed to most things being delivered to their homes. Retailers will need to differentiate their offerings by expertise that consumers can’t get online.  For example, going to a nursery to buy a plant means seeing the plant’s condition. To close the sale, the consumer will want to ask an expert gardener how to plant it and care for it.  Shopping malls will need to develop attractions or experiences to motivate consumers to leave their homes and shop. 

Work at Office or Plant

Companies will soon discover that having employees work at home as many days as possible will reduce their costs.  The need for office space will likely be reduced, and the need for a variety of support services like cafeterias, lounges, team rooms, etc. will decline.  The need for shared office tenant spaces will fall. After all, except for key meetings, it is cheaper to have their employees work from home and eliminate or reduce office space, computer systems, utilities, and all the overhead of an employee office. Manufacturers will figure out how to achieve the same level of production using fewer employees. Production management systems will continue to be installed with sophisticated automation systems using artificial intelligence features. As more robots are installed we expect they will stay in place so manufacturing employment will not return to pre-COVID-19 levels. Features like non-touch time clocks, automated employee temperature monitoring, and other pandemic related services will probably be kept in place post-COVID-19.

Technology Services

Consumers already using the internet 24 hours a day will be looking for more ways to use laptops and internet services.  Demand for high-speed internet services will be even greater. Many consumers use personal assistants like Alexa. We expect using personal assistants to gain new users after their shelter-in-home experience.  We can expect to see more artificial intelligence features added to ‘dumb’ devices like refrigerators to provide monitoring of food usage, make recommendations, and suggest food purchases based on usage. Home security systems do surveillance today like turning on lights while a person walks from room to room.  These systems may add employee temperature surveillance, so companies will know how healthy their employees are at home.  There is likely to be increased stress from the blurring of family versus home life, and issues related to child care. This stress may impact work from home so firms will be interested in monitoring work at home activity. Firms will be able to use retina scans to determine how focused a worker is on his screen. The scans will be reported back to companies to know when their employee was at their computer, and for hourly workers, how many hours they have worked.

Health

After their pandemic experience, consumers will be obsessed with their fitness. Some consumers may look for their doctor to become a ‘health consultant’ helping them to stay healthy with a focus on preventive medicine, diet, and lifestyle management.  Artificial intelligence will be applied to diagnostics as medicine becomes ever more complex and expensive to reduce doctor’s hours and costs. Telemedicine will become the norm for visits as patients will want to stay home if they can.  In some cases, doctor’s offices and clinics will shrink in size as being ‘on-premise’ for doctor visits will be a premium service. Clinics will shift some services to urgent care. Consumers will take even more control of their health, use more online advice services, and drug delivery apps. The use of stress reduction virtual apps will soar to help people transition into normal life as they use mindfulness to go out ‘into the real world’ again.

Entertainment

The merging of the internet with television and streaming channels will be accelerated.  Internet applications like polling, audience interaction, and 3D experiences will merge with consumers doing things at home they would otherwise go out to do.  During quarantine, entertainers have opened their homes to produce programs they used to do from studios. We expect more mixing of these personal entertainer ‘home visits’ to create an artificial intimacy with audiences that are not with them in person. The boundaries between movies, television shows, and gaming will continue to blur. For example, group ‘Minecraft games’ with a host and multi-player options become the norm. The focus on delivering entertainment to the home means less need for studio space and expensive studio crews. Audiences will still demand live concerts, though we expect to see more tie-ins with virtual pre-concert events and games along with post-concert follow up with entertainers.

Learning

Higher education will transition into lower-cost online learning. College online learning will become the standard.  In person education will be ‘extra’ at the college level.  The emphasis online learning to the home in elementary grades will place new stress on teachers and require far more sophisticated software for learning than is available today.  Small colleges that focus on ‘in person’ learning experiences will be hard pressed to attract students during the lockdown or reopening phases of the pandemic control. We expect that many small colleges may be forced to close or merge their curriculum and teaching staff with other larger schools that have the ability to attract a large enough student base to be financially viable.

Housing

Home sales will take a long time to recover from the market contraction of the pandemic.  Millennials have often been the first to be laid off, have little savings, and spend more on experiences than saving for large purchases. Major incentives will have to be offered by builders and existing homeowners as the market will be slow to return to pre-pandemic sales levels. Homes will be remodeled, and new homes built to accommodate the home centric needs for office space, closed off family rooms, and sound dampening for video conferencing privacy.  Apartments that offer ‘work-at-home’ floor plans and capabilities will be in demand while smaller apartments will see reduced demand.  The pandemic may force home buyers to think about leaving the city and its density to suburbs or even further out since they can use the internet to do their job. An essential homebuyer requirement that their home is near their office will no longer be as crucial in locating a home for purchase.

Banking

Many banks have closed their retail offices due to social distancing.  We expect banks to close many retail offices as being too expensive. Thus, customers to see a banker will need to make an appointment to see their banker at a specific branch. Virtual banking relationships will be the norm. Direct digital transfer of funds will grow leaving banks out of money transfers, particularly between customers and small businesses. Tap and go credit cards will be a standard way of handing a transaction at stores without touching cards or receipts.  Digital wallets with financial account information will be readily adopted as tech savvy millennials become the dominant consumer group.

Consumers will think about money differently as a result of a panipression experience. Not having money for food, rent, or utilities will leave emotional scars and teach new habits.  Similar to the Great Depression generation, consumers are likely to use less credit, increase their savings and be careful about getting over-leveraged with significant purchases. They will make conservative investments similar to baby boomers after the 2008 recession, who did not reinvest in stocks. Building consumer spending will likely take three or more years to reach previous levels.

The New Economy will feel different, much more virtually driven by software, the internet and home centric. All major aspects of consumer behavior will be affected by the panipression experience opening new opportunities for products and services. In contrast, others will see reduced demand and be forced to close. Investors will want to watch emerging social trends as they cluster into a set of needs where businesses can flourish and become profitable.

What We Need To Do To Create A New Economy

Virus Containment

Challenge: The most crucial next step is to contain the virus and provide people with the confidence to go about their social life without the fear of becoming infected.

Proposal: Provide unifying intelligent leadership at the federal level to overcome the virus. The people need support, compassion, and hope, not divisive politics, bickering, and conspiracy theories as a basis of policy. A federal team of scientists using facts, research, and the latest techniques for pandemic containment needs to be authorized to bring the virus under control quickly. Other countries like Germany have focused their efforts on containment without politics leading to moderate success in virus containment.

Self-Renewing Economy Investment

Challenge: Rural areas of the country were already in recession from being hollowed out by manufacturing moving overseas.  The pandemic has ravaged inner-city areas where many hourly workers lived in tight quarters.  Small businesses across all regions are reeling from the lockdowns temporally shutting their businesses down, forcing them onto a financial cliff.

Proposal: Build New Economy innovation development centers using the Silicon Valley model. We see promise in using a Silicon Valley model of integrated partnerships between venture capitalists, company incubators, universities, and local government to build new businesses.  The model has been used in places like Portland, Oregon with their Silicon Forest and in Salt Lake City with their Silicon Slope to build successful self-renewing economies.  We recommend that this model be used to target inner-city regions, rural areas, or any area where the pandemic has taken a toll on the local economy.  Since the federal government has limited funding we recommend the government act as a ‘seed’ investor to jump-start these development centers with partner investments by venture capitalists and cash rich firms like Apple, Google, and Microsoft.  To ensure a well-trained labor force, the centers could be located near university campuses and integrated into degree or certification programs. The Department of Education could assist with scholarships for workers that need tuition and fees financial aid to study at the universities.

Climate Change Solutions

While the focus over the next three to five years will rightly be on containing the virus and rebuilding the economy, the existential climate change problem continues to go unsolved.  The impact of climate change is already felt in rising seas flooding coast side cities and mega wildfires destroying millions of acres.

Proposal:

Focus employment development in renewable industries.  The pandemic economic slowdown has reduced carbon emissions by 8% during the past two months, according to experts.  The latest U.N. climate change analysis recommends that an 8% a year reduction in emissions be continued until 2030 to achieve the global emissions reduction target of 2 degrees Celsius. A U.N. sponsored Science Based Targets Initiative organization of 890 companies has endorsed shifting investments and employment toward reaching the 2030 emissions reduction target. A diverse set of 165 U.S. companies are SBTI members including: Walmart, Target, Coca-Cola, Adobe, Microsoft, Hewlett-Packard, Owens-Corning, Whirlpool, Proctor & Gamble, and Verizon. We should start now solving the next major global challenge by focusing on federal, non-government organizations, private research, and business development on innovative solutions to climate change problems.  Focusing on climate change for job creation ensures that we tackle two major issues: employment and climate change.  With so many workers unemployed we should shift their skills to a new industry that has been growing fast and is urgently needed while offering long term careers

Final Comment

We expect corporate leaders to take the lead in employment development for a long term economic transformation as political divisions will continue.  We noted in our post: A Pandemic Iceberg Hits the ‘Unsinkable’ US Economy’ that the fabric of a robust labor safety net needs to be built to mitigate the impact of an economic crisis like COVID-19 on labor in the future.  It is in the interest of executives to build businesses where workers are thriving, not just surviving. The focus must be on building an innovative economy that is creating new jobs through entrepreneurship. Otherwise, we are faced with a stagnating economy dependent on government transfer payments. We conclude with the following declaration from that post:

Americans built the most innovative, self-renewing, wealth building economy in the world.  It is the American spirit of entrepreneurship combined with invention, self-sacrifice, equal opportunity, and creativity that will build the businesses of the future. These new businesses will adjust to new social realities and pave the way for workers to gain job security and become confident enough to spend at robust levels.”

______________________________________________________________________________

Patrick Hill is the Editor of The Progressive Ensign, writes from the heart of Silicon Valley, leveraging 20 years of experience as an executive at firms like HP, Genentech, Verigy, Informatica, and Okta to provide investment and economic insights. Twitter: @PatrickHill167

The post COVID-19 Triggers Transformation into a New Economy – Part 2 appeared first on RIA.

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Coronavirus dashboard for October 5: an autumn lull as COVID-19 evolves towards seasonal endemicity

  – by New Deal democratBack in August I highlighted some epidemiological work by Trevor Bedford about what endemic COVID is likely to look like, based…

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 - by New Deal democrat

Back in August I highlighted some epidemiological work by Trevor Bedford about what endemic COVID is likely to look like, based on the rate of mutations and the period of time that previous infection makes a recovered person resistant to re-infection. Here’s his graph:




He indicated that it “illustrate[s] a scenario where we end up in a regime of year-round variant-driven circulation with more circulation in the winter than summer, but not flu-like winter seasons and summer troughs.”

In other words, we could expect higher caseloads during regular seasonal waves, but unlike influenza, the virus would never entirely recede into the background during the “off” seasons.

That is what we are seeing so far this autumn.

Confirmed cases have continued to decline, presently just under 45,000/day, a little under 1/3rd of their recent summer peak in mid-June. Deaths have been hovering between 400 and 450/day, about in the middle of their 350-550 range since the beginning of this past spring:



The longer-term graph of each since the beginning of the pandemic shows that, at their present level cases are at their lowest point since summer 2020, with the exception of a brief period during September 2020, the May-July lull in 2021, and the springtime lull this year. Deaths since spring remain lower than at any point except the May-July lull of 2021:



Because so many cases are asymptomatic, or people confirm their cases via home testing but do not get confirmation by “official” tests, we know that the confirmed cases indicated above are lower than the “real” number. For that, here is the long-term look from Biobot, which measures COVID concentrations in wastewater:



The likelihood is that there are about 200,000 “actual” new cases each day at present. But even so, this level is below any time since Delta first hit in summer 2021, with the exception of last autumn and this spring’s lulls.

Hospitalizations show a similar pattern. They are currently down 50% since their summer peak, at about 25,000/day:



This is also below any point in the pandemic except for briefly during September 2020, the May-July 2021 low, and this past spring’s lull.

The CDC’s most recent update of variants shows that BA.5 is still dominant, causing about 81% of cases, while more recent offshoots of BA.2, BA.4, and BA.5 are causing the rest. BA’s share is down from 89% in late August:



But this does not mean that the other variants are surging, because cases have declined from roughly 90,000 to 45,000 during that time. Here’s how the math works out:

89% of 90k=80k (remaining variants cause 10k cases)
81% of 45k=36k (remaining variants cause 9k cases)

The batch of new variants have been dubbed the “Pentagon” by epidmiologist JP Weiland, and have caused a sharp increase in cases in several countries in Europe and elsewhere. Here’s what she thinks that means for the US:


But even she is not sure that any wave generated by the new variants will exceed summer’s BA.5 peak, let alone approach last winter’s horrible wave:



In summary, we have having an autumn lull as predicted by the seasonal model. There will probably be a winter wave, but the size of that wave is completely unknown, primarily due to the fact that probably 90%+ of the population has been vaccinated and/or previously infected, giving rise to at least some level of resistance - a disease on its way to seasonal endemicity.

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Gonorrhea became more drug resistant while attention was on COVID-19 – a molecular biologist explains the sexually transmitted superbug

The US currently has only one antibiotic available to treat gonorrhea – and it’s becoming less effective.

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The _Neisseria gonorrhoeae_ bacterium causes gonorrhea by infecting mucous membranes. Design Cells/iStock Getty Images Plus via Getty Images

COVID-19 has rightfully dominated infectious disease news since 2020. However, that doesn’t mean other infectious diseases took a break. In fact, U.S. rates of infection by gonorrhea have risen during the pandemic.

Unlike COVID-19, which is a new virus, gonorrhea is an ancient disease. The first known reports of gonorrhea date from China in 2600 BC, and the disease has plagued humans ever since. Gonorrhea has long been one of the most commonly reported bacterial infections in the U.S.. It is caused by the bacterium Neisseria gonorrhoeae, which can infect mucous membranes in the genitals, rectum, throat and eyes.

Gonorrhea is typically transmitted by sexual contact. It is sometimes referred to as “the clap.”

Prior to the pandemic, there were around 1.6 million new gonorrhea infections each year. Over 50% of those cases involved strains of gonorrhea that had become unresponsive to treatment with at least one antibiotic.

In 2020, gonorrhea infections initially went down 30%, most likely due to pandemic lockdowns and social distancing. However, by the end of 2020 – the last year for which data from the Centers for Disease Control and Prevention is available – reported infections were up 10% from 2019.

It is unclear why infections went up even though some social distancing measures were still in place. But the CDC notes that reduced access to health care may have led to longer infections and more opportunity to spread the disease, and sexual activity may have increased when initial shelter-in-place orders were lifted.

As a molecular biologist, I have been studying bacteria and working to develop new antibiotics to treat drug-resistant infections for 20 years. Over that time, I’ve seen the problem of antibiotic resistance take on new urgency.

Gonorrhea, in particular, is a major public health concern, but there are concrete steps that people can take to prevent it from getting worse, and new antibiotics and vaccines may improve care in the future.

How to recognize gonorrhea

Around half of gonorrhea infections are asymptomatic and can only be detected through screening. Infected people without symptoms can unknowingly spread gonorrhea to others.

Typical early signs of symptomatic gonorrhea include a painful or burning sensation when peeing, vaginal or penal discharge, or anal itching, bleeding or discharge. Left untreated, gonorrhea can cause blindness and infertility. Antibiotic treatment can cure most cases of gonorrhea as long as the infection is susceptible to at least one antibiotic.

There is currently only one recommended treatment for gonorrhea in the U.S. – an antibiotic called ceftriaxone – because the bacteria have become resistant to other antibiotics that were formerly effective against it. Seven different families of antibiotics have been used to treat gonorrhea in the past, but many strains are now resistant to one or more of these drugs.

The CDC tracks the emergence and spread of drug-resistant gonorrhea strains.

Why gonorrhea is on the rise

A few factors have contributed to the increase in infections during the COVID-19 pandemic.

Early in the pandemic, most U.S. labs capable of testing for gonorrhea switched to testing for COVID-19. These labs have also been contending with the same shortages of staff and supplies that affect medical facilities across the country.

Many people have avoided clinics and hospitals during the pandemic, which has decreased opportunities to identify and treat gonorrhea infections before they spread. In fact, because of decreased screening over the past two and a half years, health care experts don’t know exactly how much antibiotic-resistant gonorrhea has spread.

Also, early in the pandemic, many doctors prescribed antibiotics to COVID-19 patients even though antibiotics do not work on viruses like SARS-CoV-2, the virus that causes COVID-19. Improper use of antibiotics can contribute to greater drug resistance, so it is reasonable to suspect that this has happened with gonorrhea.

Overuse of antibiotics

Even prior to the pandemic, resistance to antibiotic treatment for bacterial infections was a growing problem. In the U.S., antibiotic-resistant gonorrhea infections increased by over 70% from 2017-2019.

Neisseria gonorrhoeae is a specialist at picking up new genes from other pathogens and from “commensal,” or helpful, bacteria. These helpful bacteria can also become antibiotic-resistant, providing more opportunities for the gonorrhea bacterium to acquire resistant genes.

Strains resistant to ceftriaxone have been observed in other countries, including Japan, Thailand, Australia and the U.K., raising the possibility that some gonorrhea infections may soon be completely untreatable.

Steps toward prevention

Currently, changes in behavior are among the best ways to limit overall gonorrhea infections – particularly safer sexual behavior and condom use.

However, additional efforts are needed to delay or prevent an era of untreatable gonorrhea.

Scientists can create new antibiotics that are effective against resistant strains; however, decreased investment in this research and development over the past 30 years has slowed the introduction of new antibiotics to a trickle. No new drugs to treat gonorrhea have been introduced since 2019, although two are in the final stage of clinical trials.

Vaccination against gonorrhea isn’t possible presently, but it could be in the future. Vaccines effective against the meningitis bacterium, a close relative of gonorrhea, can sometimes also provide protection against gonorrhea. This suggests that a gonorrhea vaccine should be achievable.

The World Health Organization has begun an initiative to reduce gonorrhea worldwide by 90% before 2030. This initiative aims to promote safe sexual practices, increase access to high-quality health care for sexually transmitted diseases and expand testing so that asymptomatic infections can be treated before they spread. The initiative is also advocating for increased research into vaccines and new antibiotics to treat gonorrhea.

Setbacks in fighting drug-resistant gonorrhea during the COVID-19 pandemic make these actions even more urgent.

Kenneth Keiler receives funding from NIH.

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Measuring the Ampleness of Reserves

Over the past fifteen years, reserves in the banking system have grown from tens of billions of dollars to several trillion dollars. This extraordinary…

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Over the past fifteen years, reserves in the banking system have grown from tens of billions of dollars to several trillion dollars. This extraordinary rise poses a natural question: Are the rates paid in the market for reserves still sensitive to changes in the quantity of reserves when aggregate reserve holdings are so large? In today’s post, we answer this question by estimating the slope of the reserve demand curve from 2010 to 2022, when reserves ranged from $1 trillion to $4 trillion.

What Are Reserves? And Why Do They Matter?

Banks hold accounts at the Federal Reserve where they keep cash balances called “reserves.” Reserves meet banks’ various needs, including making payments to other financial institutions and meeting regulatory requirements. Over the past fifteen years, reserves have grown enormously, from tens of billions of dollars in 2007 to $3 trillion today. The chart below shows the evolution of reserves in the U.S. banking system as a share of banks’ total assets from January 2010 through September 2022. The supply of reserves depends importantly on the actions of the Federal Reserve, which can increase or decrease the quantity of reserves by changing its securities holdings, as it did in response to the global financial crisis and the COVID-19 crisis.

Reserves Have Ranged from 8 to 19 Percent of Bank Assets from 2010 to 2022

Sources: Federal Reserve Bank of New York; Federal Reserve Economic Data, FRED (“TLAACBW027SBOG”); authors’ calculations.

Why does the quantity of reserves matter? Because the “price” at which banks trade their reserve balances, which in turn depends importantly on the total amount of reserves in the system, is the federal funds rate, which is the interest rate targeted by the Federal Open Market Committee (FOMC) in the implementation of monetary policy. In 2022, the FOMC stated that “over time, the Committee intends to maintain securities holdings in amounts needed to implement monetary policy efficiently and effectively in its ample reserves regime.” In this ample reserves regime, the Federal Reserve controls short-term interest rates mainly through the setting of administered rates, rather than by adjusting the supply of reserves each day as it did prior to 2008 (as discussed in this post). In today’s post, we describe a method to measure the sensitivity of interest rates to changes in the quantity of reserves that can serve as a useful indicator of whether the level of reserves is ample.

The Demand for Reserves Informs Us about Rate Sensitivity to Reserve Shocks

To assess whether the level of reserves is ample, one needs to first understand the demand for reserves. Banks borrow and lend in the market for reserves, typically overnight. The reserve demand curve describes the price at which these institutions are willing to trade their balances as a function of aggregate reserves. Its slope measures the price sensitivity to changes in the level of reserves. Importantly, banks earn interest on their reserve balances (IORB), set by the Federal Reserve. Because the IORB rate directly affects the willingness of banks to lend reserves, it is useful to describe the reserve demand curve in terms of the spread between the federal funds rate and the IORB rate. In addition, we control for the overall growth of the U.S. banking sector by specifying reserve demand in terms of the level of reserves relative to commercial banks’ assets.

There is a clear nonlinear downward-sloping relationship between prices and quantities of reserves, consistent with economic theory. The chart below plots the spread between the federal funds rate and the IORB against total reserves as a share of commercial banks’ total assets.  When reserves are very low, the demand curve has a steep negative slope, reflecting the willingness of borrowers to pay high rates because reserves are scarce. At the other extreme, when reserves are very high, the curve becomes flat because banks are awash with reserves and the supply is abundant. Between these two regions, an intermediate regime–that we refer to as “ample”–emerges, where the demand curve exhibits a modest downward slope. The color coding of the chart reflects the shifts in the reserve demand curve over time. In particular, the curve appears to have moved to the right and upward around 2015 and then moved upward after March 2020, at the onset of the COVID pandemic.

Reserve Demand Has Shifted over Time

Sources: Federal Reserve Bank of New York; Federal Reserve Economic Data, FRED (“TLAACBW027SBOG,” “IOER,” and “IORB”); authors’ calculations.

This chart highlights two of the main challenges in estimating the slope of the reserve demand curve. First, the curve is highly nonlinear, which means that a standard linear estimation approach is not appropriate. Second, various long-lasting changes in the regulation and supervision of banks, in their internal risk-management frameworks, and in the structure of the reserve market itself have resulted in shifts in the reserve demand curve. A third challenge is that the quantity of reserves may be endogenous to banks’ demand for them. Therefore, to properly measure the reserve demand curve, one must disentangle shocks to supply from those to demand. As we explain in detail in a recent paper, our estimation strategy addresses all three of these challenges.

Estimating the Slope of the Reserve Demand Curve

Our approach provides time-varying estimates of the price sensitivity of the demand for reserves that can be used to distinguish between periods in which reserves are relatively scarce, ample, or abundant. The chart below presents our daily estimates of the slope of the demand curve, as measured by the rate sensitivity to changes in reserves. Although we do not have a precise criterion for when reserves are scarce versus ample, during two episodes in our sample, the estimated rate sensitivity is well away from zero. The first episode occurs early in our sample, in 2010, and the second emerges almost ten years later, in mid-2019. In two other periods—during 2013-2017 and from mid-2020 through early September 2022—the estimated slope is very close to zero, indicating an abundance of reserves. The remaining periods are characterized by a modest negative slope of the reserve demand curve, consistent with ample (but short of abundant) reserves. The overall pattern of these estimates is robust to changes in the model specification, such as including spillovers from the repo and Treasury markets or measuring reserves as a share of gross domestic product or bank deposits (instead of as a share of banks’ assets).

Rate Sensitivity Changed over Time, Following the Path of Reserves

Sources: Federal Reserve Bank of New York; Federal Reserve Economic Data, FRED (“TLAACBW027SBOG,” “IOER,” and “IORB”); authors’ calculations.

Interest Rate Spreads Alone Are Not Reliable Indicators of Reserve Scarcity

As we discuss in our paper, the time variation in the estimated price sensitivity in the demand for reserves is based on observations of small movements along the demand curve due to exogenous supply shocks. The location of the curve itself, however, also changes over time. That is, there is not a constant relationship between the level of reserves and the slope of the reserve demand curve.  

In our paper, we find evidence of both horizontal and vertical shifts in the reserve demand curve, with vertical upward shifts being particularly important since 2015. This finding implies that the level of the federal funds-IORB spread may not be a reliable summary statistic for the sensitivity of interest rates to reserve shocks, and that estimates of the price sensitivity in the demand for reserves provide additional useful information.

In summary, we have developed a method to estimate the time-varying interest rate sensitivity of the demand for reserves that accounts for the nonlinear nature of reserve demand and allows for structural shifts over time. A key advantage of our methodology is that it provides a flexible and readily implementable approach that can be used to monitor the market for reserves in real time, allowing one to assess the “ampleness” of the reserve supply as market conditions evolve.

Gara Afonso is the head of Banking Studies in the Federal Reserve Bank of New York’s Research and Statistics Group.

Gabriele La Spada is a financial research economist in Money and Payments Studies in the Federal Reserve Bank of New York’s Research and Statistics Group.   

John C. Williams is the president and chief executive officer of the Federal Reserve Bank of New York.  

How to cite this post:
Gara Afonso, Gabriele La Spada, and John C. Williams, “Measuring the Ampleness of Reserves,” Federal Reserve Bank of New York Liberty Street Economics, October 5, 2022, https://libertystreeteconomics.newyorkfed.org/2022/10/measuring-the-ampleness-of-reserves/.


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The views expressed in this post are those of the author(s) and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author(s).

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