Looking at the Glass Half-Full as the Fed Meets on Rates

Episode 129 of the Investopedia Express with Caleb Silver (March 20, 2023)

Express Podcast Episode 129 Recirc Image

Justin Wolfers, professor of public policy and economics at the University of Michigan, joins the Investopedia Express this week. Justin says the economy is in much better shape than most people think, and believes the Fed can actually hike interest rates while putting out the contagion around banks. Plus, big tech is back in the driver's seat as investors return to their old favorites in search of safety and the prospect for a pause in rate hikes.

Meet Justin Wolfers

Justin Wolfers

University of Michigan | Gerald R. Ford School of Public Policy

Justin Wolfers is a professor of public policy and economics at the University of Michigan and a visiting professor of economics at the University of Sydney. He is also a research associate with the National Bureau of Economic Research (NBER); and a non-resident senior fellow with the Brookings Institution and the Peterson Institute for International Economics.

He was previously a visiting professor at Princeton, an associate professor at Wharton, an assistant professor at Stanford Graduate School of Business, and an economist with the Reserve Bank of Australia. He is also a past editor of the Brookings Papers on Economic Activity, and was a member of the Congressional Budget Office Panel of Economic Advisers.

Justin was recently named by the International Monetary Fund (IMF) as one of the "25 economists under 45 shaping the way we think about the global economy." Wolfers' research focuses on labor economics, macroeconomics, political economy, law and economics, social policy and behavioral economics. Beyond research, he is a contributing columnist for the New York Times, appears frequently on TV, radio and in print. He is also a popular teacher, with many teaching awards to his name, and an author of a leading introductory economics textbook.

What's in this Episode?

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Term of the Week: Liquidity Coverage Ratio

This week's term comes to us from Lindsey Morrison, who wrote in suggesting 'liquidity coverage ratio' this week, and we love that term given all the concerns about liquidity in our nation's banks.

According to our favorite website, the liquidity coverage ratio refers to the proportion of highly liquid assets held by financial institutions, to ensure their ongoing ability to meet short-term obligations. This ratio is essentially a generic stress test that aims to anticipate market-wide shocks and make sure that financial institutions possess suitable capital preservation to ride out any short-term liquidity disruptions that may plague the market.

The liquidity coverage ratio was a key outcome of the Basel Accord from back in 2010, which is a series of regulations developed by the Basel Committee on Banking Supervision (BCBS). The BCBS is a group of 45 representatives from major global financial centers.

One of the goals of the BCBS was to mandate banks to hold a specific level of highly liquid assets and maintain certain levels of fiscal solvency to discourage them from lending high levels of short-term debt. As a result, banks are required to hold an amount of high-quality liquid assets that is enough to fund cash outflows for 30 days.

High-quality liquid assets include only those with a high potential to be converted easily and quickly into cash. The three categories of liquid assets with decreasing levels of quality are level 1, level 2A, and level 2B. Read more about them on Investopedia.com, because those assets are under the microscope right now as investors, regulators, and customers want to know just how healthy bank liquidity ratios are at the moment.

Great suggestion, Lindsey. We're going to be sending you some of our finest socks to keep you smart this spring!

Links for Show Notes

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