MEMORANDUM
TO: Investment Committee
FROM: Senior Economist
DATE: May 31, 2026
SUBJECT: Critical Analysis of Recent Federal Reserve District Research
I have filtered the recent Fed publications to isolate the signals from the noise. While there is significant academic output, the following six papers provide the most actionable intelligence regarding current systemic risks and macroeconomic headwinds.
1. [NY] Will Mounting Supply Chain Strains Hamstring the AI Investment Boom?
The Middle East conflict has triggered a third global supply shock in six years, specifically threatening the hardware pipeline for AI. This suggests a potential "capex cliff" or significant margin compression for Big Tech if the physical infrastructure cannot keep pace with the software ambitions.
2. [NY] AI’s Macroeconomic Challenges and Promises
For the first time in Q3 2025, top tech firms' capital expenditures exceeded their operating earnings. This indicates a transition from the "hype/efficiency" phase to a high-stakes "infrastructure build" phase, raising the risk of a valuation correction if productivity gains do not materialize rapidly.
3. [NY] Stress and Strain from NBFIs to Banks
The bankruptcies of Tricolor and First Brands, alongside Blue Owl’s redemption freeze, signal a contagion vector from Non-Bank Financial Institutions (NBFIs) back to the banking sector. This highlights a critical vulnerability in the "shadow banking" system that could trigger a liquidity crunch despite stable headline bank capital.
4. [NY] Explaining the K-Shaped Economy: What’s Behind the Divide?
New Economic Heterogeneity Indicators (EHIs) confirm that aggregate spending growth is being driven almost exclusively by high-income households, while lower-income tiers face food insecurity and pessimism. This bifurcation limits the "consumption floor" and suggests that aggregate GDP figures are masking a fragile underlying consumer base.
5. [NY] Same Shock, Different Roads? A K-Shaped Pattern at the Pump
The March 2026 energy price surge (via the Strait of Hormuz closure) acted as a regressive tax, hitting low-income households disproportionately. This creates a policy dilemma for the Fed: energy-driven inflation may necessitate tight policy, but the resulting pressure on the vulnerable population increases the risk of a hard landing.
6. [STL] Algorithms as Shadow Regulation: Secondary Market Access Overrides Home Buyer Credit Risk
The research suggests that automated underwriting and secondary market requirements are effectively overriding traditional credit risk assessments in housing. This "algorithmic regulation" could be creating hidden systemic bubbles by decoupling loan origination from actual borrower solvency.
Synthesis:
The U.S. economy is currently characterized by a dangerous divergence: an AI-driven capex boom is colliding with severe geopolitical supply shocks and a deeply bifurcated consumer base. We are seeing a shift in systemic risk from traditional banks to NBFIs and algorithmic credit models, suggesting that headline stability is masking significant structural fragility.
The analysis examines regional consumer spending indicators within the Second District to identify income-based disparities. It finds a K-shaped spending pattern in retail and gasoline, mirroring national trends of divergent economic experiences across income levels.
In this post, we use the inaugural release of our regional consumer spending indicators to ask whether these patterns hold for a significant portion of the Second District, and how regional spending patterns by income have been similar to or different from the national patterns we documented earlier. We find similar K‑shaped patterns in both retail and gas spending in our region as we do in the nation, with the K‑shaped pattern in gasoline in response to the recent gas price shock being more pronounced in the region.
The analysis examines the widening economic divide in the U.S., noting a bifurcation between high-income growth and lower-income financial strain. It highlights how food insecurity and consumer pessimism persist despite overall solid macroeconomic expansion.
Current discussions regarding a bifurcated U.S. economy highlight the increasing economic divide between lower- and higher-income Americans in spending and earnings growth and wealth accumulation. While many households are doing fine and economic activity overall has been expanding at a solid pace, large segments of the population are facing high levels of economic insecurity and financial strain, and consumer sentiment on the whole has dropped to low levels. In this post, we use newly collected data from the Survey of Consumer Expectations (SCE) to update our 2020 analysis of disproportionate
The paper introduces Trend Wage Inflation (TWIn) as a tool to isolate underlying wage inflation from short-run fluctuations. This approach aims to better assess labor market imbalances and their subsequent impact on price pressures.
Economists often look at nominal wage growth to gauge labor market imbalances, price pressures, and households’ spending ability. But to use wage growth for these purposes, it is important to look through short-run fluctuations and retrieve underlying wage inflation. In this post, we use our own measure of wage growth persistence—called Trend Wage Inflation (TWIn in short)—to summarize what we learned from wage growth behavior in the past years and draw conclusions for what may lie ahead. Since peaking in late 2021, TWIn has been on a steady decline, reaching levels near those of the 2017-19 p
The paper examines the tension between the long-term productivity potential of AI and its current high capital costs. It finds that AI investment is currently absorbing resources faster than it is generating operational returns.
In the third quarter of 2025, America's largest tech firms for the first time spent more on capital investment than they earned from operations. The implication is that AI, a technology with the potential to make the economy more productive, is, for now, absorbing resources faster than it is generating returns. This post discusses how the tension between AI's long-run promise and its short-run costs affects the outlooks for inflation, real activity, and financial stability.
The paper analyzes the global corporate bond market, highlighting a significant lack of diversification due to a dominant global credit cycle. It finds that a vast majority of bonds move in tandem, impacting risk management for nonfinancial firm funding.
The global corporate nonfinancial bond market is both a large investment asset class and a vital source of funding for nonfinancial firms. With $19 trillion outstanding at the end of 2024, a broad portfolio of corporate bonds would be expected to be well diversified. Yet, in 37 percent of months between 1998 and 2024, more than 80 percent of bonds in the ICE Global Bond Indices—a portfolio with over 10,000 constituents spanning diverse industries, credit ratings, and regions—moved in the same direction, suggesting a large degree of synchronization. In this post, we introduce the global credit
The paper examines the widening gap between U.S. foreign liabilities and assets, noting a significant shortfall in holdings. It analyzes the dynamics of investment income receipts relative to the mounting deficit in foreign asset ownership.
Foreign holdings of U.S. financial assets are immense, with official estimates putting their current market value at $69 trillion. U.S. holdings of foreign assets are also impressive but much smaller, at $41 trillion. The shortfall in U.S. foreign assets relative to foreign liabilities has been mounting for decades. Yet U.S. investment income receipts—in profits, dividends, and interest—comfortably exceeded income payments until recently. We show that the fading of the net investment income surplus stems from the upward shift in interest rates in the aftermath of the pandemic along with the co
The paper investigates whether generative AI tools are influencing labor demand by analyzing U.S. job postings. It utilizes occupational AI exposure measures to identify early shifts in hiring patterns.
As generative AI tools become more widely used, a key issue is the technology’s impact on labor demand. Where might we find evidence of that impact? In this post, we examine whether early evidence of AI’s effect on the labor market appears in firms’ job postings. We combine an occupational measure of AI exposure with detailed U.S. job-posting data from Lightcast, which aggregates listings from company career pages, national and local job boards, and job-listing aggregators. Using this data, we test whether postings for AI-exposed occupations declined disproportionately since the release of Cha
Household debt increased to $18.8 trillion in 2026:Q1, driven by rises in mortgage, HELOC, and auto balances. The data highlights a return of student loan defaults following the expiration of pandemic-era pauses.
During 2026:Q1, household debt balances increased slightly, by $18 billion, to reach $18.8 trillion, according to the latest Quarterly Report on Household Debt and Credit from the New York Fed’s Center for Microeconomic Data. Amid upticks in mortgage, HELOC, and auto balances and a seasonal decline in credit card balances, student loan balances remained unchanged. However, the share of student loan balances past due increased, nearing pre-pandemic levels at just over 10 percent. In this post, we focus on which borrowers entered default on their federal student loans over the past two quarters.
The paper examines how geopolitical conflicts in the Middle East create global supply shocks that threaten U.S. economic stability. It specifically analyzes the risk of physical shortages and price increases impacting the AI investment cycle via Asian supply chains.
The conflict in the Middle East has precipitated a global supply shock—the third in six years following the pandemic in 2020 and Russia’s invasion of Ukraine in 2022. The current shock raises the specter of spillovers to the U.S. through both prices and physical shortages of goods. A critical conduit for spillovers through these channels is via Asian supply chains, especially from middle- to lower-middle income countries in southeast Asia, which are key suppliers for goods needed for the AI infrastructure build-out in the U.S. These countries are also heavily reliant on Middle East energy impo
The paper examines whether recent bankruptcies and redemption halts within the non-bank financial institution (NBFI) sector pose systemic risks to the banking system. It concludes that while individual distress exists, these events are unlikely to trigger broader systemic instability.
Do the recent stresses in the NBFI space—notably the bankruptcies of Tricolor and First Brands, and the decision of Blue Owl Capital Corp II (OBDC II) to end its redemption program and return capital through a wind-down of the fund—create distress for banks? The general sentiment is that the recent stresses are unlikely to amount to systemic concerns, although it does not mean there might not be “some stress and strain” for banks and that policymakers are “watching carefully” for exposure across banks. In a series of previous posts, we showed that shocks to nonbank financial institutions (NBFI
The analysis examines the disparate impact of energy price shocks on nominal and real gas consumption across various income levels. It identifies a K-shaped consumption pattern, suggesting that lower-income households are more vulnerable to energy price volatility.
In March 2026, energy prices surged to a four-year high, driven by the Iranian closure of the Strait of Hormuz amid the ongoing conflict in the Middle East. In this Liberty Street Economics post, we use the new consumer spending module of the Economic Heterogeneity Indicators to analyze recent changes in nominal and real gas consumption across different income groups. We find that households had very different experiences with gasoline spending: in March, high-income households increased nominal spending the most and kept real consumption essentially unchanged, while low-income households decr
The analysis examines recent shifts in U.S.-China trade policy, noting that significant policy changes have had minimal impact on the overall trade balance. Despite volatility, the U.S. trade deficit remained stable while China's global trade surplus increased.
Over the past year, U.S. trade policy with China has undergone enormous changes, but with surprisingly little effect on overall trade balances. In fact, the U.S.’s twelve-month trade deficit, while highly volatile due to import front-running early in the year, ended 2025 at $1.2 trillion, almost unchanged from 2024. At the same time, China’s trade surplus with the world actually increased from $1 trillion to $1.2 trillion. However, when looking at changes between individual countries, one sees large shifts in bilateral balances. In this post, we will focus on changing trade flows between the U
The analysis examines the 'K-shaped' economic recovery, highlighting how retail spending growth is disproportionately driven by high-income households. It utilizes Economic Heterogeneity Indicators to identify a widening divide in spending patterns across income levels.
In our companion post, we used a new module of our Economic Heterogeneity Indicators (EHIs) to shed light on how recent retail spending growth has been driven by high-income households. This fact is consistent with the popular press’s idea of a “K-shaped economy” in which higher-income households experience faster growth in spending than lower-income households. In this post, we dive deeper into the reasons behind this divergence by analyzing for which goods this trend holds true and ask whether it can be explained by changes in wages, inflation, or wealth. We find that, since 2023, wealth has
This paper investigates the distribution of real consumer spending growth since 2023 to determine if aggregate gains are widely shared. It argues that reliance on a small group of high-spending households may mask underlying macroeconomic risks.
Aggregate real consumer spending has risen solidly since 2023. However, it is less clear how widely shared this improvement has been across all segments of society. This is important because systematic heterogeneity may mask the dependence of aggregate growth on a relatively small group of households and thus conceal macroeconomic risks. In this post, we use consumer spending data recently added to the Economic Heterogeneity Indicators (EHIs) and find that retail spending growth has been driven by high-income households—those earning more than $125,000 per year. In the popular press, the pheno
The analysis examines the divergence between actual and natural Beveridge curves to evaluate labor market efficiency. It argues that this gap provides critical guidance for the effectiveness of stabilization policies.
Analyzing the gap between the actual and natural Beveridge curves gives policymakers a better sense of how much stabilization policy can accomplish.
The study evaluates the efficiency of unemployment insurance programs through economic modeling. It concludes that the current U.S. framework aligns closely with the theoretical optimal design for such programs.
One model suggests that the optimal unemployment insurance program would be set up pretty close to what the U.S. currently has.
The paper examines the relationship between productivity growth and monetary policy decisions during the 1990s. It specifically analyzes how productivity gains influence FOMC deliberations and draws parallels to the potential impact of artificial intelligence on trend growth.
With the potential of artificial intelligence to raise trend productivity growth, it is illuminating to revisit Al Broaddus' contributions to late 1990s FOMC discussions.
The paper evaluates the role of Community Development Financial Institutions (CDFIs) in addressing systemic market failures. It argues that funding concentration is a critical determinant of a CDFI's ability to drive broad community economic change.
Funding concentration seems to play a significant role in how effective CDFIs are in fulfilling widespread change in communities.
The paper argues that secondary market pricing algorithms act as a form of shadow regulation by dictating lending standards. This mechanism effectively overrides individual lender assessments of home buyer credit risk to ensure securitization eligibility.
The research develops a framework for detecting systemic tail risk across diverse asset classes. It focuses on identifying co-movements during extreme market downturns to improve systemic risk monitoring.
The paper quantifies the magnitude and mechanism of fiscal transfers between member states within the Eurozone. It evaluates how these cross-country flows impact regional stability and fiscal integration.
The paper examines how corporate tax regimes influence the strategic placement and ownership of intangible assets across borders. It argues that tax differentials drive the global allocation of intellectual property to optimize after-tax returns.
The research examines the nature of firm-worker matching, analyzing whether worker quality is determined by accumulated experience or through a screening process. It explores the implications for labor market efficiency and hiring frictions.
This study compares the rate and depth of AI adoption between European and United States economies. It analyzes the structural and regulatory drivers that create a gap in technological integration.
The paper explores the Dual Beveridge Curve to analyze the relationship between job vacancies and unemployment. It likely examines how labor market frictions impact employment outcomes and wage dynamics.