Author(s): Sean Creehan and Kaitlin Asrow, Federal Reserve Bank of San Francisco

Technology and innovation in financial services have been essential forces in improving individual well-being and strengthening our economy for centuries. Going back to the origins of money itself, which enabled basic economic activities, like lending, trade, and investment, financial technology at its best provides tools that enable and enrich economic life.

At the same time, unchecked innovation can introduce a variety of risks to individuals and the economy. Alternative approaches to lending may provide credit access to new customers but could also lead to overborrowing and excess risk in the system. Faster payment tools can increase convenience and access to funds but may introduce new vulnerabilities to theft, fraud, or money laundering. In recognition of the potential for harm from rapid adoption of new technology, modern financial regulation and supervision has typically...

Developed countries have recently turned to very low—even negative—interest rates to try to stimulate their economies. Low or negative rates can affect banks in novel ways because they often base their retail rates on the policy rate. In particular, the rate banks pay households for deposits usually remains at zero during times of low or negative policy rates, rather than falling together with the policy rate, as it would during normal times. This can decrease banks’ net interest margins, negatively impacting their profitability, equity, and ability to lend.

Community development financial institutions (CDFIs) are financial institutions with a mission to serve low- and moderate-income (LMI) individuals and communities. They can be depository institutions (including banks and credit unions) and nondepository institutions (including loan funds, venture capital funds, and community development corporations). Provided they meet established criteria, the Department of the Treasury’s CDFI Fund may certify CDFIs in order for them to receive capital support.

From March 22 through May 14, 2021, the Federal Reserve fielded the 2021 CDFI Survey. The effort gathered information from 345 CDFIs on their financial well-being throughout the COVID-19 pandemic, operational gaps and challenges, and effects on clients and communities they serve. Survey results and key findings are organized into the following sections.

U.S. labor productivity has grown quickly during the pandemic compared with the past decade. However, this rapid pace is unlikely to be sustained. Similar to the Great Recession, the primary reasons for strong productivity growth now are cyclical effects that are likely to unwind as the economy continues to recover. For example, the number of workers has fallen, so capital per worker has risen—raising labor productivity in the short term. What effect the pandemic itself might have on productivity remains uncertain.

U.S. labor productivity has grown quickly during the pandemic compared with the past decade. However, this rapid pace is unlikely to be sustained. Similar to the Great Recession, the primary reasons for strong productivity growth now are cyclical effects that are likely to unwind as the economy continues to recover. For example, the number of workers has fallen, so capital per worker has risen—raising labor productivity in the short term. What effect the pandemic itself might have on productivity remains uncertain.

Charise Fong and Emily Busch, EBALDC: Local CDCs are vital to safeguarding and creating the spaces integral to healthy, vibrant, and equitable neighborhoods and cultural business districts, such as the Fruitvale Transit Village, Swan’s Market, and San Francisco and Oakland Chinatowns. CDCs support these neighborhoods by providing affordable commercial and cultural spaces, which are essential to supporting low-income families and entrepreneurs. This especially holds true for neighborhoods with rising rents and property values. 

As community anchors, CDCs have been vital to the survival of Black, Indigenous, and People of Color (BIPOC) businesses, especially during COVID. We rolled up our sleeves to provide emergency response programs throughout the pandemic that included:

The link between changes in U.S. inflation and the output gap has weakened in recent decades. Over the same time, a positive link between the level of inflation and the output gap has emerged, reminiscent of the original 1958 version of the Phillips curve. This development is important because it indicates that structural changes in the economy have not eliminated the inflationary pressure of gap variables. Improved anchoring of people’s expectations for inflation, which makes the expected inflation term in the Phillips curve more stable, can account for both observations.