The Federal Reserve's balance sheet has undergone significant changes since 2007, reflecting its response to major economic crises. From a modest *** trillion U.S. dollars at the end of 2007, it ballooned to approximately **** trillion U.S. dollars by October 29, 2025. This dramatic expansion, particularly during the 2008 financial crisis and the COVID-19 pandemic—both of which resulted in negative annual GDP growth in the U.S.—showcases the Fed's crucial role in stabilizing the economy through expansionary monetary policies. Impact on inflation and interest rates The Fed's expansionary measures, while aimed at stimulating economic growth, have had notable effects on inflation and interest rates. Following the quantitative easing in 2020, inflation in the United States reached ***** percent in 2022, the highest since 1991. However, by August 2025, inflation had declined to *** percent. Concurrently, the Federal Reserve implemented a series of interest rate hikes, with the rate peaking at **** percent in August 2023, before the first rate cut since September 2021 occurred in September 2024. Financial implications for the Federal Reserve The expansion of the Fed's balance sheet and subsequent interest rate hikes have had significant financial implications. In 2024, the Fed reported a negative net income of ***** billion U.S. dollars, a stark contrast to the ***** billion U.S. dollars profit in 2022. This unprecedented shift was primarily due to rapidly rising interest rates, which caused the Fed's interest expenses to soar to over *** billion U.S. dollars in 2023. Despite this, the Fed's net interest income on securities acquired through open market operations reached a record high of ****** billion U.S. dollars in the same year.

Using a factor-augmented vector autoregression (FAVAR), this paper shows that residential investment contributes substantially to GDP following monetary policy shocks. Further, it shows that the number of new housing units built, not changes in the sizes of existing or new housing units, drives residential investment fluctuations. Motivated by these results, this paper develops a dynamic stochastic general equilibrium (DSGE) model where houses are built in discrete units and traded through searching and matching. The search frictions transmit shocks to housing construction, making them central to producing fluctuations in residential investment. The interest rate spread between mortgages and risk-free bonds also transmits monetary policy to the housing market. Following monetary shocks, the DSGE model matches the FAVAR's positive co-movement between nondurable consumption and residential construction spending. In addition, the FAVAR shows that the mortgage spread falls following an expansionary monetary shock, providing empirical support for the DSGE model's monetary transmission mechanism.

The Finance sector's operating environment was previously characterised by record-low interest rates. Nonetheless, high inflation prompted the Reserve Bank of Australia (RBA) to hike the cash rate from May 2022 onwards. This shift allowed financial institutions to impose higher loan charges, propelling their revenue. Banks raised interest rates quicker than funding costs in the first half of 2022-23, boosting net interest margins. However, sophisticated competition and digital disruption have reshaped the sector and nibbled at the Big Four's dominance, weighing on ADIs' performance. In the first half of 2025, the fierce competition has forced ADIs to trim lending rates even ahead of RBA moves to protect their slice of the mortgage market. Higher cash rates initially widened net interest margins, but the expiry of cheap TFF funding and a fierce mortgage war are now compressing spreads, weighing on ADIs' profitability. Although ANZ's 2024 Suncorp Bank takeover highlights some consolidation, the real contest is unfolding in tech. Larger financial institutions are combatting intensified competition from neobanks and fintechs by upscaling their technology investments, strengthening their strategic partnerships with cloud providers and technology consulting firms and augmenting their digital offerings. Notable examples include the launch of ANZ Plus by ANZ and Commonwealth Bank's Unloan. Meanwhile, investor demand for rental properties, elevated residential housing prices and sizable state-infrastructure pipelines have continued to underpin loan growth, offsetting the drag from weaker mortgage affordability and volatile business sentiment. Overall, subdivision revenue is expected to rise at an annualised 8.3% over the five years through 2024-25, to $524.6 billion. This growth trajectory includes an estimated 4.8% decline in 2024-25 driven by rate cuts in 2025, which will weigh on income from interest-bearing assets. The Big Four banks will double down on technology investments and partnerships to counter threats from fintech startups and neobanks. As cybersecurity risks and APRA regulations evolve, financial institutions will gear up to strengthen their focus on shielding sensitive customer data and preserving trust, lifting compliance and operational costs. In the face of fierce competition, evolving regulations and shifting customer preferences, consolidation through M&As is poised to be a viable trend for survival and growth, especially among smaller financial institutions like credit unions. While rate cuts will challenge profitability within the sector, expansionary economic policies are poised to stimulate business and mortgage lending activity, presenting opportunities for strategic growth in a dynamic market. These trends are why Finance subdivision revenue is forecast to rise by an annualised 1.1% over the five years through the end of 2029-30, to $554.9 billion