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International · October 11, 2026 · 2 min read

Fed research separates trade balances from the financial flows behind them

By Econ Data Tools Editorial Team

Published October 11, 2026 • Updated October 11, 2026

Reviewed by Instinct editorial QC

The October 9 note finds little bilateral link between current-account and financial-account balances. Gross flows, asset values and investor geography matter beyond the net deficit.

A Federal Reserve research note published on October 9 by Cody Kallen and Alexandra Tabova examines U.S. external imbalances through cross-border financial flows and investment positions. Its central distinction is between a current-account balance and the much larger movements of capital into and out of the country. The note is research, not a new monetary-policy decision or a forecast of a financial crisis. Net financial inflows are the difference between foreign investment in the United States and U.S. investment abroad. The authors show that gross inflows and gross outflows are both large and tend to move together. A small or balanced current account therefore does not establish that a country has little cross-border financial exposure. The type and source of financing also matter. Foreign direct investment, portfolio securities and cross-border banking flows have different patterns of volatility and different risks. The note describes a greater role for private financing in more recent periods, rather than treating every U.S. deficit as financed in the same way by foreign governments. The net international investment position measures external financial assets minus external liabilities. Its movement reflects financial transactions, valuation changes and other adjustments. The authors attribute much of the recent deterioration relative to GDP to U.S. equity-market outperformance. An increase in equity liabilities is not equivalent to an increase in debt that must be repaid; asset prices and risk sharing affect the interpretation. Across 21 U.S. trading partners over 2003-2025, the authors report a correlation of 0.078 between bilateral current-account and financial-account balances in dollar terms, and 0.004 when scaled by GDP. These sample results do not establish a strong bilateral relationship. The note also warns that investment routed through financial centers can cause the recorded country of the immediate investor to differ from the ultimate source. Limits: the aggregate accounting relationship does not imply that a trade deficit with one country is financed by that same country. The research says policies that change the geographic pattern of trade should not automatically be assumed to change the aggregate U.S. external balance or its financing. Many of the underlying data are dated June 2026; this is not a fresh October measurement of every investment position or a personal investment recommendation.

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