FRBSF Economic Letters are brief summaries of SF Fed economic research that explain in reader-friendly terms what our work means for the people we serve. This section contains Economic Letters on monetary economics and macro-finance topics.
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The Zero Lower Bound Remains a Medium-Term Risk
Sophia Cho
Financial markets—specifically derivatives—contain information about the range of probable future short-term interest rates. The information from this statistical distribution can help measure the perceived risk of interest rates returning to the zero lower bound in the future. The risk varies over time, driven mainly by the expected level of interest rates. At longer forecast horizons, a higher risk of returning to the lower bound primarily reflects a higher amount of uncertainty. Currently, the perceived risk appears slim over the next few years but is significant at longer horizons.
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Dynamic Central Bank Communication
Mary C. Daly
Central banks have a responsibility to share information in ways that improve the public’s understanding. This communication must be consistent enough that people can follow, and dynamic enough that it can adjust to the circumstances that are faced. Federal Reserve communications over the past 30 years have evolved to become significantly more transparent. The following is adapted from remarks presented by the president of the Federal Reserve Bank of San Francisco at the Western Economic Association International 100th Annual Conference in San Francisco on June 22.
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Do Local Economic Conditions Influence FOMC Votes?
Anton Bobrov, Rupal Kamdar, Caroline Paulson, Aditi Poduri
Monetary policy in the United States is determined by the Federal Open Market Committee (FOMC), a decisionmaking body that includes regional representation. Evidence shows that the economic conditions in their respective regions have influenced how presidents of the 12 regional Federal Reserve Districts voted at the FOMC meetings in past decades. Specifically, a 1 percentage point higher unemployment rate in a District relative to the national average is associated with a 9 percentage point higher probability of dissenting in favor of looser policy during the FOMC vote.
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A Rising Star: The Natural Interest Rate in the Euro Area
Jens H. E. Christensen, Sarah Mouabbi
The natural rate of interest, also known as r-star, is a key variable for analyzing fiscal and monetary policy. A novel method of measuring this rate for the euro area uses a yield curve model estimated directly on the prices of bonds that are indexed to euro-area inflation. Estimates suggest that the euro-area natural interest rate declined persistently in the two decades before the pandemic but has risen notably in recent years. Projections using this methodology suggest that the rate is likely to increase further, albeit more gradually.
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Underlying Trends in the U.S. Neutral Interest Rate
Carlos Carvalho, Andrea Ferrero, Felipe Mazin, Fernanda Nechio
After a prolonged decline, U.S. inflation-adjusted interest rates have increased somewhat since the pandemic—possibly implying a higher new normal. As central banks attempt to tame the post-pandemic inflationary bout, whether real rates will fall back closer to pre-pandemic levels will ultimately depend on the trends in their long-term underlying determinants. Estimates suggest that the pre-pandemic downward pressures from global factors and from U.S. population aging have faded, while fiscal conditions continue to put upward pressure on U.S. real rates.
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Do Low Survey Response Rates Threaten Data Dependence?
Sylvain Leduc, Luiz Edgard Oliveira, Caroline Paulson
Monetary policy is forward-looking and dependent on policymakers’ economic outlook. When the outlook is deemed highly uncertain, policymakers may put more weight on incoming data when making monetary policy considerations. However, falling survey response rates suggest employment and inflation data may have become less reliable. Analysis of payroll employment and consumer price inflation data shows that data revisions over the past few years have been in line with their pre-pandemic averages. This suggests that these data have not been an outsized source of uncertainty in recent years.
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Current Perceptions About Monetary Policy
Michael Bauer, Carolin Pflueger, Adi Sunderam
Surveys of professional economic forecasters and financial market data can reveal public perceptions about the future conduct of monetary policy. Current estimates suggest that both professional forecasters and investors expect the Federal Reserve to respond strongly and systematically to changes in economic conditions. The current perceived responsiveness to inflation is particularly high relative to past responsiveness. Furthermore, the perceived importance of employment as a driver of future policy interest rates has strengthened since 2024.
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Ben Bernanke: Solving a Crisis, Changing the Fed
Mary C. Daly
Ben Bernanke’s contributions to economic thinking have been vast, from his extensive study of the Great Depression to groundbreaking research on the interplay of finance and the macroeconomy and the usefulness of unconventional monetary policy tools. His research helped guide his tenure as Federal Reserve Chair and his role in putting the U.S. economy on a path to the longest expansion in its history. Through that role, he also built a better and more transparent Fed for the future. The following remarks are adapted from a presentation by the Federal Reserve Bank of San Francisco president, who joined Christina Romer (University of California-Berkeley), Mark Gertler (New York University), Emi Nakamura (University of California-Berkeley), and Peter Rousseau (Vanderbilt University) to discuss Bernanke’s legacy at the American Economic Association Annual Meeting in San Francisco on January 5.
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Pandemic-Era Demand Squeezed Housing Inventories
Valeska Fresquet Kohan, John Mondragon, Adam Shapiro
The housing market experienced historically low levels of inventory along with rapid price growth in the two years following the onset of the pandemic. Analysis of national and county-level housing data suggests this price surge was fueled by heightened demand rather than low supply. The inflow of new listings remained at pre-pandemic levels, but the outflow due to sales was unusually high, which fed into the low inventory. By mid-2022, rising mortgage rates moderated demand, allowing inventory levels to return to pre-pandemic trends.
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Examining the Performance of FOMC Inflation Forecasts
Hamza Abdelrahman, Luiz Edgard Oliveira, Kevin J. Lansing
Calendar-year inflation forecasts from Federal Open Market Committee meeting participants typically start near 2% and then are revised in response to incoming data. Before the pandemic when actual inflation was mostly below 2%, participants consistently lowered their forecasts over time. From 2021 onward when inflation surged to 40-year highs, participants consistently raised their forecasts over time. In both periods, cumulative forecast revisions help predict the size of subsequent forecast errors. This implies that the typical inflation forecast was slow to adjust to new information that could have improved forecast accuracy.