FRBSF Economic Letter

Economic analysis for a general audience

2023

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Kevin J. Lansing and Federico C. Nucera
September 25, 2023

During the 1970s and early 1980s, rises in inflation tended to coincide with weaker economic activity and lower stock prices. But in more recent decades, rises in inflation have tended to coincide with stronger economic activity and higher stock prices. The emergence of a pattern where inflation, economic activity, and stock prices all move together over the business cycle can be traced to the beneficial effects of well-anchored inflation expectations.

Òscar Jordà, Sanjay R. Singh, and Alan M. Taylor
September 5, 2023

Monetary policy is often regarded as having only temporary effects on the economy, moderating the expansions and contractions that make up the business cycle. However, it is possible for monetary policy to affect an economy’s long-run trajectory. Analyzing cross-country data for a set of large national economies since 1900 suggests that tight monetary policy can reduce potential output even after a decade. By contrast, loose monetary policy does not appear to raise long-run potential. Such effects may be important for assessing the preferred stance of monetary policy.

Leila Bengali, Marcus Sander, Robert G. Valletta, and Cindy Zhao
August 28, 2023

Workers with a college degree typically earn substantially more than workers with less education. This so-called college wage premium increased for several decades, but it has been flat to down in recent years and declined notably since the pandemic. Analysis indicates that this reflects an acceleration of wage gains for high school graduates rather than a slowdown for college graduates. This pattern is most evident for workers in racial and ethnic groups other than White, possibly reflecting an unusually tight labor market that may have altered their college attendance decisions.

Andrew Foerster and Zinnia Martinez
August 21, 2023

The Summary of Economic Projections offers important insights into the views of Federal Open Market Committee participants. The summary’s “dot plot” charts each participant’s assessment of the appropriate path for monetary policy given their economic outlook. A new index measuring the level of disagreement indicated by the dots shows that disagreement fell during the 2010s expansion, was nearly nonexistent early in the pandemic, and has been increasing recently. Policy disagreement is correlated with disagreement about future inflation, but factors unrelated to disagreement about the outlook also play a large role.

Andreas Hornstein, Marianna Kudlyak, Brigid Meisenbacher, and David A. Ramachandran
August 14, 2023

Labor force participation in the United States has dropped a percentage point since the pandemic began. Analyzing how participation has evolved for various groups of the population suggests that more than two-thirds of this decline has been due to persistent “trend” factors. The remainder is due to temporary economic conditions, or “cyclical” factors. Estimates project that trend factors—driven largely by population aging—could push labor participation down an additional percentage point over the next decade.

Augustus Kmetz, Schuyler Louie, and John Mondragon
August 7, 2023

Shelter inflation has remained high even as other components of inflation have fallen. However, various market indicators, including house prices and rents, suggest that the housing market has slowed significantly with the rise in interest rates. Forecasting models that combine several measures of local shelter and rent inflation can help explain how recent trends might affect the path of future shelter inflation. The models indicate that shelter inflation is likely to slow significantly over the next 18 months, consistent with the evolving effects of interest rate hikes on housing markets.

Sylvain Leduc, Daniel J. Wilson, and Cindy Zhao
July 12, 2023

Given steady declines in price inflation for core goods and expectations that rent inflation will moderate over time, the outlook for nonhousing core services—or “supercore”—inflation has grown in importance. State-level data document a typically weak relationship between this indicator and unemployment rates, highlighting the stickiness of supercore inflation. The data show that its sensitivity to labor markets strengthened early in the pandemic recovery in connection with strong demand for service workers. However, it’s uncertain whether this sensitivity will remain heightened or return to its persistent pre-pandemic weakness.

Erin E. Crust, Kevin J. Lansing, and Nicolas Petrosky-Nadeau
July 10, 2023

Inflation has climbed since 2021, as the labor market has tightened. Two historical data relationships can account for elevated inflation over the past two years: the Beveridge curve, which relates job vacancies and unemployment rates over the business cycle, and a nonlinear version of the Phillips curve, which links inflation to labor market slack. Combining estimates of the two curves implies that inflation can fall in conjunction with a “soft landing” for the economy if labor market easing is achieved mainly by reducing job vacancies rather than increasing unemployment.

Joan Monras
July 3, 2023

Immigration is fundamentally an urban phenomenon. Both in the United States and elsewhere, immigrants settle primarily in cities—especially high-wage, high cost-of-living cities. The most likely reason is that immigrants often send a significant share of their income back to their origin country. As a result, they value a city’s high wages and are less discouraged by the high living costs than native-born workers. Migration policies can reinforce this urban concentration pattern.

Gregory Casey, Stephie Fried, and Ethan Goode
June 26, 2023

How might rising temperatures around the world affect the growth rate of GDP per person? Examining data across countries over the past half-century shows that a change in temperature affects GDP growth, but only temporarily. Combining estimates from past data with a simple growth model can help project the impacts of future higher temperatures on GDP per person by country. These projections suggest that total global losses in output per person could be substantial, though smaller than if a given change in temperature had a permanent effect on GDP growth.

Zheng Liu and Thuy Lan Nguyen
June 20, 2023

Global supply chain disruptions following the onset of the COVID-19 pandemic contributed to the rapid rise in U.S. inflation over the past two years. Evidence suggests that supply chain pressures pushed up the cost of inputs for goods production and the public’s expectations of higher future prices. These factors accounted for about 60% of the surge in U.S. inflation beginning in early 2021. Supply chain pressures began easing substantially in mid-2022, contributing to the slowdown in inflation.

Adam Hale Shapiro
May 30, 2023

Tight labor markets have raised concerns about the role of labor costs in persistently high inflation readings. Policymakers are paying particular attention to nonhousing services inflation, which is considered most closely linked to wages. Analysis shows that higher labor costs are passed along to customers in the form of higher nonhousing services prices, however the effect on overall inflation is very small. Labor-cost growth has no meaningful effect on goods or housing services inflation. Overall, labor-cost growth is responsible for only about 0.1 percentage point of recent core PCE inflation.

Mary C. Daly
May 22, 2023

Public service is not a job. It’s a choice to see people clearly and to act on what you see. This is the message of the following commencement speech delivered on May 12 by the president and CEO of the Federal Reserve Bank of San Francisco to the Sol Price School of Public Policy, University of Southern California, Los Angeles.

Hamza Abdelrahman and Luiz E. Oliveira
May 8, 2023

U.S. households built up savings at unprecedented rates following the strong fiscal response and lower consumer spending related to the pandemic. Despite recent rapid drawdowns of those funds, estimates suggest a substantial stock of excess savings remains in the aggregate economy. Since 2020, households across all income levels have held a historically large share of savings in cash or other easily accessible forms. Estimates suggest that those funds could be available to support personal spending at least into the fourth quarter of 2023.

Jack Mueller and Mark M. Spiegel
April 10, 2023

The Paycheck Protection Program (PPP) and the PPP Liquidity Facility were launched early in the pandemic to help many small businesses survive. These programs encouraged banks to lend more extensively to small businesses over the first half of 2020. Since then, however, banks have reduced their exposure to these loans, leaving no significant changes in small business lending associated with participation in these programs over the three-year period from 2020 through 2022. This raises some doubt that emergency lending programs encourage long-term relationships that outlast the programs.

Denis Gorea, Augustus Kmetz, Oleksiy Kryvtsov, Marianna Kudlyak, and Mitchell Ochse
March 27, 2023

New evidence based on listings of homes for sale from 2000 to 2019 suggests house prices adjust to monetary policy changes over weeks rather than years, faster than previously thought. Housing list prices fall within two weeks after the Federal Reserve announces an unexpected policy tightening, similar to responses of other financial assets. House prices respond more strongly to unexpected changes in long-term interest rates than to surprises in the short-term federal funds rate. Changes in mortgage rates following Fed announcements are key to explaining this rapid house price reaction.

Mary C. Daly
March 9, 2023

Restoring price stability is a key part of the Fed’s mandate, and it is what the American people expect. Achieving it will take time and a broad view of economic conditions. Policymakers have to respond to an economy that is evolving in real time and prepare for what the economy will look like in the future. The following is adapted from remarks by the president of the Federal Reserve Bank of San Francisco to Griswold Center for Economic Policy Studies at Princeton University on March 4.

Ian Burn, Daniel Firoozi, Daniel Ladd, and David Neumark
March 6, 2023

Studies suggest that employers discriminate against older workers in hiring, responding less favorably to equally qualified job applicants who are older. Employers may also limit hiring of older workers by including age stereotypes in job ads that signal a preference for younger workers. Evidence from an experimental study shows that older workers are less likely to apply to job advertisements that contain language with ageist stereotypes. The results indicate that this impact is comparable to the direct effects of employer age discrimination in hiring decisions.

Evgeniya A. Duzhak
February 27, 2023

Immigrants contribute a large portion of the growth in the U.S. population and labor force. However, immigration flows into the United States slowed significantly following immigration policy changes from 2017 to 2020 and the onset of the COVID-19 pandemic. Analysis of state-level data shows that this migration slowdown tightened local labor markets modestly, raising the ratio of job vacancies to unemployed workers 5.5 percentage points between 2017 and 2021. More recent data show immigration has rebounded strongly, helping to close the shortfall in foreign-born labor and ease tight labor markets.

Troy Davig and Andrew Foerster
February 21, 2023

Inflation targeting has become the dominant way countries approach setting monetary policy goals. However, central banks differ in how they conduct that policy and how they evaluate their success in meeting a stated inflation goal. A new assessment method combines a percentage range around a target, known as an inflation tolerance band, with central banks stating how long it will take for high or low inflation to return to that range, known as a time horizon. Comparing previously projected horizons with realized horizons can be used to evaluate policy success.

Zheng Liu and Mollie Pepper
February 13, 2023

Rent inflation has surged since early 2021. Because the cost of housing is an important component of total U.S. consumer spending, high rent inflation has contributed to elevated levels of overall inflation. Evidence suggests that, as monetary policy tightening cools housing markets, it can also reduce rent inflation, although this tends to adjust relatively slowly. A policy tightening equivalent to a 1 percentage point increase in the federal funds rate could reduce rent inflation as much as 3.2 percentage points over 2½ years.

Simon H. Kwan and Louis Liu
February 6, 2023

The current round of federal funds rate increases is expected to reverse a historically large gap between the real funds rate and the neutral rate at the beginning of the tightening cycle. Financial markets have reacted faster and more strongly than in past monetary tightening cycles, in part because of this large gap and the Federal Reserve’s forward guidance. Historical experiences suggest financial conditions could tighten even more given the size of the gap.

Andrés Rodríguez-Clare, Mauricio Ulate, and Jose P. Vasquez
January 19, 2023

Global supply chain disruptions due to the COVID-19 pandemic have increased the costs of trade between countries. Given the interconnectedness of the U.S. economy with the rest of the world, higher trade costs can have important impacts on U.S. labor markets. A model of the U.S. economy that incorporates variation in industry concentrations across regions can help quantify these effects. The analysis suggests that recent global supply disruptions could cause a sizable and persistent reduction in labor force participation.

Remy Beauregard, Jens H.E. Christensen, Eric Fischer, and Simon Zhu
January 17, 2023

Price inflation has increased sharply since early 2021 in many countries, including Mexico. If sustained, high inflation in Mexico could raise questions about the ability of its central bank to bring inflation down to its 3% inflation target. However, analyzing the difference between market prices of nominal and inflation-indexed government bonds suggests investors’ long-term inflation expectations in Mexico are close to the central bank’s inflation target and are projected to remain so in coming years.

2022

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Thomas M. Mertens
December 27, 2022

The jobless unemployment rate is a reliable predictor of recessions, almost always showing a turning point shortly before recessions but not at other times. Its success in predicting recessions is on par with the better-known slope of the yield curve but at a shorter horizon. Hence, it performs better for predicting recessions in the near term. Currently, this data and related series analyzed using the same method are not signaling that a recession is imminent, although that may change in coming months.

Pascal Paul
December 20, 2022

Banks limit their interest rate risk exposure by issuing adjustable-rate loans and protect their funding costs by slowly adjusting deposit rates. These actions allow banks to maintain largely stable profit margins even if monetary policy tightens unexpectedly. Evidence from the pre-pandemic tightening cycle suggests that bank profit margins could increase rather than decline over the coming months. However, the slow adjustment of rates that banks pay on deposits may result in people moving their savings, leading to a reallocation of assets away from the regulated banking system.

Wataru Miyamoto, Thuy Lan Nguyen, and Dmitry Sergeyev
November 30, 2022

New evidence suggests that rising oil prices associated with declining oil supply slow economic activities less when interest rates are constrained at the zero lower bound. Moreover, these oil price spikes can even increase overall output. Evidence points to the following explanation. An oil supply shock raises inflation in all periods, but the nominal interest rate does not react under the zero lower bound, so the shock reduces the real interest rate, stimulating demand in the economy.

Mary C. Daly
November 28, 2022

As monetary policymakers work to deliver low and stable prices and an economy that works for all, they will need to be resolute and mindful. This means moving firmly toward our goal, while constantly calibrating our stance of policy so that we go far enough to get the job done, but not so far that we overdo it. The following is adapted from remarks by the president of the Federal Reserve Bank of San Francisco to the Orange County Business Council in Irvine, California, on November 21.

Matteo Benetton, Marianna Kudlyak, Louis Liu, John Mondragon, and Mitchell Ochse
November 21, 2022

Young adults are more likely to own a home if their parents are homeowners than if their parents are renters. New research reveals how parents owning a home can lead to an increase in the persistence in homeownership across generations. Specifically, homeowner parents are often able to extract the equity value from their home to help their children purchase a home. This “dynastic” home equity enables children of homeowner parents who extract equity to accumulate approximately one third more housing wealth by age 30 than children of renters.

Augustus Kmetz, Adam H. Shapiro, and Daniel J. Wilson
November 14, 2022

How households expect inflation to evolve plays an important role in explaining overall inflation dynamics. Household expectations rose dramatically over the past year or so, much faster than professional forecasters’ inflation expectations. News coverage can explain part of this growing gap. Analyzing the volume and sentiment of daily news articles on inflation suggests that one-fourth of the increased gap between household and professional expectations can be attributed to heightened negative media coverage. These results highlight the important impact of the content and tone of economic information on the real economy.

Jason Choi, Taeyoung Doh, Andrew Foerster, and Zinnia Martinez
November 7, 2022

The Federal Reserve’s use of forward guidance and balance sheet policy means that monetary policy consists of more than changing the federal funds rate target. A proxy federal funds rate that incorporates data from financial markets can help assess the broader stance of monetary policy. This proxy measure shows that, since late 2021, monetary policy has been substantially tighter than the federal funds rate indicates. Tightening financial conditions are similar to what would be expected if the funds rate had exceeded 5¼% by September 2022.

Leila Bengali
October 17, 2022

Measuring the price of shelter for homeowners is difficult, even when housing markets are stable. A new measure of shelter price inflation uses mortgage, tax, and insurance payments, rather than the implied rental value of homes used in the consumer price index (CPI). The payments method suggests year-over-year shelter price inflation rose 4.3% nationally in July, compared with the CPI’s 5.8% estimate. Conditions in rental markets likely explain this difference. Comparing the varying results nationally and across regions highlights the challenge of accurately measuring the shelter inflation that homeowners face.

Regis Barnichon
October 11, 2022

If the Federal Reserve had expected the upcoming inflation surge back in March 2021, would it have acted differently? A new method to tackle such “what if” questions suggests that it may have been preferable to only moderately raise the federal funds rate during 2021, even with perfect foresight. In that case, inflation would have been about 1 percentage point lower as of June 2022, while unemployment would be about 2 percentage points higher. This result reflects the importance of the Fed’s dual mandate of price stability and maximum employment.

Mary C. Daly
October 3, 2022

Economic security depends on both jobs and stable prices. Together, these two congressionally mandated goals constitute the Fed’s dual mandate. This mandate is not a choice between two desirable things. It is a balance meant to deliver on a singular goal—a sustainable and expanding economy that works for everyone. The following is adapted from remarks by the president of the Federal Reserve Bank of San Francisco at Boise State University on September 29.

Augustus Kmetz, John Mondragon, and Johannes Wieland
September 26, 2022

The COVID-19 pandemic reshaped the way households work. Nearly a third of employees still worked from home part time or full time as of August 2022. This has significantly increased housing demand and is a key factor explaining why U.S. house prices grew 24% between November 2019 and November 2021. Analysis shows that the shift to remote work may account for more than half of overall house price increases and similar increases in rents. This fundamental evolution in work-related housing demand may be important for future house prices.

Òscar Jordà, Celeste Liu, Fernanda Nechio, and Fabián Rivera-Reyes
September 6, 2022

In a tight labor market, workers are able to respond to price increases by bargaining for higher wages. Analyzing conditions since the pandemic shows that, in the recent environment of elevated inflation and low unemployment, wages have become much more sensitive to expected price inflation than in the past. The impact of inflation expectations on wages also appears to have become longer lasting.

Brandyn Bok, Nicolas Petrosky-Nadeau, Robert G. Valletta, and Mary Yilma
August 29, 2022

As U.S. economic growth slows this year, a key question is whether job openings can fall from historical highs without a substantial rise in unemployment. Analyzing the current Beveridge curve relationship between unemployment and job openings presents a meaningful possibility that labor market pressures can ease and achieve a “soft landing” with only a limited increase in unemployment. This view is supported by high rates of job matching in the U.S. labor market in 2022, despite ongoing employment reallocation across industries.

Brigitte Roth Tran
August 22, 2022

Variation in weather could cause greater disruptions to a range of economic outcomes as severe weather events become more frequent or more extreme. Analyzing daily sales at a national apparel and sporting goods brand’s stores reveals that weather effects on store sales are surprisingly persistent, even after accounting for shoppers simply changing when and where they make their purchases. Moreover, sales at stores that have more experience with adverse weather events have a lower response, suggesting that adaptation may reduce the negative impact of increasingly severe weather on sales.

Pascal Paul
August 15, 2022

More than two years after the outbreak of COVID-19, concerns remain that U.S. businesses are substantially more vulnerable and less productive than in the past. Using extensive data on private and public firms allows for a detailed assessment of these concerns. According to a number of performance measures, businesses borrowing from large U.S. banks appear relatively healthy, increased leverage is concentrated among safer companies rather than riskier ones, and probabilities of default are close to pre-crisis levels.

Reuven Glick, Sylvain Leduc, and Mollie Pepper
August 8, 2022

Households are currently expecting inflation to run high in the short run but to remain muted over the more distant future. Given this divergence, what role do short-run and long-run household inflation expectations play in determining what workers expect for future wages? Data show that wage inflation is sensitive to movements in household short-run inflation expectations but not to those over longer horizons. This points to an upside risk for inflation, as workers negotiate higher wages that businesses could pass on to consumers by raising prices.

Jens H.E. Christensen and Mark M. Spiegel
August 3, 2022

The Japanese government’s strong response to the economic fallout from COVID-19 presents an opportunity to examine whether expansionary fiscal policies raise long-term inflation expectations. Analyzing market-based estimates of long-term inflation expectations in Japan shows that announcements of government fiscal stimulus under COVID-19 had no meaningful impact on investors’ long-term inflation expectations. This illustrates the challenge of moving long-term expectations after they become anchored below a central bank’s inflation target, as they have been in Japan.

Aina Puig
August 1, 2022

Household spending typically falls as interest rates rise, but the responses vary by race and gender. Data show that households with mortgages headed by white women cut their spending on durable goods about a quarter percentage point in the three years following a 1 percentage point increase in interest rates. This is a much larger reduction than for households with mortgages headed by white men or Black men or women. The differences highlight the challenge of understanding how policy interest rate changes affect a diverse population.

Jens H.E. Christensen
July 5, 2022

Supply and demand imbalances associated with the COVID-19 pandemic have contributed to a sharp increase in price inflation since early 2021. In response, market-based measures of short-term inflation compensation have risen sharply in the United States. Survey-based measures suggest that this has not affected longer-term inflation expectations. However, analyzing the difference between market prices of standard and inflation-indexed government bonds provides tentative indications that investors have raised their 10-year inflation expectations since spring 2021 to levels above their historical range.

Mary C. Daly
June 28, 2022

Bringing inflation down is the Federal Reserve’s number one priority. The goal is to do that without crippling growth and stalling the labor market. This will not be easy, but the economy and the Fed’s policy toolkit have both evolved, which will help for meeting those goals. The following is adapted from remarks by the president of the Federal Reserve Bank of San Francisco at the Shadow Open Market Committee Conference held at Chapman University in Orange, CA, on June 24.

John Mondragon
June 27, 2022

The recent rapid rise in house prices has raised some questions about the potential risk to broader financial stability. However, credit quality in the mortgage market appears to be very high, and lending standards tightened in early 2020. While low interest rates increased the demand for refinancing, evidence from large nonconforming loans shows that credit supply contracted sharply in March 2020 and remained tight through the early pandemic period. The shift in credit supply suggests that lenders adjusted their standards to mitigate some risk in the housing market.

Adam Hale Shapiro
June 21, 2022

Inflation has remained at levels well above the Federal Reserve’s inflation goal of 2% for over a year. Separating the underlying data from the personal consumption expenditures price index into supply- versus demand-driven categories reveals that supply factors explain about half of the run-up in current inflation levels. Demand factors are responsible for about one-third, with the remainder resulting from ambiguous factors. While supply disruptions are widely expected to ease this year, this outcome is highly uncertain.

Brandyn Bok and Nicolas Petrosky-Nadeau
May 31, 2022

Before the pandemic, the U.S. unemployment rate reached a historic low that was close to estimates of its underlying longer-run value and the short-run level associated with an absence of inflationary pressures. After two turbulent years, unemployment has returned to its pre-pandemic low, and the estimated underlying longer-run unemployment rate appears largely unchanged. However, economic disruptions appear to have pushed up the short-run noninflationary rate substantially, as high as 6%. Examining these different measures of the natural rate of unemployment can provide useful insights for policymakers.

Kevin J. Lansing
May 23, 2022

How much persistent versus transitory forces contribute to inflation influences the Federal Reserve’s ability to achieve its goal of 2% average inflation over time. If elevated inflation is driven mainly by persistent shocks, then a stronger and longer-lasting policy response is likely to be needed to bring inflation back down. Recent data show that consecutive changes in monthly inflation rates have tended to move increasingly in the same direction. This pattern suggests that the contribution of persistent shocks to inflation has been rising since mid-2019.

Evgeniya A. Duzhak
May 16, 2022

Workers in service industries and occupations with a lot of close social contact suffered the highest job losses during the pandemic recession. This differed from previous downturns, which tended to have their most severe effects on industries with high concentrations of manual labor. As a result, the unemployment impact of the pandemic on different demographic groups has not followed historical patterns, particularly for Asian, Black, and female workers. The unemployment gap between these racial groups has not been as wide as previous economic fluctuations would have predicted.

Michael D. Bauer and Thomas M. Mertens
May 9, 2022

The slope of the Treasury yield curve is a popular recession predictor with an excellent track record. The two most common alternative measures of the slope typically move together but have diverged recently, making the resulting recession signals unclear. Economic arguments and empirical evidence, including its more accurate predictions, favor the difference between 10-year and 3-month Treasury securities. Recession probabilities for the next year derived from this spread so far remain modest.

Mary C. Daly
April 22, 2022

The inflation outlook combined with a strong labor market leave no doubt that further monetary policy tightening is appropriate. The question is, how much and how quickly? The appropriate path of policy confronts the economic headwinds immediately ahead while also laying the groundwork for the economy we want in the future. The following is adapted from remarks by the president of the Federal Reserve Bank of San Francisco to the Center for Business and Economic Research, at the University of Nevada, Las Vegas, on April 20.

Sarah Albert, Olivia Lofton, Nicolas Petrosky-Nadeau, and Robert G. Valletta
April 11, 2022

Unemployment insurance benefits were expanded substantially to help overcome the pandemic labor market shock in early 2020. However, improved labor market conditions in early 2021 prompted many states to withdraw from the enhanced unemployment benefits programs several months before the federal program was scheduled to end in early September. A comparison of states that ended enhanced benefits early with those that maintained them suggests that the withdrawal is associated with a small pickup in employer hiring, consistent with prior studies that found the unemployment benefit expansions had modest effects.

Bart Hobijn
April 4, 2022

The record percentage of workers who are quitting their jobs, known as the “Great Resignation,” is not a shift in worker attitudes in the wake of the pandemic. Evidence on which workers are quitting suggests that it reflects the strong rebound of the demand for younger and less-educated workers. Historical data on quits in manufacturing suggest that the current wave is not unusual. Waves of job quits have occurred during all fast recoveries in the postwar period.

Òscar Jordà, Celeste Liu, Fernanda Nechio, and Fabián Rivera-Reyes
March 28, 2022

Inflation rates in the United States and other developed economies have closely tracked each other historically. Problems with global supply chains and changes in spending patterns due to the COVID-19 pandemic have pushed up inflation worldwide. However, since the first half of 2021, U.S. inflation has increasingly outpaced inflation in other developed countries. Estimates suggest that fiscal support measures designed to counteract the severity of the pandemic’s economic effect may have contributed to this divergence by raising inflation about 3 percentage points by the end of 2021.

Hishgee Jargalsaikhan, Sylvain Leduc, and Luiz E. Oliveira
March 21, 2022

Understanding what kinds of climate-related risks businesses could face is part of the Federal Reserve’s work to support a thriving economy and well-functioning financial system. To advance these goals, the San Francisco Fed surveyed businesses in its nine-state region to learn how they perceive and approach climate risk. Findings show that businesses view a changing climate as a moderate risk to their activities, particularly through possible regulation changes, higher input costs, and variations in demand. Many businesses are adopting formal risk mitigation strategies, including monitoring climate-risk exposure and reducing carbon dependence.

Mary C. Daly
February 28, 2022

The Federal Reserve has evolved since the “Great Inflation” of the 1970s. With new tools and a deeper understanding of the importance of transparency, it is better prepared to meet the dual mandate goals of price stability and full employment, even in challenging times. The following is adapted from remarks by the president of the Federal Reserve Bank of San Francisco to the Los Angeles World Affairs Council & Town Hall on February 23.

Regis Barnichon and Adam Hale Shapiro
February 22, 2022

Different ways of measuring the economy’s unused capacity, or slack, can result in varying inflation forecasts. Estimates suggest that direct measures of labor market tightness, such as the ratio of job vacancies to unemployment or the rate of employee job switching, provide more accurate forecasts than commonly used measures, such as the unemployment rate or the output gap. Recent elevated values of these measures of labor market tightness suggest greater inflation pressure than is implied by the unemployment rate alone.

Kevin J. Lansing, Luiz E. Oliveira, and Adam Hale Shapiro
February 14, 2022

Rising rents account for a significant portion of recent inflation. Estimates of how rent inflation typically responds to two leading indicators—current asking rents and current house prices—can help forecast the path of overall inflation for the next two years. This method predicts that higher rent inflation could add about 0.5 percentage point to personal consumption expenditures price inflation for both 2022 and 2023. These potential additions are important in light of the Federal Reserve’s 2% inflation target.

Sarah Albert and Robert G. Valletta
February 7, 2022

How well the economy is progressing toward the Federal Reserve’s goal of maximum employment is reflected in a range of indicators that evolve over time. Beyond the unemployment rate, two key metrics of labor market health are the labor force participation rate and the employment-to-population ratio. The aging of the population is reducing the levels of both measures, implying that they are unlikely to return to pre-pandemic highs. However, these two indicators remain well below their demographic trends, and analysis suggests that they will not recover to trend until 2024.

Vasco Cúrdia
January 10, 2022

The Federal Reserve adopted average inflation targeting as part of its long-run monetary strategy framework in 2020. This strategy allows inflation to rise and fall such that it averages 2% over time. Analysis shows that a version of average inflation targeting that is partly forward-looking—that is, one that responds in part to expected future inflation—could have improved economic outcomes in the recovery from the financial crisis of 2008, as well as substantially reduced the uncertainty around economic outcomes.

2021

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Robert E. Hall and Marianna Kudlyak
November 29, 2021

Unemployment fell at a slow and steady rate in the 10 cyclical recoveries from 1949 through 2019. These historical patterns also apply to the recovery from the pandemic recession after accounting for the unprecedented burst of temporary layoffs early in the pandemic followed by their rapid reversal from April to November 2020. Unemployment for other reasons—which has been most important in other recent recoveries—did not start declining until November 2020. Since then, unemployment for other reasons has declined at a faster pace than its historical average.

Sarah Albert, Andrew Foerster, and Pierre-Daniel G. Sarte
November 22, 2021

The COVID-19 pandemic generated sharp losses in employment in early 2020, followed by a partial but incomplete recovery that continues to this day. The effects on employment in business sectors that produce goods and those that provide services varied substantially across states. This was the case during both the initial drop and the subsequent recovery. The extent of the cross-state variation and how the variation has evolved over time has been unlike any past recessions, making the pandemic recession and recovery unprecedented in both its severity and its uneven impact.

Mary C. Daly
November 19, 2021

The impact of COVID and its ongoing threat continue to disrupt and delay the full recovery of the economy. It is tempting to act now, believing that what we see today are clear signals. However, acting without clarity is risky. In the face of unprecedented uncertainty caused by the long tail of the pandemic, the best policy is recognizing the need to wait. The following is adapted from remarks by the president of the Federal Reserve Bank of San Francisco to The Commonwealth Club of California on November 16.

Samuel R. Tarasewicz and Daniel J. Wilson
November 15, 2021

The relationship between economic activity and local COVID-19 conditions—infections and deaths—has changed over time. While activity was strongly tied to local virus conditions during the first six to nine months of the pandemic, they decoupled in late 2020 through the first half of 2021. This link strengthened again in the third quarter of 2021, particularly for highly vaccinated counties. One possible interpretation of this restrengthening is that areas with high vaccination rates have heightened virus risk aversion and hence high sensitivity to changes in local virus conditions.

Jens H.E. Christensen, Jose A. Lopez, and Paul L. Mussche
November 8, 2021

The longest-term U.S. Treasury bonds that investors can buy mature in 30 years. Some other countries offer up to 50-year government bonds. Examining these foreign bond markets and extrapolating U.S. Treasury yields to evaluate such longer-term options suggests that the extra costs of introducing 50-year bonds relative to conventional 30-year bonds are likely to be small on average. Because the U.S. fiscal deficit remains substantial, such longer-term debt instruments could provide an attractive opportunity to finance the growing debt in a sustainable way.

Michael D. Bauer and Glenn D. Rudebusch
October 20, 2021

Climate change—including higher temperatures and more extreme weather—is already causing economic damage and is projected to have further long-lasting effects. To properly assess the potential future economic losses from climate change, they must be discounted to produce comparable values in today’s dollars. The discount rates required for this assessment are influenced by the long-run equilibrium real interest rate, which has declined notably since the 1990s. Accounting for a persistently lower real rate increases the present discounted future costs of climate change, which is relevant for climate policy choices.

Regis Barnichon, Luiz E. Oliveira, and Adam H. Shapiro
October 18, 2021

The American Rescue Plan provided fiscal support during a strong economic rebound, raising concerns about the risk of fueling inflation. One way to assess this risk of economic overheating uses the ratio of job vacancies to unemployment, which measures labor market slack more accurately and, hence, can predict future inflation better than the unemployment rate alone. Estimates suggest that the fiscal plan acts to temporarily raise the vacancy-to- unemployment ratio, in turn pushing up inflation by about 0.3 percentage point per year through 2022.

Mary C. Daly
October 4, 2021

The pandemic has shined a vivid light on the deep roots of economic inequity, showing that the rules are not the same for everyone. Persistent, unfair gaps in opportunity and well-being across different groups in our society limit people’s potential. Eliminating these inequities could substantially boost GDP and increase the economy’s long-run rate of growth, leading to greater prosperity for all. The following is adapted from remarks by the president of the Federal Reserve Bank of San Francisco to the UCLA Anderson Forecast Webinar on September 29.

Evgeniya A. Duzhak
September 7, 2021

Racial disparities in socioeconomic outcomes for the U.S. population are often masked by aggregate statistics. Unemployment rates vary significantly across groups according to gender and race or ethnicity and have different sensitivities to the business cycle. Focusing on jobless rates by demographic groups shows that Black and Hispanic workers, particularly men, are the most sensitive to periods of economic growth and decline. This higher sensitivity persists across individuals with the same education level. Occupation plays a role in explaining the relative cyclical differences in unemployment rates across demographic groups.

Renuka Diwan, Evgeniya A. Duzhak, and Thomas M. Mertens
August 30, 2021

Net household wealth is highly unequal across U.S. households, and the types of assets people hold tend to change according to their position along the distribution of wealth. The pattern of household portfolios shows that the top 1% of households hold most of their wealth in stocks, while home values are most important for the wealth of the bottom half of the distribution. Higher growth in equity values relative to real estate values therefore tends to widen the wealth distribution, as experienced during the coronavirus pandemic.

Mauricio Ulate and Olivia Lofton
August 23, 2021

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.

John Fernald, Huiyu Li, and Mitchell Ochse
August 16, 2021

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.

Peter Lihn Jørgensen and Kevin J. Lansing
August 9, 2021

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.

Sophia Friesenhahn and Simon Kwan
August 2, 2021

The COVID-19 pandemic disproportionately affected the health and financial well-being of communities of color. Over the past year, minority banks that specialize in providing financial services to underserved communities and minority borrowers have also performed significantly worse than other banks of similar size. Minority banks projected higher loan losses and had lower profits than nonminority banks. To the extent that underperforming minority banks may be more reluctant to expand lending—whether to avoid risk or minimize regulatory scrutiny—it could further exacerbate the unevenness of the recovery.

Reuven Glick, Noah Kouchekinia, Sylvain Leduc, and Zheng Liu
July 12, 2021

Household surveys indicate that consumers expect higher inflation this year than in recent years, as the U.S. economy rebounds from the deep recession. This has coincided with a surge in commodity prices, as strong demand for goods like gas, food, and construction materials is catching producers with low supplies. Evidence suggests that households respond to commodity price increases by raising their expectations of future inflation. However, since surges in commodity prices are transitory, their effects on inflation expectations—particularly long-term expectations—are modest and short-lived.

James Aylward, Elizabeth Laderman, Luiz E. Oliveira, and Gladys Teng
July 6, 2021

Widespread job losses starting in mid-March last year forced many households to rely more heavily on nonemployment income and liquid assets on hand to continue buying what they needed. Federal assistance through the Coronavirus Aid, Relief, and Economic Security Act helped boost household resilience—the ability to sustain consumption despite the loss of employment income. Data suggest that the aid increased household resilience by 15 weeks, chiefly through enhanced unemployment insurance benefits. Among racial groups, this benefited Black and Hispanic households the most, raising median household resilience by 19 weeks.

Mary C. Daly
June 28, 2021

While the severity and scope of a changing climate remains unclear, the consensus is that it poses a significant risk to the global economy and financial system. As monetary policymakers, the Fed’s job is to navigate this uncertainty by anticipating the potential changes and understanding their implications. The following is adapted from remarks by the president of the Federal Reserve Bank of San Francisco to the Peterson Institute for International Economics on June 22.

Stephie Fried, Kevin Novan, and William B. Peterman
June 21, 2021

Uncertainty about U.S. climate policy in the future creates risk that affects the investment decisions businesses make today. If firms expect future policy to raise the cost of carbon emissions, then they could react to this by both shifting investment towards cleaner capital and reducing overall investment. These two responses lead to lower emissions, even if no actual climate policy is in place. Evidence suggests that this risk encourages companies to voluntarily reduce emissions using internal carbon prices and other mechanisms.

Troy Gilchrist and Bart Hobijn
June 1, 2021

A broad dashboard of indicators is sending mixed signals about the state of the labor market. Some indicators have deviated widely from their normal historical relationships since the onset of COVID-19. Because of the uneven economic impact of the pandemic, the labor force participation rate, payroll employment, and the share of job losers among the unemployed have provided more reliable signals about overall conditions than other components of the dashboard. They suggest that labor slack is higher than implied by the current headline unemployment rate.

Ethan Goode, Zheng Liu, and Thuy Lan Nguyen
May 24, 2021

The United States has implemented large-scale fiscal policy measures to help households and businesses cushion the economic fallout from the COVID-19 pandemic and to strengthen the recovery. The Federal Reserve has also supported the economy by keeping its policy rate at the zero lower bound. Evidence from Japan suggests that, in a sustained zero-bound environment, an unexpected increase in government spending has much larger and more persistent effects on real GDP, and even more so when the economy is in a recession.

Jens H.E. Christensen and Nikola Mirkov
May 10, 2021

Investors are usually willing to pay a higher price, known as a premium, for a safe fixed-income asset in return for the convenience of its high quality and liquidity. A study of Swiss government bonds—widely considered to be extremely safe but not particularly liquid—can give some insights into how quality affects the premium. The large and variable safety premium of these bonds surged to persistently higher levels following the launch of the euro. However, subsequent large asset purchases by the European Central Bank depressed the safety premium.

Mary C. Daly
May 3, 2021

As lender of last resort, the Federal Reserve plays a vital role in maintaining a sound and stable financial system. But the frequency and scale of Fed interventions following disruptions like the Global Financial Crisis and COVID-19 are concerning. As the country emerges from the pandemic, it’s time to focus on crafting more resilient policies, particularly by addressing Treasury market vulnerabilities and providing greater prudential oversight. The following is adapted from remarks by the president of the Federal Reserve Bank of San Francisco to the Money Marketeers on April 15.

Daniel J. Wilson
April 12, 2021

Consumer spending and business operations across the United States have been highly dependent on local conditions related to the COVID-19 pandemic. Current economic forecasts therefore must incorporate projections for where the pandemic is headed. A new econometric model provides county-level and national forecasts of COVID-19 infections. Estimates from the model indicate that population immunity acquired from prior infections is the primary driver of recent declines in new cases. This factor should continue to exert strong downward pressure on new cases in the weeks ahead.

Olivia Lofton, Nicolas Petrosky-Nadeau, and Lily Seitelman
April 5, 2021

Gender gaps in labor market outcomes during the pandemic largely reflect differences in parents’ experiences. Labor force participation fell much less for fathers compared with other men and all women at the onset of the pandemic; the recovery has been more pronounced for men and women without children. Meanwhile, labor force participation among mothers declined with the start of the school year. Evidence suggests flexibility in setting work schedules can offset some of the adverse impact on mothers’ employment, while the ability to work from home does not.

Renuka Diwan, Zheng Liu, and Mark M. Spiegel
March 29, 2021

Surges of foreign investment into developing countries can amplify economic stress and potentially undermine their financial stability. New evidence suggests that excessive foreign capital inflows can also increase income inequality in emerging economies. Research shows that, as low global interest rates trigger more investment, those inflow surges benefit entrepreneurs by raising their returns, while lowering household earnings on bank deposits within the countries. The potential impact on income inequality provides another reason beyond financial stability for resisting abrupt surges in capital inflows.

Reuven Glick and Noah Kouchekinia
March 22, 2021

Disagreement among economic forecasters about the outlook for inflation in both the United States and the euro area has increased since the onset of the pandemic. The nature of these forecast differences can provide insights into the inflation risks that lie ahead. Many forecasters initially expected substantially lower inflation over the next year but subsequently raised their expectations as economic activity began to improve. In contrast, changes in expectations and disagreement about longer-term inflation have been relatively subdued and suggest a balanced likelihood between higher and lower inflation.

Mary C. Daly
March 4, 2021

Today’s economic challenges are different from the past, and it’s important to learn from history to achieve a better economic future for everyone. As the economy recovers from the effects of COVID-19, the Fed’s new policy framework retains vigilance against inflation while committing to not pull back the reins on the economy in response to a strong labor market. The following is adapted from a virtual webinar by the president and CEO of the Federal Reserve Bank of San Francisco to the Economic Club of New York on March 2.

Simon Kwan
March 1, 2021

Stress tests in December 2020 showed that the largest U.S. banks had strong capital levels and could continue to lend to households and businesses under hypothetical severe recessions. Assessing thousands of small community banks against similar criteria suggests that, while about one-fifth could fall below adequate capitalization, only a handful of those risk becoming insolvent. Overall, this is a reassuring view for small banks and their communities, suggesting that the risk of widespread bank failures leading to financial instability appears to be small.

Jean-Benoît Eyméoud, Nicolas Petrosky-Nadeau, Raül Santaeulàlia-Llopis, and Etienne Wasmer
February 22, 2021

The onset of the COVID-19 pandemic and the unprecedented slowing of economic activity that followed caused severe disruptions to labor markets around the globe. In contrast to the United States, European Union countries funded short-time work programs to maintain jobs during a period of lockdown that was expected to be transitory. This succeeded in avoiding sharp increases in unemployment early in the recession. However, if the pandemic leads to a permanent reallocation of economic activity, short-time work programs may slow the process of workers moving from shrinking to growing sectors of the economy.

John Fernald, Huiyu Li, and Mitchell Ochse
February 16, 2021

The COVID-19 pandemic has caused massive disruptions to the U.S. educational system. Research on school closures—particularly combined with parental income loss—implies that children are likely to attain lower levels of lifetime education compared with pre-pandemic trends. Projections show learning disruptions could lower the level of annual economic output ¼ percentage point on average over the next 70 years. The effect is small the first 5–10 years then peaks at a loss of ½ percentage point in about 25 years, when the children reach prime working age.

Glenn D. Rudebusch
February 8, 2021

The ongoing trend of climate change—including higher temperatures and more extreme weather—will result in economic and financial losses for many businesses, households, and governments. Moreover, the uncertainty about the severity and timing of these losses is a source of financial risk. Recently, the Federal Reserve joined other financial regulators to warn that such climate-related financial risk may threaten the safety and soundness of individual financial institutions and the stability of the overall financial system.

Regis Barnichon, Davide Debortoli, and Christian Matthes
February 1, 2021

A key to designing fiscal policy is understanding how government purchases affect economic output overall. Research suggests that expanding government spending is not very effective at stimulating an economy in normal times. However, in deep downturns when monetary policy is constrained at the zero lower bound, public spending is more potent and can become an effective way to escape a recession.

Andrea Ajello, Isabel Cairó, Vasco Cúrdia, and Albert Queralto
January 11, 2021

The natural rate of interest, or r-star, is used to evaluate whether monetary policy is restrictive or supportive of economic activity. However, this benchmark rate can only be estimated, and policymakers’ misperceptions of the level of the natural rate can carry substantial economic costs in terms of unemployment and inflation. A scenario using mistaken perceptions shows that the costs of overestimating the natural rate are greater than the cost of underestimating it if policy space is limited by the effective lower bound on the nominal federal funds rate.

2020

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Mary C. Daly
December 3, 2020

What lessons should we take from a difficult year—and what should our priorities be for 2021? Overcoming the harsh and uneven economic impacts of COVID-19 and returning to full employment and sustainable 2% inflation will be the Federal Reserve’s chief concerns. But success will require us to have confidence in the power of our tools. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the Arizona State University Economic Forecast Luncheon on December 1.

Andrew Foerster and Lily M. Seitelman
November 30, 2020

Separating U.S. economic output into permanent and transitory components can help explain the effects of recessions and expansions. GDP growth shifted to a lower trend rate in 2000, indicating a slowdown long before the 2008–09 recession. GDP was substantially above trend before that recession; it then declined significantly and did not recover to its trend rate until 2017. The recession resulted in permanent losses to GDP. Without those permanent effects, GDP at the end of the latest expansion would have been about $380 billion or $1,460 per person higher.

Remy Beauregard, Jose A. Lopez, and Mark M. Spiegel
November 23, 2020

Small businesses and farms were hit hard by restrictions that limited their ability to pay operating costs during the COVID-19 crisis. Banks played an important supportive role, substantially expanding the loans available to these firms during the early months of the crisis. The growth in lending was associated with small business participation in the Paycheck Protection Program (PPP) and bank use of the PPP Liquidity Facility. Analyzing data for the first half of 2020 suggests that these programs were successful in supporting lending growth during the crisis, particularly among small banks.

Erin Wolcott, Mitchell G. Ochse, Marianna Kudlyak, and Noah A. Kouchekinia
November 16, 2020

Temporary layoffs accounted for essentially the entire increase in unemployment to its historically high rate in April 2020. Although the rate has come down since its peak, unemployment remains well above pre-pandemic levels. There is little evidence that temporary layoffs are becoming permanent at a higher rate than in the past. However, the continuation of the health and economic crisis poses a risk that a growing share of unemployment will consist of people in persistent categories of joblessness, thereby slowing the overall recovery.

Gianluca Benigno, Andrew Foerster, Christopher Otrok, and Alessandro Rebucci
November 9, 2020

The COVID-19 pandemic produced a sharp contraction in capital flows in emerging markets during the spring of 2020. Such contractions are known as “sudden stops” and historically have been associated with significant downturns in a country’s economic activity. Evidence from Mexico’s financial crisis history suggests that sudden stops tend to exhibit a common pattern: the crisis lasts one to two years before a rapid but partial recovery, followed by years of protracted stagnation.

Mary C. Daly
October 19, 2020

Not every American gets the same chance at life, liberty, and the pursuit of happiness. We have to acknowledge and confront this reality—as individuals, as institutions, and as a nation. The Fed can help create more inclusive economic success by finding full employment experientially. But achieving true equality will require commitment from all of us. The following reflects remarks delivered in a virtual presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the University of California, Irvine, on October 13.

Kevin J. Lansing
October 13, 2020

History suggests that elevated values of the cyclically adjusted price-earnings (CAPE) ratio may indicate an overvalued stock market. A valuation model that uses a small set of economic variables can help account for movements in the CAPE ratio over the past six decades. One of these variables is a macroeconomic uncertainty index. Comparing the model’s prediction for the second and third quarters of 2020 to the 2008–2009 period suggests that investors have reacted to macroeconomic uncertainty very differently during the COVID-19 outbreak than they did during the financial crisis.

Sophia M. Friesenhahn and Simon H. Kwan
October 5, 2020

Many businesses had amassed high levels of debt, or leverage, before the COVID-19 pandemic. Out of precaution or necessity, firms increased their borrowing further after the onset. Although the shock to those firms’ value significantly increased their risk, measured by their distance-to-default, the default risk remains relatively small for most corporate debt. Nevertheless, the amount of outstanding liabilities among firms with elevated risk of insolvency is more than two times higher than at the peak of the global financial crisis.

Remy Beauregard and Mark M. Spiegel
September 28, 2020

Do extended periods of negative policy interest rates continue to encourage commercial bank lending? A large panel of European and Japanese banks provides evidence on the impact of negative rates over different lengths of time. Analysis suggests that both bank profitability and bank lending activity erode more the longer such negative policy rates continue, primarily due to banks’ reluctance to pass negative rates along to retail depositors. This appears to negate one of the main arguments for moving policy rates below the zero bound.

Nicolas Petrosky-Nadeau and Robert G. Valletta
September 21, 2020

People receiving unemployment insurance benefits during the COVID-19 recession were entitled to $600 of additional payments per week through July. This large increase in benefit payments raised a concern that recipients would delay returning to work. However, analysis suggests that the available aid would not outweigh the value of a longer-term stable income in workers’ decisions to accept job offers. Evidence from recent labor market outcomes confirms that the supplemental payments had little or no adverse effect on job search.

Regis Barnichon and Winnie Yee
September 3, 2020

Stay-at-home orders issued to slow the spread of COVID-19 may have severely distorted labor market statistics, notably the official unemployment rate. A method to correct the survey biases associated with the pandemic indicates that the true unemployment rate was substantially higher than the official rate in April and May. However, the biases appeared to fade thereafter, making the drop in June even more dramatic than implied by the official data.

Erin E. Crust, Mary C. Daly, and Bart Hobijn
August 31, 2020

Despite a sharp spike in unemployment since March 2020, aggregate wage growth has accelerated. This acceleration has been almost entirely attributable to job losses among low-wage workers. Wage growth for those who remain employed has been flat. This pattern is not unique to COVID-19 but is more profound now than in previous recessions. This means that, in the wake of the virus, evaluations of the labor market must rely on a dashboard of indicators, rather than any single measure, to paint a complete picture of the losses and the recovery.

Huiyu Li and Mitchell G. Ochse
August 27, 2020

Applications to start new businesses tanked from mid-March through May, contracting more severely than during the 2008–2009 financial crisis. Since then, however, applications have recovered so strongly that the total number filed in 2020 should be similar to that for 2019, even if applications growth reverts to the average lows experienced during the early days of the pandemic. This should result in only a modest loss of new businesses and is not likely to cause much additional strain on overall jobs and productivity gains.

Adam Hale Shapiro
August 24, 2020

Inflation fell dramatically following the onset of the COVID-19 pandemic. Dividing the underlying price data according to spending category reveals that a majority of the drop in core personal consumption expenditures inflation comes from a large decline in consumer demand. This demand effect far outweighs upward price pressure from COVID-related supply constraints. A new monthly data page from the San Francisco Fed tracks how sensitivity to the economic disruptions of COVID-19 affects different categories of inflation over time (discontinued September 2023).

Jens H.E. Christensen, Eric Fischer, and Patrick J. Shultz
August 17, 2020

The pandemic caused by the coronavirus is depressing economic activity and severely straining government budgets globally. Without international support, the ability of emerging economies to weather this crisis will depend crucially on access to and the cost of borrowing in domestic government bond markets. Analyzing bond flows and risk premiums for Mexican government bonds during the pandemic gives some insights into a major emerging economy’s experience. Mexican risk premiums have increased more than 1 percentage point above predicted levels, pointing to tighter funding conditions for the Mexican government.

Renuka Diwan, Sylvain Leduc, and Thomas M. Mertens
August 10, 2020

In response to the COVID-19 pandemic, the Federal Reserve cut the federal funds rate to essentially zero. It took further measures to support the functioning of financial markets and the flow of credit. Nevertheless, the economic downturn is putting downward pressure on inflation, which had already been running below the Fed’s 2% target for several years. This raises additional concerns that inflation expectations could decline and push inflation down further, ultimately hampering economic activity. A monetary policy framework based on average-inflation targeting could help address these challenges.

Andrew Foerster, Christian Matthes, and Lily M. Seitelman
August 3, 2020

Productivity growth shows evidence of switching between long periods of high and low average growth. Estimates suggest that the United States has been in the low-growth regime since 2004. Assuming this low growth continues, productivity growth in the year 2025 would be 0.6%. By dropping this assumption and allowing for a switch to consistent higher growth, an alternative estimate forecasts that the distribution of possible productivity growth across quarters could average about 1.1% in 2025.

Òscar Jordà, Noah Kouchekinia, Colton Merrill, and Tatevik Sekhposyan
July 15, 2020

In times of economic turbulence, revisions to GDP data can be sizable, which makes conducting economic policy in real time during a crisis more difficult. A simple model based on Okun’s law can help refine the advance data release of real GDP growth to provide an improved reading of economic activity in real time. Applying this to data from the Great Recession explains some of the massive GDP revisions at that time. This could provide a guide for possible revisions to GDP releases during the current coronavirus crisis.

James Aylward and Luiz E. Oliveira
July 13, 2020

The growing risk from natural disasters is a key economic effect of climate change. Severe wildfires are a leading example, and they are particularly important for the western states that make up the 12th Federal Reserve District. Analyzing data on wildfire hazard and economic activity confirms that these states are substantially more exposed to wildfire risk than the rest of the country. This gap in regional wildfire risk is likely to grow over time as climate change continues.

Galina Hale and Sylvain Leduc
July 6, 2020

One potential side effect from the rapid decline of global economic activity since the worldwide pandemic is a reduction in carbon dioxide emissions. Historically, CO2 emissions rise and fall in tandem with economic activity in the short run. Since the industries most affected by the downturn also produce the most CO2, emissions could drop more than output this time around. However, without substantial and sustained changes in energy sources and efficiency, the concentration of CO2 in the atmosphere—the relevant factor causing climate change—will continue on its upward trajectory.

Mary C. Daly, Shelby R. Buckman, and Lily M. Seitelman
June 29, 2020

Since COVID-19 hit the United States, more than 20 million American workers have become unemployed and countless others have left the labor force altogether. While the labor market disruptions have affected workers in a wide set of industries and occupations, those without a college degree have experienced the most severe impact. Addressing gaps in educational attainment will be important to creating better economic resiliency for individuals against future shocks.

Pascal Paul and Simon W. Zhu
June 22, 2020

While banks seem to face inherent risk from short-term interest rate changes, in practice they structure their balance sheets to avoid exposure to such risk. Nonetheless, recent research finds that banks cannot offload all of the interest rate risk they are naturally exposed to. Historically, banks’ profit margins reflect their compensation for taking on interest rate risk and their stock prices are highly sensitive to changes in interest rates. These findings can help practitioners assess banks’ risk exposures and may have implications for unconventional monetary policy.

Mary C. Daly
June 15, 2020

Three crises—health, economic, and social—are converging into one difficult moment in American history. Everyone has been affected, but the highest costs are falling on those least prepared to bear them. The path forward will require investments in “opportunity infrastructure” that maximize individual potential, reduce inequities, and lay the foundation for long-term economic growth. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the National Press Club, Washington, DC, on Monday, June 15.

Simon H. Kwan and Thomas M. Mertens
May 28, 2020

News about the COVID-19 public health crisis has affected asset prices to varying degrees across sectors of the U.S. economy. Stocks in the utilities, real estate, and energy sectors initially suffered the worst sector-specific shocks, while the information technology, health-care, and telecommunications sectors fared relatively better. Businesses with higher financial leverage saw larger declines in their valuations. A simultaneous repricing of credit derivatives suggests concerns about insolvency contributed to the valuation declines. Although some stocks are recovering from the initial lows, significant differences across sectors remain.

Daniel J. Wilson
May 26, 2020

The United States enacted a series of fiscal relief and stimulus bills in recent weeks, centered around the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The current fiscal response shares key similarities to the fiscal stimulus enacted during the Great Recession. Research over the past 10 years on the macroeconomic impact of that stimulus thus has important implications for the current fiscal response. The results point to a large potential impact on GDP.

Nicolas Petrosky-Nadeau and Robert G. Valletta
May 18, 2020

The COVID-19 pandemic has upended the U.S. labor market, with massive job losses and a spike in unemployment to its highest level since the Great Depression. How long unemployment will remain at crisis levels is highly uncertain and will depend on the speed and success of coronavirus containment measures. Historical patterns of monthly flows in and out of unemployment, adjusted for unique aspects of the coronavirus economy, can help in assessing potential paths of unemployment. Unless hiring rises to unprecedented levels, unemployment could remain severely elevated well into next year.

Jens H.E. Christensen, James M. Gamble IV, and Simon Zhu
May 11, 2020

The pandemic caused by COVID-19 represents an unprecedented negative shock to the global economy that is likely to severely depress economic activity in the near term. Could the crisis also put substantial downward pressure on price inflation? One way to assess the potential risk to the inflation outlook is by analyzing prices of standard and inflation-indexed government bonds. The probability of declining price levels—or deflation—among four major countries within the next year indicates that the perceived risk remains muted, despite the recent economic turmoil.

Pascal Paul and Joseph H. Pedtke
May 4, 2020

Long-run historical data for advanced economies provide evidence to help policymakers understand specific conditions that typically lead up to financial crises. Recent research finds that rapid growth in the top income share and prolonged low labor productivity growth are robust predictors of crises. Moreover, if crises are preceded by these developments, then the subsequent recoveries are slower. This recent empirical evidence suggests that financial crises are not simply random events but are typically preceded by a prolonged buildup of macrofinancial imbalances.

Vasco Cúrdia
April 13, 2020

The Federal Reserve slashed the federal funds rate in response to the effects of the COVID-19 pandemic. The full impact of the pandemic on the economy is still uncertain and depends on many factors. Analysis suggests that allowing the federal funds rate to fall fast will help the economy cope with the aftermath of COVID-19. In particular, the limited policy space due to the effective lower bound of the federal funds rate before the pandemic reinforces rather than offsets the need for a rapid funds rate decline.

Shelby R. Buckman, Adam Hale Shapiro, Moritz Sudhof, and Daniel J. Wilson
April 6, 2020

The COVID-19 pandemic is causing severe disruptions to daily life and economic activity. Reliable assessments of the economic fallout in this rapidly evolving situation require timely data. Existing sentiment indexes are useful indicators of current and future spending but are only available with a lag or have a short history. A new Daily News Sentiment Index provides a way to measure sentiment in real time from 1980 to today. Compared with survey-based measures of consumer sentiment, this index shows an earlier and more pronounced drop in sentiment in recent weeks.

Sylvain Leduc and Zheng Liu
March 30, 2020

The outbreak of the novel coronavirus, or COVID-19, has severely disrupted economic activity through various supply and demand channels. The pandemic can also have pervasive economic impact by raising uncertainty. In the past, sudden and outsized spikes in uncertainty have led to large and protracted increases in unemployment and declines in inflation. These effects are similar to those resulting from declines in aggregate demand. Monetary policy accommodation, such as interest rate cuts, can help cushion the economy from such uncertainty shocks.

Marianna Kudlyak and Mitchell G. Ochse
March 2, 2020

Unemployment is at a 50-year low. The low rate is not from an unusually high job-finding rate out of unemployment but, rather, an unusually low rate at which people enter unemployment. The low entry rate reflects a long-run downward trend likely due to population aging, better job matches, and other structural factors. These developments lowered the long-run unemployment rate trend. At the end of 2019, the unemployment rate was below the trend but no more so than in previous business cycle peaks, indicating that the labor market is no tighter.

Robert Amano, Thomas J. Carter, and Sylvain Leduc
February 24, 2020

U.S. inflation has remained below the Fed’s 2% goal for over 10 years, averaging about 1.5%. One contributing factor may be the impact from a higher probability of future monetary policy being constrained by the effective lower bound on interest rates. Model simulations suggest that this higher risk of hitting the lower bound may lead to lower expectations for future inflation, which in turn reduces inflation compensation for investors. The higher risk may also change household and business spending and pricing behavior. Taken together, these effects contribute to weaker inflation.

Mary C. Daly
February 18, 2020

Countries around the globe face slow growth, low real interest rates, and persistently low inflation. This makes economies less resilient and less able to offset everyday shocks with traditional tools. Policymakers must actively look for outside perspectives and be courageous enough to take action in times of uncertainty. The following is adapted from a speech by the president and CEO of the Federal Reserve Bank of San Francisco delivered as part of the Iveagh House Lectures at the Irish Department of Foreign Affairs and Trade in Dublin on February 10.

Kevin J. Lansing and Winnie Yee
February 10, 2020

Growth forecasts by Federal Open Market Committee meeting participants were persistently too optimistic for 2008 through 2016. The typical forecast started out high but was revised down over time, often dramatically, as incoming data failed to meet expectations. In contrast, forecasts for 2017 through 2019 started low but were revised up over time. Cumulative forecast revisions for these years were much smaller on average than in the past. These observations suggest that participants have adjusted their forecast methodology, including lowering estimates of trend growth, to eliminate the prior optimistic bias.

Marianna Kudlyak
January 13, 2020

The best predictor of someone from outside the labor force finding a job is how recently the person was employed, rather than their self-reported desire to work as is conventionally thought. Between 1999 and 2019, the composition of the out of the labor force group shifted towards people out of work for longer. Consequently, the pool has become less employable. This indicates that, even though the out of the labor force pool is larger, it does not signify additional labor market slack beyond that accounted for by the standard unemployment rate.

David Neumark and Peter Shirley
January 6, 2020

The Earned Income Tax Credit (EITC) substantially subsidizes earnings for low- to moderate-income families with children in the United States. Research has established that the EITC has positive short-term effects on the employment of less-educated single mothers and reduces overall poverty. The EITC may also generate higher earnings in the long run, as the short-run positive employment effects for low-skilled women accumulate into greater labor market experience that makes them more productive.

2019

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Galina B. Hale, Òscar Jordà, and Glenn D. Rudebusch
December 16, 2019

To better understand the implications of climate change for the financial sector and the broader economy, the Federal Reserve Bank of San Francisco recently hosted a conference on the economics of climate change to gather and debate the latest analyses from universities and policy institutions, nationally and abroad. It was the first Fed-sponsored conference devoted to investigating the economic and financial consequences and risks arising from climate change and potential policy responses.

Marianna Kudlyak
November 25, 2019

Involuntary part-time employment reached unusually high levels during the last recession and declined only slowly afterward. The speed of the decline was limited because of a combination of two factors: the number of people working part-time due to slack business conditions was declining, and the number of those who could find only part-time work continued to increase until 2013. Involuntary part-time employment recently returned to its pre-recession level but remains slightly elevated relative to historically low unemployment, likely due to structural factors.

Òscar Jordà and Alan M. Taylor
November 18, 2019

A country’s interest rate often reflects more than just the policy stance of its central bank. Movements in the global neutral rate of interest and the domestic neutral rate also play a significant role. Estimates from international models for Japan, Germany, the United Kingdom, and the United States show that central bank policy explains less than half of the variation in interest rates. The rest of the time, the central bank is catching up to trends dictated by productivity growth, demographics, and other factors outside of its control.

Peter J. Klenow, Huiyu Li, and Theodore Naff
November 4, 2019

U.S. productivity is growing slower than in the past. Meanwhile, sales have become increasingly concentrated in the largest businesses. Analysis suggests that IT innovation may have facilitated the rise in concentration by reducing the cost for large firms to enter new markets. This contributed to booming productivity growth from 1995 to 2005. Though large firms are more profitable, their expansion may have increased competition and reduced profit margins within markets. Lower profit margins in a given market could have deterred innovation, eventually lowering growth.

Jens H.E. Christensen
October 15, 2019

Given the low level of interest rates in many developed economies, negative interest rates could become an important policy tool for fighting future economic downturns. Because of this, it’s important to carefully examine evidence from economies whose central banks have already deployed such policies. Analyzing financial market reactions to the introduction of negative interest rates shows that the entire yield curve for government bonds in those economies tends to shift lower. This suggests that negative rates may be an effective monetary policy tool to help ease financial conditions.

John Fernald, Neil Gerstein, and Mark Spiegel
October 7, 2019

China’s official GDP shows that its pace of economic growth has slowed gradually since 2010 but remains remarkably high, around 6%. A new index, the China Cyclical Activity Tracker, or China CAT, provides an alternative way to measure fluctuations in Chinese economic activity using a weighted average of several non-GDP indicators. The index suggests that economic activity has slowed noticeably since 2017 to a pace slightly below trend. GDP growth statistics appear excessively smooth over recent years, but, as of mid-2019, are in line with the China CAT.

Sylvain Leduc and Zheng Liu
September 30, 2019

The portion of national income that goes to workers, known as the labor share, has fallen substantially over the past 20 years. Even with strong employment growth in recent years, the labor share has remained at historically low levels. Automation has been an important driving factor. While it has increased labor productivity, the threat of automation has also weakened workers’ bargaining power in wage negotiations and led to stagnant wage growth. Analysis suggests that automation contributed substantially to the decline in the labor share.

Michael D. Bauer and Thomas M. Mertens
September 23, 2019

Interest rate derivatives—financial investments whose value depends on interest rates—provide useful information about the risk of short-term rates falling again to the zero lower bound. According to new market-based estimates, the probability of a return to the lower bound by the end of 2021 is about 24%. This is roughly in line with other survey-based and model-based estimates of zero lower bound risk. In recent months, the market-based measure of lower bound risk has increased markedly.

Mary C. Daly
September 3, 2019

A new and less familiar economic environment has emerged in the United States and other countries. Our collective futures now include slower potential growth, lower long-term interest rates, and persistently weak inflation. This new landscape demands we think differently about how to balance and achieve price stability and full employment objectives. The following is adapted from a speech by the president and CEO of the Federal Reserve Bank of San Francisco to the conference “Inflation Targeting—Prospects and Challenges” in Wellington, New Zealand, on August 29.

Jens H.E. Christensen and Mark M. Spiegel
August 26, 2019

After Japan introduced a negative policy interest rate in 2016, market expectations for inflation over the medium term fell immediately. This can be seen by assessing how prices for Japanese bonds with embedded deflation protection responded to the policy announcement. The reaction stresses the uncertainty surrounding the effectiveness of negative policy rates as expansionary tools when inflation expectations are anchored at low levels. Japan’s experience also illustrates the desirability of taking preemptive steps to avoid the zero interest rate bound.

Nicolas Petrosky-Nadeau and Robert G. Valletta
August 19, 2019

Unemployment is running near its 50-year low, but inflation has not picked up as expected. This suggests that the unemployment rate consistent with stable inflation has fallen. Combining a conventional Phillips curve tradeoff between unemployment and inflation with a noninflationary unemployment rate that can change over time shows that estimates of this unemployment threshold have declined toward 4% in recent years. One possible reason for this decline is improvements in how job matches are made, reflected in unusually favorable job-finding rates for disadvantaged groups.

Neil Gerstein, Bart Hobijn, Fernanda Nechio, and Adam Shapiro
August 5, 2019

In June 2016, citizens of the United Kingdom voted to leave the European Union by a small majority. This looming departure became known as “Brexit.” As a consequence of the Brexit referendum, the British pound depreciated sharply, and overall inflation ramped up in the following months. Comparing price movements between tradable and nontradable goods shows that close to two-thirds of the inflation spike in the United Kingdom since the Brexit vote can be attributed to the sharp movement in the exchange rate.

Òscar Jordà, Chitra Marti, Fernanda Nechio, and Eric Tallman
July 15, 2019

A hot economy eventually boosts inflation. Such is the simple wisdom of the Phillips curve. Yet inflation across developed countries has been remarkably weak since the 2008 global financial crisis, even though unemployment rates are near historical lows. What is behind this recent disconnect between inflation and unemployment? Contrasting the experiences of developed and developing economies before and after the financial crisis shows that broader factors than monetary policy are at play. Inflation has declined globally, and this trend preceded the financial crisis.

Andrew Foerster, Andreas Hornstein, Pierre-Daniel Sarte, and Mark Watson
July 8, 2019

Trend GDP growth has slowed about 2.3 percentage points to 1.7% since 1950. Different economic sectors have contributed to this slowing to varying degrees depending on the distinct trends of technology and labor growth in each sector. The extent to which sectors influence overall growth depends on the degree of spillovers to other sectors, which amplifies the effect of sectoral changes. Three sectors with slowing growth and linkages to other sectors—construction, nondurable goods, and professional and business services—account for 60% of the decline in trend GDP growth.

John Fernald and Huiyu Li
June 24, 2019

Estimates suggest the new normal pace for U.S. GDP growth remains between 1½% and 1¾%, noticeably slower than the typical pace since World War II. The slowdown stems mainly from demographic trends that have slowed labor force growth, about which there is relatively little uncertainty. A larger challenge is productivity. Achieving GDP growth consistently above 1¾% will require much faster productivity growth than the United States has typically experienced since the 1970s.

Andrew Foerster and Sylvain Leduc
June 3, 2019

The Federal Reserve’s balance sheet is significantly larger today than it was before the financial crisis of 2008–2009. Rising demand for currency due to greater economic activity is partly responsible for this increase. The balance sheet will also need to remain large because the Federal Reserve now implements monetary policy in a regime of ample reserves, using a different set of tools than in the past to achieve its interest rate target.

Regis Barnichon
May 20, 2019

Labor force participation among prime-age workers has climbed over the past few years, reversing from the substantial drop during and after the last recession. These gains might suggest that the strength of the job market is pulling people from the sidelines into the labor force. However, analysis that accounts for underlying flows between labor force states shows that, rather than drawing new people in, the hot labor market has instead reduced the number of individuals who are dropping out.

Jens H.E. Christensen
May 13, 2019

Following the global financial crisis, U.S. monetary policy was constrained by the zero lower bound for short-term interest rates for many years. It has since lifted off and rates have gradually climbed. However, in light of the continuing economic expansion, it is relevant to ask how likely it is for the lower bound on interest rates to again become a constraint on monetary policy. Analysis using several different approaches suggests that there currently appears to be a low risk of the economy returning to the zero lower bound for at least the next several years.

Kevin J. Lansing
May 6, 2019

A key challenge for monetary policymakers is to predict where inflation is headed. One promising approach involves modifying a typical Phillips curve predictive regression to include an interaction variable, defined as the multiplicative combination of lagged inflation and the lagged output gap. This variable appears better able to capture the true underlying inflationary pressure associated with the output gap itself. Including the interaction variable helps improve the accuracy of Phillips curve inflation forecasts over various sample periods.

Adam Shapiro and Daniel J. Wilson
April 15, 2019

Analyzing the narrative of historical Federal Open Market Committee meeting transcripts provides insights about how inflation target preferences of participants have evolved over time. From around 2000 until the Great Recession, there was general consensus among participants that their inflation target should be about 1½%, significantly below both average inflation over the period and survey measures of longer-run inflation expectations. By the end of the recession in 2009, however, the consensus had shifted up to 2%, which became the official target announced to the public in January 2012.

Pascal Paul
April 8, 2019

In assessing the current or near-term state of the economy, forecasts from Federal Reserve staff seem to provide little additional information to improve commercial forecasts. However, Fed forecasts for economic growth a year or more in the future substantially enhance the accuracy of private-sector forecasts. The Fed’s policy announcements often reveal some of this forecast information. Accordingly, when the Fed surprises financial markets with indications of higher future interest rates, private forecasters tend to revise up their projections of future output growth.

Simon Kwan
April 1, 2019

Real estate has hit record high prices and elevated valuations in some markets. Do bank lenders have sufficient capital to withstand a large price drop? While their portfolios have a similar concentration in real estate as they did before the global financial crisis, both underwriting standards and capitalization have improved significantly since then. Estimates using the Federal Reserve’s stress test scenarios suggest that, although a few small banks would be undercapitalized, the banking sector overall appears resilient enough to weather a steep decline in real estate prices.

Glenn D. Rudebusch
March 25, 2019

Climate change describes the current trend toward higher average global temperatures and accompanying environmental shifts such as rising sea levels and more severe storms, floods, droughts, and heat waves. In coming decades, climate change—and efforts to limit that change and adapt to it—will have increasingly important effects on the U.S. economy. These effects and their associated risks are relevant considerations for the Federal Reserve in fulfilling its mandate for macroeconomic and financial stability.

Pascal Paul
March 4, 2019

Research has revealed several facts about financial crises based on historical data. Crises are rare events that are associated with severe recessions that are typically deeper than normal recessions. They are usually preceded by a buildup of system imbalances, particularly a rapid increase of credit. Financial crises tend to occur after prolonged booms but do not necessarily result from large shocks. Recent work shows a novel way to replicate these facts in a standard macroeconomic model, which policymakers could use to gain insights to prevent future crises.

Galina Hale, Bart Hobijn, Fernanda Nechio, and Doris Wilson
February 25, 2019

Imports from China are an important part of overall U.S. imports of consumer and investment goods. Thus, tariffs on these imports are likely to have sizable effects on consumer, producer, and investment prices in this country. Tariffs implemented thus far may have contributed an estimated 0.1 percentage point to consumer price inflation and 0.4 percentage point to price inflation for business investment goods. If implemented, an across-the-board 25% tariff on all Chinese imports would raise consumer prices an additional 0.3 percentage point and investment prices an additional 1.0 percentage point.

Galina Hale, Jose A. Lopez, and Shannon Sledz
February 19, 2019

The financial crisis provided a stark example of how interconnected the financial system is. Since then, researchers have developed several ways to monitor patterns of connectedness within the banking system. A key challenge is removing the impact of conditions that affect all banks in order to highlight evidence of direct connectedness. A new measure filters these common factors from bank stock market data. Estimates using this method show how different assumptions can affect conclusions about the connections among banks.

Òscar Jordà, Chitra Marti, Fernanda Nechio, and Eric Tallman
February 11, 2019

The well-known Phillips curve describes inflation as a persistent process that depends on public expectations of future inflation and economic slack, a measure of how stretched the economy’s resources are. The role of each component has changed over time. In particular, maintaining the public’s expectations that the Federal Reserve is committed to an inflation target of 2% has grown in importance over the slack component, in part because realigning expectations is costly to undo. Such considerations are important as the Federal Reserve evaluates its future policy options.

Vasco Cúrdia
February 4, 2019

The Federal Reserve dropped the federal funds rate to near zero during the Great Recession to bolster the U.S. economy. Allowing the federal funds rate to drop below zero may have reduced the depth of the recession and enabled the economy to return more quickly to its full potential. It also may have allowed inflation to rise faster toward the Fed’s 2% target. In other words, negative interest rates may be a useful tool to promote the Fed’s dual mandate.

Huiyu Li
January 22, 2019

In official statistics, manufacturing is the top contributor to U.S. productivity growth despite its shrinking share of employment. However, official numbers tend to understate growth among new producers that improve on existing producers, which is more prevalent outside of manufacturing. Accounting for such missing productivity growth shows that it plays a larger role in sectors such as retail trade and services. Also, the relative contribution of manufacturing to productivity growth has dropped significantly. These findings suggest that nonmanufacturing may be an increasingly important engine of U.S. growth.

Sylvain Leduc, Chitra Marti, and Daniel J. Wilson
January 14, 2019

The unemployment rate ended 2018 at just under 4%, substantially lower than most estimates of the natural rate. Could such an ostensibly tight labor market lead to a sharp pickup in wage growth from its recent moderate pace, such that the relationship between wage growth and unemployment is not always linear? Investigations using state-level data show no economically significant nonlinearity between wage growth and unemployment that would predict an abrupt jump in wage growth.

Galina Hale, Bart Hobijn, Fernanda Nechio, and Doris Wilson
January 7, 2019

When U.S. shoppers buy something imported, are they also paying for local inputs? How much of what is “Made in the U.S.A.” actually is? These questions require accounting for both the U.S. components in the price of imported goods and the use of imported inputs in U.S. production. Estimates show that nearly half of spending on imports stays in the United States, paying for the local components of these goods. Over 10 cents of every dollar U.S. consumers spend reflects the cost of imports at various stages of production.

2018

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Kevin J. Lansing and Michael Tubbs
December 24, 2018

Studies that seek to forecast stock price movements often consider measures of market sentiment or stock return momentum as predictors. Recent research shows that a multiplicative combination of sentiment and momentum can help predict the return on the Standard & Poor’s 500 stock index over the next month. This predictive power derives mainly from periods when sentiment has been declining over the past year and recent return momentum is negative—periods that coincide with an increase in investor attention to the stock market as measured by a Google search volume index.

David Neumark and Bogdan Savych
December 10, 2018

Some reports blame opioid use for part of the decline in labor force participation among adult men. Estimates based on workers’ compensation data shed light on the relationship between opioid prescriptions and the return to work among people who suffer work-related low-back injuries, for which opioid use is common. Differences in opioid prescribing patterns across locations demonstrate how various use of these medications can impact how quickly workers return to work. When opioids are prescribed for longer-term treatment, workers have considerably longer durations of temporary disability following an injury.

Glenn D. Rudebusch
December 3, 2018

The Federal Reserve has typically used a short-term interest rate as the policy tool for achieving its macroeconomic goals. However, with short-term rates constrained near zero for much of the past decade, the Fed was impelled to use two unconventional monetary policy tools: forward guidance and quantitative easing. These tools likely strengthened the economic recovery and helped return inflation to the Fed’s target—although their full impact remains uncertain.

Adam Shapiro
November 26, 2018

A key measure of inflation finally reached the Fed’s 2% target in July after remaining persistently below that for years after the end of the last recession. Analysis shows that most of the increase in personal consumption expenditures price inflation towards the Fed’s target can be attributed to acyclical factors and are not due to a strengthening economy. While risks to the outlook for inflation appear broadly balanced, they include the considerable possibility that inflation has not yet sustainably reached target.

Andreas Hornstein, Marianna Kudlyak, and Annemarie Schweinert
November 19, 2018

A labor force participation rate that is at or above its long-run trend is consistent with a labor market at or above full employment. In 2018, the estimated rate is at its trend of 62.8%, suggesting that the labor market is at full employment. Studying the population’s demographic makeup and labor trends for different groups sheds some light on what is driving the aggregate participation trend and implications for the future. Projections based on these trends estimate that labor participation will decline about 2.5 percentage points over the next decade.

Mary C. Daly, Joseph H. Pedtke, Nicolas Petrosky-Nadeau, and Annemarie Schweinert
November 13, 2018

Labor force participation among U.S. men and women ages 25 to 54 has been declining for nearly 20 years, a stark contrast with rising participation in Canada over this period. Three-fourths of the difference between the two countries can be explained by the growing gap in labor force attachment of women. A key factor is the extensive parental leave policies in Canada. If the United States could reverse the trend in participation of prime-age women to match Canada, it would see 5 million additional prime-age workers join the labor force.

Jens H.E. Christensen
October 15, 2018

The yield spread between long-term and short-term Treasury securities is known to be a good predictor of economic activity, particularly of looming recessions. One way to learn more is through a careful scrutiny of the historical variation of such yield spreads and how they relate to the current slope of the Treasury yield curve. The results suggest that the recent flattening of the yield curve implies only a slightly elevated risk of a recession in the near term relative to any other month.

Jess Benhabib, Ben Shapiro, and Mark M. Spiegel
October 1, 2018

People’s feelings about the economy have been shown to be strongly connected to a state’s current economic health over short horizons. So, how well do such consumer sentiment measures coincide with economic growth over a longer period? Sentiment shocks are associated with large and statistically significant changes in state economic output over as long as a three-year horizon. While the sentiment shocks initially affect state consumption expenditures to a smaller degree, the impact tends to be more persistent, continuing as long as five years after the initial shock.

Rob Valletta and Nathaniel Barlow
September 10, 2018

U.S. labor force participation by people in their prime working years fell substantially during the Great Recession, and it remains depressed despite some recovery since 2015. This appears to reflect longer-term developments, rather than lingering effects from the recession. One key factor is labor market polarization—manifested in the gradual disappearance of manual jobs—which helps predict declining worker attachment across states. This has been reinforced by other long-term economic and social trends, such as health considerations, that also have eroded prime-age labor force attachment.

Michael D. Bauer and Thomas M. Mertens
August 27, 2018

The ability of the Treasury yield curve to predict future recessions has recently received a great deal of public attention. An inversion of the yield curve—when short-term interest rates are higher than long-term rates—has been a reliable predictor of recessions. The difference between ten-year and three-month Treasury rates is the most useful term spread for forecasting recessions—without any adjustment for an estimate of the underlying term premium. However, such correlations in the data do not identify cause and effect, which complicates their interpretation.

Regis Barnichon, Christian Matthes, and Alexander Ziegenbein
August 13, 2018

A decade after the last financial crisis and recession, the U.S. economy remains significantly smaller than it should be based on its pre-crisis growth trend. One possible reason lies in the large losses in the economy’s productive capacity following the financial crisis. The size of those losses suggests that the level of output is unlikely to revert to its pre-crisis trend level. This represents a lifetime present-value income loss of about $70,000 for every American.

Tim Mahedy and Daniel J. Wilson
July 9, 2018

Thanks in large part to recently enacted tax cuts, U.S. fiscal policy has taken a decidedly procyclical turn—providing stimulus when the economy is growing. In fact, the projected increase in the federal deficit over the next few years would represent the most procyclical fiscal policy stance since the Vietnam War. This matters because many recent studies have found that fiscal stimulus has a smaller impact when the economy is strong, implying that the near-term boost to GDP growth could be two-thirds or less of that from previous tax cuts.

James Aylward, Kevin J. Lansing, and Tim Mahedy
June 25, 2018

Gross domestic income and gross domestic product—GDI and GDP—measure aggregate economic activity using income and expenditure data, respectively. Discrepancies between the initial estimates of quarterly growth rates for these two measures appear to have some predictive power for subsequent GDP revisions. However, this power has weakened considerably since 2011. Similarly, the first revision to GDP growth has less predictive power in forecasting subsequent revisions since 2011. One possible explanation is that evolving data collection and estimation methods have helped improve initial GDP and GDI estimates.

Jens H.E. Christensen, Eric Fischer, and Patrick Shultz
June 18, 2018

Many investors have turned to emerging market bonds seeking higher returns in the current low interest rate environment. This raises a natural question about the potential for financial instability if investors choose to sell off those bonds quickly. Studying how changes in foreign holdings of Mexican government bonds known as bonos affected their liquidity premiums provides an assessment of the risks and benefits from foreign investment in an emerging economy. Results show that the larger foreign market share of Mexican sovereign bonds tends to increase their liquidity risk premium.

Mary C. Daly
June 4, 2018

For the economics profession to become more diverse, leaders must focus on building an inclusive culture that welcomes new voices and listens to new ideas. This means putting out the welcome mat, asking newcomers what they think, and letting their answers influence our future. That will be key to changing the statistics. The following is adapted from a speech by the director of research of the Federal Reserve Bank of San Francisco to the Gender and Career Progression Conference at the Bank of England in London on May 14.

Zheng Liu, Mark M. Spiegel, and Eric B. Tallman
May 29, 2018

Since late 2015, growth in real GDP has consistently exceeded that in real GDI, a prominent alternative measure of aggregate output, with an average difference of about 0.65 percentage point. Is real GDP overstating the expansion? One way to address this question is by comparing the accuracy of these measures in forecasting a benchmark measure of economic activity, the Chicago Fed National Activity Index. The comparison suggests that GDP consistently outperforms GDI in predicting recent real economic activity. Therefore, the weaker GDI growth does not necessarily indicate slower economic growth.

John C. Williams
May 21, 2018

In the current economic environment, it’s important to distinguish between the strong economic conditions and the key longer-run drivers underpinning interest rates. Three factors—demographics, productivity growth, and the demand for safe assets—all point to the natural rate of interest, known as r-star, remaining low for quite some time. The following is adapted from a speech by the president and CEO of the Federal Reserve Bank of San Francisco to the Economic Club of Minnesota in Minneapolis on May 15.

Galina Hale, Arvind Krishnamurthy, Marianna Kudlyak, and Patrick Shultz
May 7, 2018

From Bitcoin’s inception in 2009 through mid-2017, its price remained under $4,000. In the second half of 2017, it climbed dramatically to nearly $20,000, but descended rapidly starting in mid-December. The peak price coincided with the introduction of bitcoin futures trading on the Chicago Mercantile Exchange. The rapid run-up and subsequent fall in the price after the introduction of futures does not appear to be a coincidence. Rather, it is consistent with trading behavior that typically accompanies the introduction of futures markets for an asset.

Marios Karabarbounis, Marianna Kudlyak, and M. Saif Mehkari
April 16, 2018

What is the effect of government spending on private consumption? Estimates show that stimulus distributed through the American Recovery and Reinvestment Act had a large positive effect. Estimates from regional data suggest every $100 of stimulus generated an additional $18 within regions. Furthermore, by accounting for economic connections that spread the impact beyond regional borders, a new study finds that every $100 triggered an increase of $40 in overall private consumption in the economy.

John C. Williams
April 9, 2018

The U.S. economy is on course to be as strong as in many decades, and inflation is moving closer to the Federal Reserve’s target. The challenge for monetary policy is to keep it that way. While this is never an easy task, the Fed is well positioned to achieve its goals and respond to unexpected developments. The following is adapted from a speech by the president and CEO of the Federal Reserve Bank of San Francisco to the World Affairs Council of Sonoma in Santa Rosa, CA, on April 6.

Mary C. Daly
April 2, 2018

The U.S. economy is facing a future of slow growth, mainly because the labor force is expanding less rapidly. However, there are ways to improve. Given the important role education plays in labor force participation, employment, and wages, investing in education across diverse groups offers an important opportunity to raise the speed limit for economic growth. The following is adapted from a speech by the executive vice president and director of research of the Federal Reserve Bank of San Francisco to Lambda Alpha International Land Economics Society in Phoenix, AZ, on March 29.

Jens H.E. Christensen
March 26, 2018

Some governments sell bonds that protect against variation in inflation. Payments of these bonds are adjusted in response to official inflation measurements with a lag. Considering the effects of such lags could matter both for understanding market-based measures of inflation compensation and for governments deciding what type of inflation-indexed securities to issue. Analyzing pairs of U.K. bonds with almost identical maturities but different lags in inflation adjustment suggests that the lag length matters mainly close to maturity, when seasonality in the underlying price index plays a role.

Michael D. Bauer and Thomas M. Mertens
March 5, 2018

The term spread—the difference between long-term and short-term interest rates—is a strikingly accurate predictor of future economic activity. Every U.S. recession in the past 60 years was preceded by a negative term spread, that is, an inverted yield curve. Furthermore, a negative term spread was always followed by an economic slowdown and, except for one time, by a recession. While the current environment is somewhat special—with low interest rates and risk premiums—the power of the term spread to predict economic slowdowns appears intact.

Pascal Paul
February 26, 2018

Recent research suggests that sustained accommodative monetary policy has the potential to increase financial instability. However, under some circumstances tighter monetary policy may increase financial fragility through two channels. First, a surprise tightening tends to reduce the market value of banks’ equity and raise their market leverage, exacerbating balance sheet fragility in the short run. Second, increases in the federal funds rate have historically been followed by an expansion of assets held by money market funds, which proved to be a source of instability in the 2007-09 financial crisis.

David Neumark, Judith K. Hellerstein, and Mark J. Kutzbach
February 20, 2018

Labor market networks are informal connections among neighbors, coworkers, family, and friends that help people find jobs through sharing information about job openings or applicants. These networks appear to play a valuable role in helping workers recover after mass layoffs. Among relatively low-skilled workers who lost their jobs in mass layoffs, those living in neighborhoods with stronger labor market connections among neighbors found new jobs more quickly. Moreover, workers who found jobs through network connections also found better positions that paid more and lasted longer.

John Fernald, Robert E. Hall, James H. Stock, and Mark W. Watson
February 12, 2018

U.S. output has expanded only slowly since the recession trough in 2009, counter to normal expectations of a rapid cyclical recovery. Removing cyclical effects reveals that the deep recession was superimposed on a sharply slowing trend in underlying growth. The slowing trend reflects two factors: slow growth of innovation and declining labor force participation. Both of these powerful adverse forces were in place before the recession and, thus, were not the result of the financial crisis or policy changes since 2009.

John C. Williams
February 5, 2018

The expansion is proceeding at a good pace, unemployment is low, and inflation is finally headed in the right direction. The data show no signs of an economy going into overdrive. This suggests that further gradual increases in interest rates are likely in 2018, assuming the data continue to come in largely as expected. The following is adapted from remarks by the president and CEO of the Federal Reserve Bank of San Francisco to the Financial Women of San Francisco on February 2.

Rhys Bidder, John Krainer, and Adam Shapiro
January 22, 2018

When lenders experience unexpected losses, the supply of credit to borrowers can be disrupted. Researchers and policymakers have long sought estimates of how the availability of loans changes following a shock. The sudden oil price decline in 2014 offers an opportunity to observe precisely how affected lenders altered their portfolios. Banks that were involved with oil and gas producers cut back on some types of lending—consistent with traditional views of bank behavior. However, they expanded other types of lending and asset holdings with a bias towards less risky securities.

Thomas Mertens, Patrick Shultz, and Michael Tubbs
January 8, 2018

Current valuation ratios for U.S. equities and household net worth are high relative to historical benchmarks. The cyclically adjusted price-to-earnings ratio reached its third highest level on record recently, and the ratio of household net worth to disposable income, which includes a broad set of household assets, stands at a record high. Such extreme values of these ratios have historically been followed by reversions toward their long-run averages. However, other current factors, such as low interest rates, caution against bearish forecasts.

2017

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John C. Williams
December 18, 2017

The economy is in a good place. Unemployment is low and confidence is high. The challenges to address are good ones: keeping the expansion going, bringing inflation up to its 2% target, and using this period to normalize monetary policy in general and interest rates in particular. The years ahead will require a balanced approach, guided by the data. The following is adapted from remarks by the president and CEO of the Federal Reserve Bank of San Francisco at the 54th Annual Economic Forecast, Phoenix, AZ, on November 29.

Tim Mahedy and Adam Shapiro
November 27, 2017

After eight years of economic recovery, inflation remains below the FOMC’s target. Dissecting the underlying price data by spending category reveals that low inflation largely reflects prices that are relatively insensitive to overall economic conditions. Notably, modest increases in health-care prices, which have been held down by mandated cuts to the growth of Medicare payments, have helped moderate overall inflation. Further slow growth in health-care prices is likely to remain a drag on inflation.

Michael D. Bauer
November 20, 2017

When the Federal Reserve raises short-term interest rates, the rates on longer-term Treasuries are generally expected to rise. However, even though the Fed has raised short-term interest rates three times since December 2016 and started reducing its asset holdings, Treasury yields have dropped instead. This decoupling of short-term and long-term rates is reminiscent of the “Greenspan conundrum” of 2004–05. This time, however, evidence suggests compelling explanations—a lower “normal” interest rate, the risk of persistently low inflation, and fiscal and geopolitical uncertainty—may account for the yield curve flattening.

Kevin J. Lansing
November 13, 2017

History suggests that extreme run-ups in the cyclically adjusted price-earnings ratio are a signal that the stock market may be overvalued. A simple regression model using a small set of macroeconomic explanatory variables can account for most of the run-up in the CAPE ratio since 2009, offering some justification for its current elevated level. The model predicts a modest decline in the ratio over the next decade. All else being equal, such a decline would imply lower stock returns relative to those in recent years when the ratio was rising.

John C. Williams
November 6, 2017

Potential output—the maximum amount an economy can produce over the long run—is an important indicator policymakers use to gauge a country’s current economic health and expectations for future growth. However, potential output can’t be observed directly, and estimating it is difficult, even with modern, sophisticated methods. Monetary policymakers are well advised to account for the perennial problem of uncertainty surrounding these estimates in devising and carrying out policy strategies.

Pete Klenow and Huiyu Li
October 23, 2017

When products disappear from the market with no substitutes from the same manufacturer, they may have been replaced by cheaper or better products from a different manufacturer. Official measurements typically approximate price changes from such creative destruction using price changes for products that were not replaced. This can lead to overstating inflation and, in turn, understating economic growth. A recent estimate suggests that around 0.6 percentage point of growth is missed per year. The bias has not increased over time, however, so it does not explain the slowdown in productivity growth.

Sylvain Leduc and Daniel J. Wilson
October 16, 2017

Although the labor market has steadily strengthened, wage growth has remained slow in recent years. This raises the question of whether the wage Phillips curve—the traditional relationship between labor market slack and wage growth—has weakened. Estimating a causal link from slack to wage growth using national data is difficult. However, using city-level data over the past 25 years shows that the cross-city relationship has weakened since the Great Recession. Explanations consistent with this timing suggest that the Phillips curve may return to a steeper curve in the future.

John C. Williams
October 10, 2017

The Federal Reserve is moving towards more normal monetary policy, which means rising interest rates. But factors including the real natural rate of interest, a slower sustainable pace of growth, and inflation all point to a new normal where interest rates are lower than in the 1990s and early 2000s. The following is adapted from a speech by the president and CEO of the Federal Reserve Bank of San Francisco to the Community Banking in the 21st Century Research and Policy Conference in St. Louis on October 5.

Thomas M. Mertens and Patrick Shultz
October 2, 2017

Exchange rate stabilization or currency “pegs” are among the most prevalent interventions in international financial markets. Removing a peg to a safer currency can make the home currency more risky and less attractive to investors. When a country with market influence removes its peg from a safer country, the risk associated with holding either currency can be affected. Analyzing the effects of a scenario that changes a peg of the renminbi from the U.S. dollar to a basket of currencies suggests that China’s interest rates increase while U.S. interest rates decrease.

Carlos Carvalho, Andrea Ferrero, and Fernanda Nechio
September 25, 2017

Interest rates have been trending down for more than two decades. One possible explanation is the dramatic worldwide demographic transition, with people living longer and population growth rates declining. This demographic transition in the United States—particularly the steady increase in life expectancy—put significant downward pressure on interest rates between 1990 and 2016. Because demographic movements tend to be long-lasting, their ongoing effects could keep interest rates near the lower bound longer. This has the potential to limit the scope for central banks to respond to future recessionary shocks.

Mary C. Daly, Bart Hobijn, and Joseph H. Pedtke
September 5, 2017

More than half a century since the Civil Rights Act became law, U.S. workers continue to experience different levels of success depending on their race. Analysis using microdata on earnings shows that black men and women earn persistently lower wages compared with their white counterparts and that these gaps cannot be fully explained by differences in age, education, job type, or location. Especially troubling is the growing unexplained portion of the divergence in earnings for blacks relative to whites.

Andreas Hornstein and Marianna Kudlyak
August 28, 2017

During the recession and recovery, hiring has been slower than might be expected considering the large numbers of vacant jobs and unemployed individuals. This raises some concern about structural changes in the process of matching job seekers with employers. However, the standard measures account for only the unemployed and not those who are out of the labor force. Including other non-employed groups in the measured pool of job seekers while adjusting for different job finding rates among these groups shows that the decline in matching efficiency is similar to earlier declines.

Deepa D. Datta and Robert J. Vigfusson
August 21, 2017

Although China’s growth has slowed recently, the country’s demand for oil could be entering a period of faster growth that could result in substantially higher oil prices. Because Americans buy and sell oil and petroleum products in the global market, global demand prospects influence the profitability of U.S. oil producers and the costs paid by U.S. consumers. Analysis based on the global relationship between economic development and oil demand illustrates the prospects for Chinese oil demand growth and the resulting opportunities and challenges for U.S. producers and consumers.

Regis Barnichon and Christian Matthes
August 14, 2017

The natural rate of unemployment, or u-star, is used by economists and policymakers to help assess the overall state of the labor market. However, the natural rate is not directly observable and must be estimated. A new statistical approach estimates the natural rate over the past 100 years. Results suggest the natural rate has been remarkably stable over history, hovering between 4.5 and 5.5% for long periods, even during the Great Depression. Recent readings on the unemployment rate have been running slightly below the natural rate estimate.

John C. Williams
August 7, 2017

As the economy has transitioned from recovery to expansion, the role of monetary policy has shifted to sustaining the expansion by gradually moving conventional and unconventional policy back to normal. But monetary policy is reaching its limit for stimulating growth, calling for private and public sector investments and policies to step up and take the lead. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the Economic Club of Las Vegas in Las Vegas on August 2.

Michael D. Bauer
July 31, 2017

Interest rates are inherently difficult to predict, and the simple random walk benchmark has proven hard to beat. But macroeconomics can help, because the long-run trend in interest rates is driven by the trend in inflation and the equilibrium real interest rate. When forecasting rates several years into the future, substantial gains are possible by predicting that the gap between current interest rates and this long-run trend will close with increasing forecast horizon. This evidence suggests that accounting for macroeconomic trends is important for understanding, modeling, and forecasting interest rates.

Patrick Kiernan and Huiyu Li
July 10, 2017

The pace of business start-ups in the United States has declined over the past few decades. Economic theory suggests that business creation depends on the available workforce, and data analysis supports this strong link. By contrast, the relationship between start-ups and labor productivity is less well-defined, in part because entrepreneurs face initial costs that rise with productivity, specifically their own lost income from alternative employment. Overall, policies that incorporate improving labor availability may help to boost new business growth.

John C. Williams
July 3, 2017

Demographic factors like slowing population and labor force growth, along with a global productivity slowdown, are fundamentally redefining achievable economic growth. These global shifts suggest the disappointing growth in recent years is a harbinger of the future. While the causes of the growth slump are well defined, the consequences will be shaped by choices that policymakers are grappling with around the globe. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco at Macquarie University, Sydney, Australia, on June 27.

John Fernald, Thomas M. Mertens, and Patrick Shultz
June 26, 2017

Interest rates in the United States have diverged from the rates of other countries over the past few years. Some commentators have voiced concerns that, as a result, exchange rates might be more sensitive to unanticipated changes in U.S. interest rates now than they were historically. However, an examination of market-based measures of policy expectations finds no convincing evidence that the U.S. dollar has become more sensitive since 2014.

Jens H.E. Christensen and Glenn D. Rudebusch
June 19, 2017

Interest rates during the current economic recovery have been unusually low. Some have argued that yields have been pushed down by declines in longer-run expectations of the normal inflation-adjusted short-term interest rate—that is, by a drop in the so-called equilibrium or natural rate of interest. New evidence from financial markets shows that a decline in this rate has indeed contributed about 2 percentage points to the general downward trend in yields over the past two decades.

Kevin J. Lansing
May 30, 2017

Investors’ demand for safe assets tends to increase when there’s more uncertainty, as in recessions. Consistent with this idea, short-term movements in the natural rate of interest, or r-star, are negatively correlated with an index of macroeconomic uncertainty. This relationship may be relevant for assessing monetary policy. An estimated policy rule that incorporates both r-star and the uncertainty index can largely reproduce the path of the federal funds rate since 1988, except during periods when policy was constrained by the zero lower bound.

Zheng Liu and Mark M. Spiegel
May 22, 2017

China’s central bank frequently adjusts its reserve requirements for commercial banks as a way to stabilize economic fluctuations. These adjustments affect the overall credit supply but can also lead to the reallocation of credit and capital. Evidence shows that increases in reserve requirements raise off-balance-sheet lending, which typically benefits China’s more productive private sector, at the expense of on-balance-sheet loans to less productive state-owned enterprises. Under certain conditions, reserve requirements can be a useful additional policy instrument for improving resource allocations and also for macroeconomic stabilization in China.

James A. Wilcox
May 15, 2017

Consumer attitudes about buying and selling homes can inform us about future housing and mortgage markets. The Home Purchase Sentiment Index (HPSI) summarizes data from the National Housing Survey on consumers’ conditions, attitudes, and intentions about housing. The HPSI shows promise both as a stand-alone indicator and as a supplement for evaluating and forecasting housing and mortgage markets. Analysis reveals the index accurately projected strong home sales in 2014 and 2015 and a weaker outlook toward the end of 2016, following the sharp rise in mortgage interest rates.

John C. Williams
May 8, 2017

Now is the right time to ask whether the monetary policy framework and strategy that worked well in the past are well suited to address the challenges ahead. A flexible price-level targeting framework has the important traits of adaptability, accessibility, and accountability. It also offers significant advantages over inflation targeting for meeting price stability and employment goals. The following is adapted from a presentation by the president and CEO of the San Francisco Fed to the Shadow Open Market Committee in New York on May 5.

Jens H.E. Christensen, Jose A. Lopez, and Paul L. Mussche
April 24, 2017

Insurance companies write policies to cover potential risks far into the future. Because the life of these contracts can extend well beyond the 30-year maturities for the longest U.S. Treasuries, it’s difficult to measure the interest rate risk involved. A new study describes how the long-term interest rates required to evaluate such long-lived liabilities can be extrapolated from shorter-maturity bond yields using a standard yield curve model. These extrapolations are a useful tool since they have very small errors relative to the yield curve variation typically considered for risk management.

Pierre-Olivier Gourinchas and Galina Hale
April 17, 2017

People of the United Kingdom voted to exit the European Union last June, a process dubbed “Brexit.” The persistent depreciation of the British pound since the vote suggests that U.K. economic conditions will be weakened over the long run following the separation from the EU. This projection of a persistent economic loss is based on the expected reversal of earlier gains from trade with other EU members and reduced cross-border labor flows.

Adam Hale Shapiro and Daniel J. Wilson
April 10, 2017

Newspaper articles and editorials about the economy do more than just report on official data releases. They also often convey how the journalist and those interviewed feel about the economy. Researchers have recently developed ways to extract data on sentiment from news articles using text analysis and machine learning techniques. These measures of news sentiment track current economic conditions quite well. In fact, they often do a better job than standard consumer sentiment surveys at forecasting future economic conditions.

Òscar Jordà, Moritz Schularick, and Alan M. Taylor
April 3, 2017

If inflation increases rapidly, how do we know that higher interest rates will bring prices under control? And how do we know how much of the monetary “medicine” to administer? Economics relies primarily on observational data to answer such questions, while medical research uses randomized controlled trials to evaluate treatments. Applying that method to economics, the long history of international finance turns out to be an excellent laboratory to conduct monetary experiments. These experiments suggest that interest rates have sizable effects on the economy.

Marianna Kudlyak
March 27, 2017

The elevated number of non-employed people who are out of the labor force has raised some concerns about how well the headline unemployment rate measures available labor. An alternative measure of labor utilization, the Non-Employment Index, accounts for all non-employed individuals, distinguishing between groups like short-term versus long-term unemployed, discouraged workers, retirees, and disabled individuals, and adjusting for how likely each is to transition to employment. Current data show the index is very close to its value in 2005–06, the period near the peak of the previous economic expansion.

Regis Barnichon and Geert Mesters
March 20, 2017

The U.S. unemployment rate fell to a very low level at the end of 2016, raising the question of whether the labor market has become too tight. After applying a new method to adjust for demographic changes in the labor force, the current unemployment rate is still 0.3 to 0.4 percentage point higher than at past labor market peaks. This indicates that the labor market may not be quite as tight as the headline unemployment rate suggests.

David Neumark, Ian Burn, and Patrick Button
February 27, 2017

Population aging and the consequent increased financial burden on the U.S. Social Security system is driving new proposals for program reform. One major reform goal is to create stronger incentives for older individuals to stay in the workforce longer. However, hiring discrimination against older workers creates demand-side barriers that limit the effectiveness of these supply-side reforms. Evidence from a field experiment designed to test for hiring discrimination indicates that age discrimination makes it harder for older individuals, especially women, to get hired into new jobs.

John C. Williams
February 21, 2017

The decline in the natural rate of interest, or r-star, over the past decade raises three important questions. First, is this low level for the real short-term interest rate unique to the U.S. economy? Second, is the natural rate likely to remain low in the future? And third, is this low level confined to “safe” assets? In answer to these questions, evidence suggests that low r-star is a global phenomenon, is likely to be very persistent, and is not confined only to safe assets.

David Byrne, John G. Fernald, and Marshall Reinsdorf
February 13, 2017

Slowing growth in U.S. productivity after 2004 is sometimes blamed on measurement problems, particularly in assessing the gains from innovation in IT-related goods and services. However, mismeasurement also occurred before the slowdown and, on balance, there is no evidence that it has worsened. Some innovations—such as free Internet services—have grown increasingly important, but they mainly affect leisure time. Moreover, the non-market benefits do not appear large enough to offset the effects of the business-sector slowdown.

Jens H.E. Christensen, Jose A. Lopez, and Patrick Shultz
February 6, 2017

In the Treasury market, the most recently issued security typically trades at a higher price than more seasoned but otherwise comparable securities. The difference is known as the “on-the-run” premium. This phenomenon opens the question of whether a similar premium exists for all Treasury bonds. Examining yield spreads between pairs of inflation-protected securities, known as TIPS, that have identical maturities but different issue dates suggests that this is not the case: There is no on-the-run premium in the TIPS market at this time.

John C. Williams
January 23, 2017

The U.S. economy is in good shape, with the labor market at maximum employment and inflation nearing the Fed’s goal. Given the progress made on these goals and signs of continued solid momentum, it makes sense to gradually move interest rates toward more normal levels. The actual pace of increases will be driven by the evolution of economic conditions and its implications for achieving the Fed’s dual mandate objectives. The following is adapted from a speech by the president and CEO of the Federal Reserve Bank of San Francisco to the 2017 Economic Forecast in Sacramento on January 17.

Huiyu Li
January 9, 2017

The rate of business turnover has declined since the late 1970s, which some argue has hampered growth in innovation and productivity. This sounds like a plausible contributor to lackluster economic growth, but the connection between business turnover and productivity is more subtle. First, while business turnover has steadily declined over the past 35 years, aggregate productivity growth has not. Second, even when business starts were at historical highs, existing firms lost very little market share to new firms. This suggests that older firms are just as innovative as newcomers.

2016

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Fernanda Nechio and Daniel J. Wilson
December 19, 2016

To foster transparency and accountability in monetary policy, the Federal Open Market Committee publishes a statement immediately following every FOMC meeting, followed by the full minutes of the meeting three weeks later. Evidence suggests the release of the minutes can have a sizable impact on Treasury bond yields. The impacts are largest when the tone of the minutes differs from the tone of the statement. This presumably leads markets to change their expectations of future monetary policy.

Michael D. Bauer and Glenn D. Rudebusch
December 5, 2016

Despite recent increases, long-term interest rates remain close to their historical lows. A variety of structural factors, notably slower productivity growth and a surplus of global saving, likely have lowered expectations of steady-state interest rates and pushed down long-term yields through the expectations component. In addition, accommodative monetary policy in the United States and abroad appears to have lowered the term premium on long-term bonds.

Martin M. Andreasen and Jens H.E. Christensen
November 21, 2016

The prices of special securities known as TIPS can give some insight into how investors view the outlook for future inflation. New research uses a novel term structure model of nominal and real yields to estimate how much the liquidity premium embedded in the prices of these securities have varied over time. Accounting for variation in the premiums notably increases estimates of the inflation expectations underlying market-based measures of inflation compensation, particularly during the most recent financial crisis.

Canyon Bosler and Nicolas Petrosky-Nadeau
November 14, 2016

Job mobility in the United States has been slowing for almost two decades. The most prominent measure of mobility is direct transitions from one job to another. This measure has declined substantially among young workers ages 16 to 24 since the late 1990s, which helps explain the majority of the overall decline in job-to-job transition rates. However, for workers ages 25 and older, the labor market is essentially as dynamic today as it was 20 years ago.

Fernanda Nechio and Glenn D. Rudebusch
November 7, 2016

At the end of 2015, many forecasters, including some Fed policymakers, projected four hikes in the federal funds rate in 2016. Instead, there have been no increases so far this year. While this shift in Fed policy has puzzled some observers, such a course correction is not unusual from a historical perspective. In addition, given recent changes in economic conditions, the reduced federal funds rate path this year is completely consistent with past Fed behavior.

Rhys Bidder, Tim Mahedy, and Rob Valletta
October 24, 2016

With the U.S. labor market at or near maximum employment, assessing trend job growth has become increasingly important. This “breakeven” rate, which is the pace of job growth needed to maintain a healthy labor market, depends primarily on growth in the labor force. Estimates that account for population aging and potential labor force participation trends suggest that trend growth ranges between about 50,000 and 110,000 jobs per month. Actual job growth has been well above this pace, implying that it can slow substantially in the future without undermining labor market health.

Kevin J. Lansing and Agnieszka Markiewicz
October 17, 2016

The increase in U.S. income inequality since 1970 largely reflects gains made by households in the top 20% of the income distribution. Estimates suggest that households outside this group have suffered significant losses from foregone consumption, measured relative to a scenario that holds inequality constant. A substantial mitigating factor for the losses has been the dramatic rise in government redistributive transfers, which have doubled as a share of U.S. output over the same period.

John Fernald
October 11, 2016

Estimates suggest the new normal for U.S. GDP growth has dropped to between 1½ and 1¾%, noticeably slower than the typical postwar pace. The slowdown stems mainly from demographics and educational attainment. As baby boomers retire, employment growth shrinks. And educational attainment of the workforce has plateaued, reducing its contribution to productivity growth through labor quality. The GDP growth forecast assumes that, apart from these effects, the modest productivity growth is relatively “normal”—in line with its pace for most of the period since 1973.

Catherine van der List and Daniel J. Wilson
October 3, 2016

Understanding how rain, snow, and cold weather affect the economy is important for interpreting economic data. A new study uses county-level data to measure the effect of unseasonable weather on monthly U.S. employment. The resulting estimates quantify how the atypical weather this year explains some of the unexpected fluctuations in hiring at the national level.

Zheng Liu and Andrew Tai
September 26, 2016

During the recovery from the Great Recession, real interest rates on government securities have stayed low, but real returns on capital have rebounded. Although this divergence is puzzling in light of standard economic theory, it can be explained by credit market imperfections that raise the cost of capital and depress aggregate investment. The unusually slow credit market recovery is likely to have contributed to the diverging paths of the risk-free rate and returns on capital. It may have also contributed to a slow recovery in investment and output.

Òscar Jordà, Moritz Schularick, and Alan M. Taylor
September 12, 2016

The collapse of an asset price bubble usually creates a great deal of economic disruption. But bubbles are hard to anticipate and costly to deflate. As a result, policymakers struggle to determine how they should respond, if at all. Evaluating the economic costs of past equity and real estate bubbles—with particular attention to how much credit grew during boom phases—can provide valuable insights for this debate. A recent study finds that equity bubbles are relatively benign. More danger comes from housing bubbles in which credit grows rapidly.

Fernanda Nechio and Rebecca Regan
September 6, 2016

In response to the global financial crisis, the Federal Reserve relied more heavily on communication to shape expectations. Since 2012 the Fed has released the Summary of Economic Projections reflecting the range of expectations from FOMC meeting participants. Policymakers also deliver speeches to further clarify their views. Using textual analysis to quantify the content of those speeches reveals a somewhat diverse set of views among policymakers. Regardless of the broad range of views, there is a positive relationship between the content of the centermost speech and the median projection for the policy rate.

Kevin J. Lansing
August 29, 2016

The “natural” rate of interest—the real rate consistent with full use of economic resources and steady inflation near the Fed’s target level—is an important benchmark for monetary policy. Current estimates suggest that this rate is near zero, but it is expected to rise gradually in the years ahead as real GDP returns to its long-run potential. If the historical statistical relationship between the growth rate of potential GDP and the natural rate holds true in the future, then a 2% long-run growth rate would imply a long-run natural rate of around 1%.

John C. Williams
August 22, 2016

Despite the very real struggles that some parts of the country, including Alaska, are facing, the broader national economy is in good shape: We’re at full employment, and inflation is well within sight of, and on track to reach, our target. Under these conditions, it makes sense for the Fed to gradually move interest rates toward more normal levels. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the Anchorage Economic Development Corporation in Anchorage, Alaska, on August 18.

John C. Williams
August 15, 2016

Central banks and governments around the world must be able to adapt policy to changing economic circumstances. The time has come to critically reassess prevailing policy frameworks and consider adjustments to handle new challenges, specifically those related to a low natural real rate of interest. While price level or nominal GDP targeting by monetary authorities are options, fiscal and other policies must also take on some of the burden to help sustain economic growth and stability.

Julia Bevilaqua and Fernanda Nechio
July 18, 2016

Following reports in 2015 that the Federal Reserve would likely begin to raise the short-term policy interest rate—after seven years of near-zero levels—net capital outflows from emerging economies intensified. Many of these countries also experienced large currency depreciations. These developments were similar to those following reports in 2013 about the possible tapering of the Fed’s asset purchases. Furthermore, in both episodes, financial market reactions varied across these developing economies according to each country’s own economic situation.

Carlos Viana de Carvalho, Eric Hsu, and Fernanda Nechio
July 11, 2016

After the onset of the global financial crisis, the Federal Reserve had to rely on other tools—including communication—to work around the constraints of being unable to lower the federal funds rate below zero. One way to assess how effective these communications were is by estimating how interest rates on bonds with different maturities reacted to Fed communications before and after the zero-bound period. A measure based on news reports of Fed communications suggests that this tool gave the Fed some ability to affect long-term yields through its communications.

Michael D. Bauer and James D. Hamilton
June 27, 2016

Some recent research has suggested that macroeconomic variables, such as output and inflation, can improve interest rate forecasts. However, the evidence for this puzzling result is based on unreliable statistical tests. A new simple method more reliably assesses which variables are useful for forecasting. The results from this method suggest that some of the published evidence on the predictive power of macroeconomic variables may be spurious, supporting the more traditional view that current interest rates contain all the relevant information for predicting future interest rates.

Yifan Cao and Adam Hale Shapiro
June 20, 2016

Some closely watched measures of inflation expectations have been in gradual decline over the past five years. Over the same time, oil prices have fallen dramatically. Although the movements in energy prices are normally considered temporary, they appear to have played a large role in pushing down some longer-term forecasts for consumer price index inflation from professional forecasters. Analysis shows the drop in energy prices can explain about three-fourths of the decline in these professional inflation forecasts over the past five years.

Frank Packer and Mark Spiegel
June 6, 2016

China has recently considered reforming its regulation of initial public offerings in equity markets. Current policy allows more IPOs in rising markets but restricts new issues in falling markets, possibly to avoid pushing down values of existing stocks. However, recent research finds China’s IPO activity has no effect on stock price changes, perhaps because of the low volume relative to the overall market. As such, cyclical restrictions on IPOs do not appear to have stabilized Chinese markets, so policy reforms may improve market efficiency without increasing volatility.

Fred Furlong
May 19, 2016

The muted housing recovery in recent years can be traced in part to slower household formation among young adults. Analysis suggests that the boom and bust in housing has been a key factor. Recent weakness in household formation relative to population growth among young adults represents a reversal of the unusual strength during the boom years. The net effect has left shares of current young adults heading households at levels similar to those in the mid-1990s before the housing boom.

John C. Williams
May 16, 2016

The labor market looks good, inflation is moving back toward the FOMC’s target, and the economic expansion remains on track. Under these conditions, monetary policy is going back to the basics. Sparking faster growth in the future through innovation and more rapid productivity gains will require investments to build human capital, which is outside the realm of monetary policy. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the Sacramento Economic Forum in Sacramento, California, on May 13.

Jeffrey Clemens, Joshua D. Gottlieb, and Adam Hale Shapiro
May 9, 2016

A steady downward trend in health-care services price inflation over the past decade has been a major factor holding down core inflation. Much of this downward trend reflects lower payments from public insurance programs. Looking ahead, current legislative guidelines imply considerable restraint on future public insurance payment growth. Therefore, overall health-care services price inflation is unlikely to rebound and appears likely to continue to be a drag on inflation.

Galina Hale and John Krainer
May 2, 2016

How well stress tests measure a bank’s ability to survive adverse conditions depends on the statistical modeling approach used. Banks can access data on loan characteristics to precisely estimate individual default risk. However, macroeconomic scenarios used for stress tests—as well as the reports banks must provide—are for a bank’s entire portfolio. So, is it better to aggregate the data before or after applying the model? Research suggests a middle-of-the-road approach that applies models to data aggregated at an intermediate level can produce accurate and stable results.

Sylvain Leduc, Kevin Moran, and Robert J. Vigfusson
April 18, 2016

The plunge in oil prices since the middle of 2014 has not translated into a dramatic boost for consumer spending, which has continued to grow moderately. This has been particularly surprising since the sharp drop should free up income for households to use toward other purchases. Lessons from an empirical model of learning suggest that the weak response may reflect that consumers initially viewed cheaper oil as a temporary condition. If oil prices remain low, consumer perceptions could change, which would boost spending.

Benjamin Pyle and John C. Williams
April 8, 2016

Market participants typically update their views on future policy actions based on incoming economic data. However, when interest rates are near zero, monetary policy actions are viewed as less data dependent than in “normal” times. From 2010 to 2014, market expectations of interest rates over the near term exhibited little data dependence. In the past year or so, market-based measures of data dependence have risen considerably, although they are still below earlier norms. This suggests that investors are increasingly viewing monetary policy actions as data dependent.

Jens H.E. Christensen and Jose A. Lopez
April 4, 2016

Persistently low price inflation, falling energy prices, and a strengthening dollar have helped push down market-based measures of long-term inflation compensation over the past two years. The decline in inflation compensation could reflect a lower appetite for risk among investors or decreased market liquidity. A third alternative supported by recent research suggests that the decline reflects lower long-term inflation expectations among investors. Projections indicate the underlying expectations will revert back to typical long-run levels only slowly.

Andrew K. Rose and Mark M. Spiegel
March 28, 2016

Domestic bond markets allow governments to inflate away their debt obligations. However, they also may create a group of bond holders with the influence and desire to demand lower stable inflation. These competing interests suggest the net impact of creating a local currency bond market on inflation is ambiguous. Recent research finds that the creation of such markets in countries with an inflation target does reduce inflation: Countries with bond markets experience inflation approximately 3 percentage points lower than those without.

Reuven Glick and Andrew K. Rose
March 21, 2016

The economic benefits of sharing a currency like the euro continue to be debated. In theory, countries that use the same currency face lower trade costs and exchange rate risk and are able to compare prices across borders more easily. These advantages should help increase trade among the economies involved. New estimates suggest that this has been the case in Europe, though perhaps to a lesser degree than previously thought.

Rhys Bidder
March 14, 2016

Investors have a hard time accounting for uncertainty when calculating how much risk they are willing to bear. They can use economic models to project future earnings, but many models are misspecified along important dimensions. One method investors appear to use to protect against particularly damaging errors in their model is by projecting worst-case scenarios. The responses to such pessimistic predictions provide insights that can explain many of the puzzles about asset prices.

Mary C. Daly, Bart Hobijn, and Benjamin Pyle
March 7, 2016

While most labor market indicators point to an economy near full employment, a notable exception is the sluggish rise of wages. However, this slow wage growth likely reflects recent cyclical and secular shifts in the composition rather than a weak labor market. In particular, while higher-wage baby boomers have been retiring, lower-wage workers sidelined during the recession have been taking new full-time jobs. Together these two changes have held down measures of wage growth.

John C. Williams
February 29, 2016

The Federal Reserve uses a number of approaches to inform its policy decisions—they’re all insightful, they’re all useful, and they’re all a part of the debate. But none is absolutely fail-safe. The idea that policymakers should follow only one approach without deviation is ill-advised. An abundance of perspectives is fundamental to the Fed’s success. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to New York University Stern School of Business in New York on February 25.

John C. Williams
February 22, 2016

Headline news can give false impressions of what motivates monetary policymakers. While international developments and financial market volatility are closely monitored, what matters for policy is how those things affect jobs and inflation. The U.S. economy has had strong job growth, and inflation is low but on course to reach target. The best course remains a gradual pace of policy rate increases. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to Town Hall Los Angeles on February 18.

Vasco Cúrdia
February 16, 2016

In the wake of the financial crisis, the Federal Reserve dropped the federal funds rate to near zero to bolster the U.S. economy. Recent research suggests that the constraint preventing this rate from being even lower has kept the economy from reaching its full potential. Given the lingering economic slack, allowing inflation to rise temporarily above the Fed’s 2% target might help achieve a better balance between the Fed’s dual mandates of maximum employment and stable prices more quickly.

Glenn D. Rudebusch
February 4, 2016

Is the current recovery more likely to end because it’s lasted so long? Have various imbalances and rigidities accumulated to make the economy frailer and more susceptible to a recessionary shock? Recent history suggests the answer is no. Instead, a long recovery appears no more likely to end than a short one. Like Peter Pan, recoveries appear to never grow old.

Robert Hall and Nicolas Petrosky-Nadeau
February 1, 2016

The percentage of people active in the labor force has dropped substantially over the past 15 years. Part of this decline appears to be the result of secular factors like the aging of the workforce. However, the participation rate among people in their prime working years—ages 25 to 54—has also fallen. Recent research suggests this decline among prime-age workers can be attributed in large part to lower participation from among the higher-income half of U.S. households.

John C. Williams
January 11, 2016

The Federal Reserve has started the process of raising interest rates, in line with ongoing improvement in U.S. economic conditions. The path for subsequent interest rate increases, however, is likely to be shallow compared with past tightening cycles. This reflects in part growing evidence that the new normal for interest rates is lower than in the past. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the California Bankers Association in Santa Barbara, California, on January 8.

2015

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David Neumark
December 28, 2015

Setting a higher minimum wage seems like a natural way to help lift families out of poverty. However, minimum wages target individual workers with low wages, rather than families with low incomes. As a result, a large share of the higher income from minimum wages flows to higher-income families. Other policies that directly address low family income, such as the earned income tax credit, are more effective at reducing poverty.

David Neumark
December 21, 2015

The minimum wage has gained momentum among policymakers as a way to alleviate rising wage and income inequality. Much of the debate over this policy centers on whether raising the minimum wage causes job loss, as well as the potential magnitude of those losses. Recent research shows conflicting evidence on both sides of the issue. In general, the evidence suggests that it is appropriate to weigh the cost of potential job losses from a higher minimum wage against the benefits of wage increases for other workers.

John C. Williams
December 7, 2015

The U.S. economy is on the cusp of full health, supported by highly accommodative monetary policy in recent years. The labor market is nearing maximum employment. Inflation remains too low, but measures of its underlying trend suggest that it is not far from the Fed’s 2% target. With real progress toward these goals, the conversation has turned to normalizing policy. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to community leaders in Portland, OR, on December 2.

Mark Spiegel
November 23, 2015

China’s demand for imports helps support the global economic recovery, so China’s recent economic slowdown has caused international concern. China’s slowdown is concentrated in the industrial sector, while its emerging service sector has shown much new strength. However, China’s service sector is relatively closed and relies only modestly on imports. Accordingly, service sector growth is unlikely to offset the adverse implications of a slowing China for global trade.

Reuven Glick, Kevin J. Lansing, and Daniel Molitor
November 16, 2015

After peaking in 2006, the median U.S. house price fell about 30%, finally hitting bottom in late 2011. Since then, house prices have rebounded strongly and are nearly back to the pre-recession peak. However, conditions in the latest boom appear far less precarious than those in the previous episode. The current run-up exhibits a less-pronounced increase in the house price-to-rent ratio and an outright decline in the household mortgage debt-to-income ratio—a pattern that is not suggestive of a credit-fueled bubble.

Rhys Bidder
November 2, 2015

Labor costs constitute a substantial share of business expenses, and it is natural to expect wages to be an important determinant of prices. However, research suggests that wages do not contain much useful information for forecasting price inflation that is not available from other indicators. Therefore, one should not infer too much from recent wage data regarding the future path of inflation.

Vasco Cúrdia
October 12, 2015

Short-term interest rates in the United States have been very low since the financial crisis. Projections of the natural rate of interest indicate that a gradual return of short-term interest rates to normal over the next five years is consistent with promoting maximum employment and stable inflation. Uncertainty about the natural rate that is most consistent with an economy at its full potential suggests that the pace of normalization may be even more gradual than implied by these projections.

John C. Williams
October 5, 2015

The recent Federal Open Market Committee decision to hold off on raising interest rates reflected conflicting signals, with favorable U.S. economic conditions offset by downside risks from abroad. However, the economy continues to make progress toward achieving the FOMC’s goals. If developments stay on track, the process of monetary policy normalization is likely to start later this year. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the UCLA Anderson School of Management in Los Angeles on September 28, 2015.

Michael D. Bauer and Erin McCarthy
September 21, 2015

A substantial decline in market-based measures of inflation expectations has raised concerns about low future inflation. An important question to address is whether these measures contain information that can improve upon alternative forecasting methods. This analysis finds that market-based inflation forecasts generally are no more accurate than surveys of professional forecasters or simple forecast rules. This suggests that financial markets can provide little additional useful forward-looking information about inflation.

Jens H.E. Christensen and Jose A. Lopez
September 8, 2015

A new proposal by the Basel Committee on Banking Supervision for setting the amount of capital banks must hold against potential losses from interest rate risk uses only a few, very stylized scenarios. Analysis shows the proposed scenarios are extremely unlikely to occur. While they may be appropriate for setting bank capital guidelines, they are much less relevant for everyday risk management. Instead, using a modeling framework with a plausible range of interest rate scenarios would be more relevant to help banks manage their interest rate risk.

John C. Williams
August 31, 2015

Central banks debate whether using monetary policy to foster financial stability through house prices is advisable. Although a rise in interest rates tends to lower house prices, it may come at a significant cost through reduced economic output and inflation. This implies a very costly tradeoff when macroeconomic and financial stability goals are in conflict. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the Bank Indonesia–BIS Conference in Jakarta on August 20.

Glenn D. Rudebusch, Daniel J. Wilson, and Benjamin Pyle
August 24, 2015

Much recent discussion has suggested that the official real GDP data are inadequately adjusted for recurring seasonal fluctuations. A similar pattern of insufficient seasonal adjustment also affects the published data for a key measure of price inflation. Still, such residual seasonality in the published output and inflation statistics is unlikely to mislead Federal Reserve policymakers or adversely affect the setting of monetary policy.

Zheng Liu
August 10, 2015

The recent slowdown in China’s growth has caused concern about its long-term growth prospects. Evidence suggests that, before 2008, China’s growth miracle was driven primarily by productivity improvement following economic policy reforms. Since 2008, however, growth has become more dependent on investment and overall growth has slowed. If the recent reform plans can successfully address the country’s structural imbalances, China could maintain a solid growth rate that might help smooth its transition to high-income status.

Òscar Jordà, Moritz Schularick, and Alan M. Taylor
August 3, 2015

Policymakers disagree over whether central banks should use interest rates to curb leverage and asset price booms. Higher interest rates make mortgages more expensive and could prevent borrowers from bidding up house prices to create a boom. However, rough calculations show that the size of rate increase needed to do so might also boost unemployment and push down inflation. Thus, using this type of policy tool may cause the central bank to deviate significantly from its goals of full employment and price stability.

Kevin J. Lansing
July 20, 2015

Inflation has remained below the FOMC’s long-run target of 2% for more than three years. But this sustained undershooting does not yet signal a statistically significant departure from the target once the volatility of the 12-month mean inflation rate is taken into account. Furthermore, the empirical Phillips curve relationship that links inflation to the size of production or employment gaps has been roughly stable since the early 1990s. Hence, continued improvements in production and employment relative to their long-run trends would be expected to put upward pressure on inflation.

John C. Williams
July 13, 2015

The U.S. economy is looking quite good. Growth is on a solid trajectory, and the FOMC’s maximum employment goal is in sight. Risks from abroad are unlikely to overturn strong U.S. fundamentals. Still, the exact timing of an initial interest rate increase will depend on convincing evidence that inflation is heading back toward target. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the International Conference of Commercial Bank Economists in Los Angeles on July 8.

Mary C. Daly, Fernanda Nechio, and Benjamin Pyle
July 6, 2015

Over the past several years, the Federal Open Market Committee’s longer-run forecasts of the short-term interest rate and unemployment rate have steadily declined. These forecasts reflect the Committee’s views about the levels of the policy interest rate and unemployment rate that will eventually prevail when the economy returns to normal. A simple monetary policy rule illustrates how the reductions in these forecasts can imply a lower projected path for the policy rate.

Bart Hobijn and Alexander Nussbacher
June 29, 2015

Policymakers often consider temporarily redistributing income from rich to poor households to stimulate the economy. This is based in part on the idea that poor households spend a larger share of their income than rich ones do. However, ample evidence suggests that the difference in spending between these groups is significantly smaller than commonly assumed. A second assumption is that redistribution through policy is more efficient than through capital markets. Whether this is true is important to consider when proposing this type of stimulus policy.

Jens H.E. Christensen and Signe Krogstrup
June 22, 2015

The Swiss National Bank expanded bank reserves as part of its unconventional monetary policy during the European sovereign debt crisis. The unprecedented expansion involved short-term rather than long-term asset purchases. This approach provides novel insights into how central bank balance sheet expansions affect interest rates. In particular, it illustrates how an expansion of reserves can lower long-term yields through a reserve-induced portfolio balance effect that is independent of the assets purchased.

Rob Valletta and Catherine van der List
June 8, 2015

The incidence of involuntary part-time work surged during the Great Recession and has stayed unusually high during the recovery. This may reflect more labor market slack than is captured by the unemployment rate alone. Analysis across states and over time indicates that a substantial part of the increase is related to the business cycle. However, structural factors such as changes in industry composition, population demographics, and labor costs have also contributed. This suggests that involuntary part-time work may remain significantly above its pre-recession level as the labor market continues to recover.

John C. Williams
June 1, 2015

Events of the past decade have refocused attention on the potential contributions of monetary policy and macroprudential approaches to fostering financial stability. However, monetary policy is poorly suited for dealing with financial stability concerns. Instead, given the scarcity of explicit macroprudential tools in the United States, microprudential regulations and supervision are used to achieve macroprudential goals. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the Symposium on Asian Banking and Finance in Singapore May 28.

John C. Williams
May 26, 2015

The U.S. economy is on solid footing. The labor market is nearing full employment, and inflation should move back toward the Federal Open Market Committee’s target. A likely gradual removal of highly accommodative monetary policy could begin at any upcoming FOMC meeting. However, the exact timing will be driven by the incoming data. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the New York Association for Business Economics in New York on May 12.

Glenn D. Rudebusch, Daniel Wilson, and Tim Mahedy
May 18, 2015

The official estimate of real GDP growth for the first three months of 2015 was shockingly weak. However, such estimates in the past appear to have understated first-quarter growth fairly consistently, even though they are adjusted to try to account for seasonal patterns. Applying a second round of seasonal adjustment corrects this residual seasonality. After this correction, aggregate output grew much faster in the first quarter than reported.

John C. Williams
May 11, 2015

The dilemma of central bank independence has been around a long time. Past attempts to solve it through an operational mandate such as the gold standard have proven ineffective. The alternative approach of achieving economic goals through reliance on a fixed policy rule also poses practical challenges. A more promising path is to enhance accountability and transparency within an existing goal mandate framework. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to Chapman University in Orange, California, on May 1.

Galina Hale and Alexej Philippov
May 1, 2015

Inflation targeting is often considered the most appropriate monetary policy framework for central banks seeking price stability. While a target can help stabilize inflation, the implications for a country’s growth are less clear. Advanced economies experienced higher economic growth immediately following the transition to inflation targeting. However, developing economies experienced only modest gains that were close to their trend growth. One explanation is that transitioning to a low-inflation regime can be more costly for less stable countries that have higher inflation expectations and less credible policies.

Adam Hale Shapiro
April 20, 2015

The 2006 health-care reform in Massachusetts relied heavily on the private insurance market. Recent evidence shows that the reform boosted payments to physicians from private insurers by 13% relative to other areas. This increase began immediately before the reform became law, suggesting that insurers raised payments in anticipation of the change. The reform may have also caused the state’s insurance premiums to fall. Overall, evidence suggests that the Massachusetts health-care reform shifted dollars away from insurers and towards providers and consumers.

Michael D. Bauer and Glenn D. Rudebusch
April 13, 2015

Financial market prices contain valuable information about investors’ views regarding future interest rates, inflation, and other economic variables. However, such market-based expectations can be hard to interpret because changes in risk and liquidity premiums also affect asset prices. In practice, policymakers should be cautious in relying on the expectations information in market prices.

Fernanda Nechio
April 6, 2015

Based on surveys of professional forecasters, expectations for price inflation 5 to 10 years ahead have edged down over the past few years. This decline seems to be primarily driven by revised expectations from forecasters who overestimated inflation in the aftermath of the Great Recession. Currently, the median survey-based expectation for long-term inflation is close to its pre-recession level and appears well anchored at the Fed’s 2% longer-run inflation objective.

Carlos Carrillo-Tudela, Bart Hobijn, Patryk Perkowski, and Ludo Visschers
March 30, 2015

Every month, millions of workers search for new jobs although they already have one. About one-tenth of these searchers switch employers in the following month. However, most of the job switchers in the United States never reported having looked for a job. This implies that, rather than those workers finding jobs, the jobs actually found them.

Òscar Jordà, Moritz Schularick, and Alan M. Taylor
March 23, 2015

In the six decades following World War II, bank lending measured as a ratio to GDP has quadrupled in advanced economies. To a great extent, this unprecedented expansion of credit was driven by a dramatic growth in mortgage loans. Lending backed by real estate has allowed households to leverage up and has changed the traditional business of banking in fundamental ways. This “Great Mortgaging” has had a profound influence on the dynamics of business cycles.

John C. Williams
March 9, 2015

The U.S. economy is likely to reach the Federal Reserve’s maximum employment goal later this year. Although inflation has remained persistently low, it is expected to return to the Fed’s 2% target over the next few years. Due to the lags between monetary policy’s implementation and its effects, the time is coming to take the first step toward normalizing monetary policy by raising short-term interest rates. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the CFA Society Hawaii on March 5, 2015.

David Neumark and Helen Simpson
March 2, 2015

Place-based policies such as enterprise zones offer economic incentives to firms to create jobs in economically challenged areas. Evidence on the effectiveness of enterprise zones is mixed. There is no clear indication that they successfully create jobs. However, positive effects are evident for other policies, including discretionary subsidies that target specific firms, infrastructure spending that targets specific areas, and investment in higher education and university research.

Daniel J. Wilson
February 23, 2015

State and local governments frequently offer tax incentives to attract businesses to locate in their area. Proponents view these incentives as a valuable tool to encourage economic development. Critics, on the other hand, argue either that incentives have little effect on business location decisions—and hence are wasteful giveaways—or that their benefits come at the expense of reduced economic activity in other areas. A key element in this debate is distinguishing what is best from a local versus a national perspective.

Rhys Bidder
February 17, 2015

Animal spirits are often suggested as a cause of business cycles, but they are very difficult to define. Recent research proposes a novel explanation based on the changing level of risk over time and people’s uncertainty about how the world works. The interaction of these two can lead to significant business cycle fluctuations in response to spikes in volatility. This finding gives researchers an alternative to irrational behavior as an explanation for why swings in consumer sentiment appear to drive the business cycle.

John Fernald and Bing Wang
February 9, 2015

Information technology fueled a surge in U.S. productivity growth in the late 1990s and early 2000s. However, this rapid pace proved to be temporary, as productivity growth slowed before the Great Recession. Furthermore, looking through the effects of the economic downturn on productivity, the reduced pace of productivity gains has continued and suggests that average future output growth will likely be relatively slow.

Kevin J. Lansing and Benjamin Pyle
February 2, 2015

Since 2007, Federal Open Market Committee participants have been persistently too optimistic about future U.S. economic growth. Real GDP growth forecasts have typically started high, but then are revised down over time as the incoming data continue to disappoint. Possible explanations for this pattern include missed warning signals about the buildup of imbalances before the crisis, overestimation of the efficacy of monetary policy following a balance-sheet recession, and the natural tendency of forecasters to extrapolate from recent data.

Rob Valletta
January 12, 2015

The earnings gap between people with a college degree and those with no education beyond high school has been growing since the late 1970s. Since 2000, however, the gap has grown more for those who have earned a post-graduate degree as well. The divergence between workers with college degrees and those with graduate degrees may be one manifestation of rising labor market polarization, which benefits those earning the highest and the lowest wages relatively more than those in the middle of the wage distribution.

Mary C. Daly and Bart Hobijn
January 5, 2015

Despite considerable improvement in the labor market, growth in wages continues to be disappointing. One reason is that many firms were unable to reduce wages during the recession, and they must now work off a stockpile of pent-up wage cuts. This pattern is evident nationwide and explains the variation in wage growth across industries. Industries that were least able to cut wages during the downturn and therefore accrued the most pent-up cuts have experienced relatively slower wage growth during the recovery.

2014

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Zheng Liu, Mark M. Spiegel, and Bing Wang
December 22, 2014

The retirement of the baby boomers is expected to severely cut U.S. stock values in the near future. Since population aging is widespread across the world’s largest countries, this raises the question of whether global aging could adversely affect the U.S. equity market even further. However, the strong relationship between demographics and equity values in this country do not hold true in other industrial countries. This suggests that global aging is unlikely to create additional headwinds for U.S. equities.

Enrico Moretti and Daniel J. Wilson
December 8, 2014

Financial incentives from state governments are part of a growing trend of policies designed to spur innovation clusters in specific regions. Biotechnology industry clusters in particular have benefited from these subsidies, which have boosted the number of star biotech scientists in those states by roughly 15%. Likewise, the number of biotech jobs overall has grown in states that offered incentives, although they have had little impact on salaries. Incentives have also spilled over to generate sizable effects in local service sectors.

Canyon Bosler, Mary C. Daly, and Fernanda Nechio
December 1, 2014

Since the Great Recession, standard ways of measuring the labor market have given mixed signals about the strength of the U.S. recovery. This has increased the uncertainty around how to interpret job market conditions, which has made calibrating monetary policy to achieve full employment more challenging. Ultimately, policymakers need to make judgments about how much these conflicting indicators reflect cyclical weakness in the job market versus structural factors that would be less easily remedied with monetary policy.

Early Elias, Helen Irvin, and Òscar Jordà
November 24, 2014

An accurate measure of economic slack is key to properly calibrate monetary policy. Two traditional gauges of slack have become harder to interpret since the Great Recession: the gap between output and its potential level, and the deviation of the unemployment rate from its natural rate. As a consequence, conventional policy rules based on these measures of slack generate wide-ranging policy rate recommendations. This variability highlights one of the challenges policymakers currently face.

Vasco Cúrdia
November 17, 2014

Although inflation is currently low, some commentators fear that continued highly accommodative monetary policy may lead to a surge in inflation. However, projections that account for the different policy tools used by the Federal Reserve suggest that inflation will remain low in the near future. Moreover, the relative odds of low inflation outweigh those of high inflation, which is the opposite of historical projections. An important factor continuing to hold down inflation is the persistent effects of the financial crisis.

Sylvain Leduc and Glenn D. Rudebusch
November 10, 2014

Over the past two years, both monetary and fiscal policy projections have been based on the view that declines in the long-run potential growth rate of the economy will in turn push down interest rates. In contrast, examination of private-sector professional forecasts and historical data provides little evidence of such a linkage. This suggests a greater risk that future interest rates may be higher than expected.

John Krainer and Erin McCarthy
November 3, 2014

The housing sector has been one of the weakest links in the economic recovery, and the latest data continue to show only modest improvement. One obstacle to a pickup in housing demand has been tight mortgage credit standards. Indeed, loan standards for borrowers with lower credit scores have shown few signs of easing. Still, as the share of new mortgages financed in the private market has started to rise, access to credit may improve.

John C. Williams
October 20, 2014

The Federal Reserve is on track to end asset purchases in the near future and has laid the groundwork for its plan to eventually normalize monetary policy by raising short-term interest rates. The process of policy normalization is unlikely to start soon, however, and its exact timing will depend on further improvements in unemployment, wages, and inflation. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to business and community leaders in Las Vegas, Nevada, on October 9, 2014.

John G. Fernald, Eric Hsu, and Mark M. Spiegel
October 6, 2014

Financial liberalization in China has broad implications, including changing how its central bank’s monetary policy affects the nation’s economy. An estimate of Chinese economic activity and inflation based on a broad set of indicators suggests that the way policy is transmitted to China’s economy has become more like Western market economies in the past decade. Although Chinese monetary policy may actually have exacerbated its economic downturn during the global financial crisis, a move toward stimulatory policy has helped ease its slower growth more recently.

Michael Bauer
September 29, 2014

Forecasts of short-term interest rates that are based on futures rates in financial markets can be very misleading when the policy rate is near the zero lower bound. By contrast, options on future short-term interest rates can provide more accurate projections. Currently these options suggest that the federal funds rate—the Federal Reserve’s key monetary policy interest rate—is most likely to lift off from zero around mid-2015 and rise only slowly afterwards at a pace of about 1 percentage point per year.

Jeffrey Clemens, Joshua D. Gottlieb, and Adam Hale Shapiro
September 22, 2014

Because the health sector makes up a large share of the U.S. economy, widespread price changes for medical services can impact overall inflation significantly. Cuts to public health-care spending spill over directly and indirectly to private spending. A recent estimate suggests the full effect of the Medicare payment cuts from the 2011 Budget Control Act resulted in a decline of 0.24 percentage point in the overall personal consumption expenditures price index. This is over twice the expected drop if private-sector spillovers are not included.

Jens H.E. Christensen and Simon Kwan
September 8, 2014

An ongoing concern has been that the public might misconstrue the Fed’s forward guidance about future monetary policy and underappreciate the extent to which short-term interest rates may vary with future news about the economy. Evidence based on surveys, market expectations, and model estimates show that the public seems to expect a more accommodative policy than Federal Open Market Committee participants. The public also may be less uncertain about these forecasts than policymakers.

Reuven Glick and Mark M. Spiegel
September 2, 2014

A new volume, Prospects for Asia and the Global Economy, summarizes the 2013 Asia Economic Policy Conference hosted by the Federal Reserve Bank of San Francisco’s Center for Pacific Basin Studies. The conference focused on challenges faced by policymakers in advanced and emerging economies as they continue to recover from the recent global financial crisis. Issues discussed included the monetary policy spillovers from advanced economies to emerging markets, the costs and benefits of foreign reserve accumulation, and the desirability of macroprudential interventions, restrictions on cross-border capital flows, and financial regulatory reforms to reduce the likelihood of future crises.

Sylvain Leduc and Dan Wilson
August 25, 2014

Highway spending in the United States between 2008 and 2011 was flat, despite the serious need for improvements and the big boost to state highway funds from the Recovery Act of 2009. A comparison of how much different states received and spent shows that these federal grants actually boosted highway spending substantially. However, this was offset by pressures to reduce state highway spending due to plummeting tax revenues. In fact, analysis suggests national highway spending would have fallen roughly 20% over this period without federal highway grants from the Recovery Act.

Galina B. Hale, Peter Jones, and Mark M. Spiegel
August 18, 2014

Historically, businesses in most countries have not been able to sell bonds denominated in their home currencies to foreign investors. In recent decades this trend has been changing. Research shows that bonds denominated in currencies other than the major global currencies have increased, particularly following the global financial crisis. However, not all countries were affected equally. Countries that were able to take advantage of the temporary disruption and near-zero interest rates in global financial markets were the ones with a combination of low government debt and a history of stable inflation.

Simon Kwan
August 4, 2014

Following the 2007–09 financial crisis, bank lending to businesses plummeted. Five years later, the dollar amount of bank commercial and industrial lending has finally surpassed the previous peak. However, despite very accommodative monetary policy and abundant excess reserves in the banking system, the spread of the commercial loan interest rates over the target federal funds rate remains above its long-run average. This suggests that business loans are not yet cheap relative to banks’ funding cost.

Bart Hobijn and Leila Bengali
July 21, 2014

Median starting wages of recent college graduates have not kept pace with median earnings for all workers over the past six years. This type of gap in wage growth also appeared after the 2001 recession and closed only late in the subsequent labor market recovery. However the wage gap in the current recovery is substantially larger and has lasted longer than in the past. The larger gap represents slow growth in starting salaries for graduates, rather than a shift in types of jobs, and reflects continued weakness in the demand for labor overall.

Hamed Faquiryan and Marius Rodriguez
July 14, 2014

The 2007–09 financial crisis drew attention to the nature and consequences of connections among financial firms. New reporting standards set in the wake of the crisis have shed more light on these ties in current financial markets. New data are available on the magnitude of risk exposure and the types of collateral that link bank holding companies with their trading partners in over-the-counter derivatives markets. The data show that both the level of risk and diversity of collateral involved in these contracts vary widely depending on the type of counterparties.

Liz Laderman and Sylvain Leduc
July 7, 2014

Start-ups typically create jobs so fast at the beginning of recoveries that even a modest drop in that pace can affect the whole economy. In fact, slower job growth among new businesses may have resulted in 760,000 fewer jobs in the first year of the current recovery. Because housing wealth is an important factor in the financing of new businesses, lower house prices may have been partly to blame for the slower growth. Conversely, recently increasing house prices may already be boosting start-up growth and, with it, overall job growth.

Yifan Cao and Adam Shapiro
June 30, 2014

The well-known Phillips curve suggests that future inflation depends on current and past inflation and a measure of economic slack or resource utilization. Using the unemployment gap to measure slack, a simple Phillips curve currently predicts that inflation will remain quite low through 2015. Two variations of the model, which impose a higher anchor for inflation expectations or focus only on a short-term unemployment gap, still predict that inflation will remain low, albeit higher than implied by the basic model.

Carlos Carvalho and Fernanda Nechio
June 23, 2014

Helping the public understand how monetary policy is conducted is an important goal for the Federal Reserve. One way to measure people’s understanding is through surveys that show household expectations for the economy. Responses from the Michigan survey show some groups of households appear to hold beliefs consistent with basic features of U.S. policy. In particular, households with higher incomes and more education appear to better grasp how interest rates relate to inflation and unemployment, particularly during times of labor market weakness.

John C. Williams
June 9, 2014

The very real and sizable costs of using monetary policy to deal with risks to financial stability—along with the uncertain benefits of doing so—argues for finding alternative tools with more favorable tradeoffs. Policymakers should study ways to design policy frameworks that support financial stability, with only a modest cost to macroeconomic goals and anchoring inflation expectations. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco at the conference “Housing Markets and the Macroeconomy: Challenges for Monetary Policy and Financial Stability” in Eltville am Rhein, Germany, on June 5, 2014.

John C. Williams
June 2, 2014

Monetary policy is moving slowly and cautiously towards normalization. Signs of improvement—falling unemployment, better financial conditions, and abating headwinds—indicate the United States is changing from extraordinary economic times back to ordinary ones. Risks to the recovery’s momentum linger, and “normalizing” should not be confused with “tightening.” Monetary policy will remain highly accommodative for some time. Overall, however, the outlook is positive. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the Association of Trade and Forfaiting in the Americas in San Francisco on May 22, 2014.

John Krainer
May 19, 2014

Sales of existing homes slowed noticeably over the second half of 2013, reflecting a more drawn-out recovery than expected for housing markets. A main reason for the slowdown is higher mortgage rates that have made financing more costly nationwide. Sales appear to be slowing even more in distressed markets, where real estate investors had bought up single-family homes to convert into rental properties following the housing bust. Evidence suggests that investors may be retreating from these markets as housing valuations rise.

Michael D. Bauer and Jens H. E. Christensen
May 12, 2014

Prices of special financial instruments called inflation derivatives can provide valuable insight into investors’ views of future inflation. Projections from inflation swap rates suggest inflation will remain low for some time and return only slowly to levels consistent with the Federal Reserve’s notion of price stability. Inflation caps and floors give evidence that investors seem less uncertain about inflation forecasts than in recent years, and that they perceive a favorable inflation outcome as increasingly likely.

Mary C. Daly and Leila Bengali
May 5, 2014

Earning a four-year college degree remains a worthwhile investment for the average student. Data from U.S. workers show that the benefits of college in terms of higher earnings far outweigh the costs of a degree, measured as tuition plus wages lost while attending school. The average college graduate paying annual tuition of about $20,000 can recoup the costs of schooling by age 40. After that, the difference between earnings continues such that the average college graduate earns over $800,000 more than the average high school graduate by retirement age.

Mary C. Daly, John Fernald, Òscar Jordà, and Fernanda Nechio
April 21, 2014

The traditional relationship between unemployment and output growth known as Okun’s law appeared to break down during the Great Recession. This raised the question of whether this rule of thumb was still meaningful as a forecasting tool. However, recent revisions to GDP data show that its relation with unemployment followed a fairly typical cyclical pattern compared with past deep recessions and slow recoveries. The comparatively common patterns suggest that rumors of the death of Okun’s law during the Great Recession were greatly exaggerated.

Reint Gropp
April 14, 2014

Before the 2007–09 crisis, standard risk measurement methods substantially underestimated the threat to the financial system. One reason was that these methods didn’t account for how closely commercial banks, investment banks, hedge funds, and insurance companies were linked. As financial conditions worsened in one type of institution, the effects spread to others. A new method that more accurately accounts for these spillover effects suggests that hedge funds may have been central in generating systemic risk during the crisis.

David Neumark and Patrick Button
April 7, 2014

The Great Recession led to large increases in unemployment rates and unemployment durations for workers of all ages, but durations rose far more for older workers than for younger workers. This difference was apparent both during and after the recession, fueling speculation that age discrimination played a role. Research indicates that in states with stronger age discrimination protections, older-worker unemployment durations increased more relative to increases for younger workers. This suggests that state age discrimination laws may need to be modified to strengthen protections during downturns.

Carlos Carrillo-Tudela, Bart Hobijn, and Ludo Visschers
March 31, 2014

Some types of jobs lost during recessions are never recovered, which suggests some unemployed workers must change careers. However, data on hiring during recessions shows the fraction of unemployed workers who change their industry or occupation declines rather than increases. This reflects in part that, when unemployment is high, employers can find applicants with qualifications that closely match job openings. Thus, the rate of overall job growth affects the pace of job market recoveries more than the need for workers to reallocate across sectors.

Jens H.E. Christensen, Jose A. Lopez, and Glenn D. Rudebusch
March 24, 2014

The Federal Reserve has purchased a large amount of longer-term bonds since December 2008. While these purchases have helped support a strengthening economy, the Fed’s resulting financial position may incur significant declines in bond values and net income when interest rates rise. However, analyzing a range of possible future interest rate scenarios—and their associated probabilities—shows that potential losses associated with these declines are very likely to be manageable.

Òscar Jordà, Moritz Schularick, and Alan M. Taylor
March 10, 2014

Recovery from a recession triggered by a financial crisis is greatly influenced by the government’s fiscal position. A financial crisis puts considerable stress on the government’s budget, sometimes triggering attacks on public debt. Historical analysis shows that a private credit boom raises the odds of a financial crisis. Entering such a crisis with a swollen public debt may limit the government’s ability to respond and can result in a considerably slower recovery.

Fernanda Nechio
March 3, 2014

In 2013, the Federal Reserve publicly described conditions for scaling back and ultimately ending its highly accommodative monetary policy. Some emerging market countries subsequently experienced sharp reversals of capital inflows, resulting in sizable currency depreciation. But others did not. Variations in financial market reactions from one country to another appear to have been related to differences in economic conditions, which partly reflected a country’s policies before the Fed’s tapering comments.

David Neumark and Diego Grijalva
February 24, 2014

In response to job losses associated with the Great Recession, a number of states adopted hiring credits to encourage employers to create jobs. These credits provide tax breaks to employers that create jobs or expand payrolls, with the aim of increasing hiring by reducing labor costs. The evidence on their effects is mixed, although some of these credits appear to have succeeded in boosting job growth.

Jens Christensen
February 10, 2014

U.S. Treasury yields and other interest rates increased in the months leading up to the Federal Reserve’s December 2013 decision to cut back its large-scale bond purchases. This increase in rates probably at least partly reflected changes in what bond investors expected regarding future monetary policy. Recent research on this episode tentatively suggests that investors moved earlier the date when they believed the Fed would exit its zero interest rate policy, even though Fed policymakers made few changes in their projections of appropriate monetary policy.

Zheng Liu
February 3, 2014

China’s household saving rate has risen substantially during the past two decades. Research suggests that increased job uncertainty following reforms and massive layoffs in state-owned enterprises during the late 1990s contributed significantly to the increase. Facing higher unemployment risks after the reforms, workers in state-owned enterprises have tended to save more as a precaution. A recent study estimates that precautionary saving driven by the reforms explains about a third of Chinese urban household wealth accumulation from 1995 to 2002.

John C. Williams
January 13, 2014

The economic outlook is increasingly positive, boosted by housing, banking, and labor market improvements. While the Federal Reserve recently eased its bond-buying program, indicating monetary policy is on the path back to normal, full normalization will take time and be based on economic data. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to Lambda Alpha International and the Arizona Bankers Association in Phoenix, Arizona, on January 7, 2014.

Fred Furlong, David Lang, and Yelena Takhtamanova
January 6, 2014

During the past decade’s housing boom, borrowers with lower credit ratings were more likely than higher-rated borrowers to choose adjustable-rate mortgages. This raises the question of whether, amid rapidly rising house prices, lower-rated borrowers paid less attention to loan pricing and interest-rate-related factors. However, even accounting for house price appreciation, research shows these borrowers were as, if not more, responsive as higher-rated borrowers to changes in interest-rate-related fundamentals. Their tendency to choose adjustable-rate mortgages is consistent with mortgage decisions based on economic considerations, rather than just lack of financial sophistication.

2013

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Mary C. Daly, John Fernald, Òscar Jordà, and Fernanda Nechio
December 23, 2013

The impact of the global financial crisis on labor markets varied widely from country to country. In the United States, the unemployment rate nearly doubled from its pre-recession level. The rate rose much less in the United Kingdom and barely changed in Germany, despite larger declines in gross domestic product. Institutional and technological changes since the 1970s had previously made relationships between output and unemployment more homogeneous across countries. But the global financial crisis undid much of this convergence as countries adopted different labor market policies to adjust output.

Yifan Cao and Adam Hale Shapiro
December 9, 2013

Inflation as measured by the personal consumption expenditures price index is near historical low levels, below the Federal Reserve’s 2% longer-run goal. Another common inflation measure, the consumer price index, is also historically low, but remains closer to 2%. The recent gap between these two measures is due largely to the cost of shelter, which makes up a larger proportion of the CPI consumption basket. Based on history, the gap between the two inflation measures should close at a rate of 0.05 percentage point per month.

Israel Malkin and Daniel J. Wilson
December 2, 2013

Taxes collected by the U.S. government are paid out through transfers that promote economic equity among states. This system redistributes funds between richer and poorer states over the long run and helps stabilize states hit by temporary economic shocks. Surprisingly, little if any of this redistribution and stabilization comes from transfer payments through federal programs and services. Rather, differences across states in federal tax payments drive these effects. Research suggests a similar system of taxes and transfers in the European Union could have reduced recent economic divergence among member states.

Bharat Trehan and Maura Lynch
November 25, 2013

Financial markets and professional forecasters expect central banks to hit their inflation targets. But U.S., British, and Japanese consumers expect inflation to be higher. Data suggest that consumers in these countries don’t pay attention to central bank inflation targets and react sluggishly to persistent shifts in the inflation rate. However, the price of oil apparently influences inflation expectations strongly. It’s possible that consumers use highly volatile oil prices in a rule of thumb for updating their inflation expectations.

Michael D. Bauer and Glenn D. Rudebusch
November 18, 2013

The Federal Reserve has indicated that it may raise the federal funds rate from its current value near zero in 2015. This forward policy guidance is broadly consistent with expectations from business surveys on the most likely timing for the funds rate liftoff. It also appears in line with estimates of policy liftoff from forward interest rates derived from Treasury yields. However, in interpreting forward rates, it is important to account for the zero lower bound on interest rates.

John C. Williams
November 12, 2013

China and the United States are both facing challenges in rebalancing their economies for the future. There are parallels and contrasts, but both face the difficult challenge of maintaining growth today while moving toward a new normal of longer-run economic health for tomorrow. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the Committee of 100 in Los Angeles, California, on November 8, 2013.

Allan M. Malz
November 4, 2013

Certain financial instruments provide information on expectations of future interest rate movements. One relatively new instrument is yield curve options, which allow investors to take financial positions on a range of possible future interest rates. These options can shed light on the views of financial markets regarding future monetary policy at a time when short-term interest rates are near zero.

William Hedberg and John Krainer
October 21, 2013

Inventories of homes for sale have been slow to bounce back since the 2007–09 recession, despite steady house price appreciation since January 2012. One probable reason why many homeowners are not putting their homes on the market is that their properties may still be worth less than the value of their mortgages, which would leave them owing additional money after a sale. In other cases, homeowners may simply be hoping that house prices will continue to rise, allowing them to recover lost equity.

Mary C. Daly, Bart Hobijn, and Benjamin Bradshaw
October 15, 2013

Federal Reserve policymakers are watching a broad set of indicators for signs of “substantial” labor market improvement, a key consideration for beginning to scale back asset purchases. One way to find which are most useful is to focus on how well movements in these indicators predict changes in the unemployment rate. Research suggests that six indicators are most promising. They offer evidence that the recovery has more momentum now than a year ago, a strong signal that the labor market is improving and could accelerate in coming months.

John C. Williams
October 7, 2013

Unconventional monetary policies such as asset purchases and forward policy guidance have given the Federal Reserve much-needed tools when the traditional policy interest rate is near zero. Looking ahead to normal times, certain types of unconventional policies are best kept in reserve. If another situation arises where the Fed needs to call on these tools, it is ready and prepared to do so. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the UC San Diego Economic Roundtable in San Diego, California, on October 3, 2013.

Eric Swanson
September 30, 2013

The Federal Reserve lowered its traditional monetary policy instrument, the federal funds rate, to essentially zero in December 2008. However, economic activity generally depends on interest rates with longer maturities than the overnight fed funds rate. Research shows that interest rates with maturities of two years or more were largely unconstrained by the zero lower bound until at least late 2011. This suggests that, despite the zero bound, the Fed has been able to continue conducting monetary policy through medium- and longer-term interest rates by using forward guidance and large-scale asset purchases.

John C. Williams
September 23, 2013

Standard asset price models have generally failed to detect bubbles, with enormous costs to the economy. Economists are now creating promising new models that account for bubbles by relaxing the assumption of rational expectations and allowing people’s decisions to be driven by their perceptions of what the future may hold. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the National Association for Business Economics in San Francisco, California, on September 9, 2013.

Elizabeth Laderman
September 9, 2013

Small businesses have historically contributed more than their share to overall employment growth in the United States. But during the recent recession, the rate of net employment losses of small businesses exceeded that of larger businesses. Sharp cuts in the rate of gross job gains at small businesses appear to have been a major factor explaining the larger net employment losses for this group. The drop in the rate of job gains reflected slower business creation and a lower rate of hiring among expanding small businesses.

Richard V. Burkhauser and Mary C. Daly
September 3, 2013

The U.S. federal government’s program that provides cash benefits to low-income families with a disabled child has grown rapidly over the past 25 years. This growth reflects changes in the implementation of the program rather than declines in children’s health or family income. Unfortunately, most disabled children from families that receive such benefits do not become employed when they grow up, so these policy changes may relegate these children to lifetime government support—probably near the poverty threshold—at the expense of taxpayers.

Rob Valletta and Leila Bengali
August 26, 2013

Part-time work spiked during the recent recession and has stayed stubbornly high, raising concerns that elevated part-time employment represents a “new normal” in the labor market. However, recent movements and current levels of part-time work are largely within historical norms, despite increases for selected demographic groups, such as prime-age workers with a high-school degree or less. In that respect, the continued high incidence of part-time work likely reflects a slow labor market recovery and does not portend permanent changes in the proportion of part-time jobs.

Simon Kwan
August 19, 2013

Investor aversion to risk varies over the course of the economic cycle. In the current recovery, the rebound in risk-taking is near the top of the historical range. The pace of economic growth does not appear to explain the increase in risk appetite. However, statistical research suggests that the severity of the preceding recession explains about 20% of the change in a measure of the long-term stock price-earnings ratio. And corporate profit growth appears to explain about 40% of the decline in the spread between risky and risk-free bonds.

Vasco Cúrdia and Andrea Ferrero
August 12, 2013

The Federal Reserve’s large-scale purchases of long-term Treasury securities most likely provided a moderate boost to economic growth and inflation. Importantly, the effects appear to depend greatly on the Fed’s guidance that short-term interest rates would remain low for an extended period. Indeed, estimates from a macroeconomic model suggest that such interest rate forward guidance probably has greater effects than signals about the amount of assets purchased.

Sylvain Leduc and Zheng Liu
July 22, 2013

Since 2009, U.S. job vacancies have increased but unemployment has fallen more slowly than in past recoveries. There is evidence that heightened uncertainty about economic policy has been an important factor behind this change. Increased uncertainty may discourage businesses from filling vacancies, thereby raising unemployment. An estimate indicates that, without policy uncertainty, the unemployment rate in late 2012 would have been close to 6.5%, 1.3 percentage points lower than the actual rate.

Mary C. Daly, Bart Hobijn, and Timothy Ni
July 15, 2013

After the Great Recession, the fraction of U.S. workers whose wages were frozen reached a record high. Many employers would have preferred to cut wages, but couldn’t do so because of the reluctance of workers to accept reduced compensation. These pent-up wage cuts initially propped up wage growth, reduced hiring, and pushed up unemployment. But, over the past 2½ years, inflation has eroded the real value of frozen wages, slowing wage growth and reducing the unemployment rate. This is similar to, but more pronounced than, the pattern observed in past recessions.

Michael D. Bauer and Glenn D. Rudebusch
July 8, 2013

Long-term U.S. government bond yields have trended down for more than two decades, but identifying the source of this decline is difficult. A new methodology suggests that reductions in long-run expectations of inflation and inflation-adjusted interest rates have played a significant role in the secular decline in yields. In contrast, standard statistical finance methods appear to overemphasize the effects of lower risk premiums and reduced uncertainty about future inflation.

John C. Williams
July 1, 2013

The U.S. economy is well into a period of sustained expansion, raising questions about when the Federal Reserve will cut back or end its stimulatory asset purchase program. Such moves will be appropriate at some point, but it’s still too early to act. The timing of any program adjustments will depend on incoming economic data. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the Sonoma County Economic Development Board in Rohnert Park, California, on June 28, 2013.

Mary C. Daly, Brian Lucking, and Jonathan A. Schwabish
June 24, 2013

Social Security Disability Insurance is projected to be insolvent before the end of the decade. How best to restore the program to long-term financial health depends on what has been driving its rapid growth. Demographic shifts and other predictable factors explain part of the increase. But a sizable share reflects increasing participation in the program across population groups. Curbing this growth is important for putting the program back on a sustainable fiscal path.

Brian Lucking and Daniel Wilson
June 3, 2013

Federal fiscal policy during the recession was abnormally expansionary by historical standards. However, over the past 2½ years it has become unusually contractionary as a result of several deficit reduction measures passed by Congress. During the next three years, we estimate that federal budgetary policy could restrain economic growth by as much as 1 percentage point annually beyond the normal fiscal drag that occurs during recoveries.

John C. Williams
May 20, 2013

The economy and the labor market have improved substantially since the Federal Reserve started its current $85 billion monthly asset purchase program last September. However, it will take further gains to demonstrate that the “substantial improvement” test for ending Fed asset purchases has been met. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco at the Portland Business Journal’s CFO of the Year Awards Luncheon in Portland, Oregon, on May 16, 2013.

Leila Bengali, Mary Daly, and Rob Valletta
May 13, 2013

The most recent U.S. recession and recovery have been accompanied by a sharp decline in the labor force participation rate. The largest declines have occurred in states with the largest job losses. This suggests that some of the recent drop in the national labor force participation rate could be cyclical. Past recoveries show evidence of a similar cyclical relationship between changes in employment and participation, which could portend a moderation or reversal of the participation decline as the current recovery continues.

Early Elias and Òscar Jordà
May 6, 2013

The Federal Reserve was created 100 years ago in response to the harsh recession associated with the Panic of 1907. Comparing that recession with the Great Recession of 2007–09 suggests the Fed can mitigate downturns to some extent. A statistical analysis suggests that if a central bank had lowered interest rates during 1907 panic the same way the Fed did during the 2008 financial crisis, gross domestic product would have contracted two percentage points less than it actually did.

John Krainer
April 22, 2013

Commercial real estate construction faltered during the 2007 recession and has improved only slowly during the recovery. However, low interest rates have led to higher property valuations and are clearly benefiting the sector. The recovery of commercial property prices has been notable. Some measures suggest that, in some segments of the market, prices are close to their pre-recession highs. Valuation measures do not suggest that current prices are excessive.

David Neumark and Jennifer Muz
April 15, 2013

California job growth over the past two decades has been relatively anemic compared with gains in the rest of the country. Nevertheless, economic output has grown faster in California than in the rest of the United States. One factor underlying this pattern may be the growth of higher-wage jobs in California, which has contributed more to output than to employment growth. This creates relatively few opportunities for low-skilled workers, which may help explain why poverty increased more in California than in most states over the period.

Stephen F. LeRoy
April 8, 2013

Why are the prices of stocks and other assets so volatile? Efficient capital markets theory implies that stock prices should be much less volatile than actually observed, reflecting an unrealistic assumption that investors are risk neutral. If instead investors are assumed to be risk averse, predicted volatility is higher. However, models that incorporate investor avoidance of risk can explain real-world stock price volatility only under levels of risk aversion that are unrealistically high. Thus, price volatility remains unexplained.

Reuven Glick and Sylvain Leduc
April 1, 2013

Although the Federal Reserve does not target the dollar, its announcements about monetary policy changes can affect the dollar’s exchange value. Before the 2007-09 financial crisis, the dollar’s value generally fell when the Fed lowered its target for the federal funds rate. Since the crisis, the Fed’s announcements of monetary policy easing through unconventional means have had similar effects on the dollar’s exchange rate.

John Fernald, Israel Malkin, and Mark Spiegel
March 25, 2013

Some commentators have questioned whether China’s economy slowed more in 2012 than official gross domestic product figures indicate. However, the 2012 reported output and industrial production figures are consistent both with alternative Chinese indicators of the country’s economic activity, such as electricity production, and trade volume measures reported by non-Chinese sources. These alternative domestic and foreign sources provide no evidence that China’s economic growth was slower than official data indicate.

Adam Hale Shapiro
March 11, 2013

Medical-care expenditures have been rising rapidly and now represent almost one-fifth of all U.S. economic activity. An analysis of the privately insured health-care market from 2003 to 2007 indicates that higher prices for medical services contributed largely to nominal spending growth, but did not greatly exceed general overall inflation. In addition, the quantity of services consumed per episode of treatment did not grow during this period. Instead, most of the rise in inflation-adjusted medical-care spending reflected a higher percentage of insurance enrollees receiving treatment.

Leila Bengali and Mary Daly
March 4, 2013

Economic mobility is a core principle of the American narrative and the basis for the American Dream. However, research suggests that the United States may not be as mobile as Americans believe. The United States has high absolute mobility in the sense that children readily become richer than their parents. But the nation appears to fall short on relative mobility, which is the ability of children to change their rank in the income distribution relative to their parents.

John C. Williams
February 25, 2013

The primary reason unemployment remains high is a lack of demand. An aggregate demand shortfall is exactly the kind of problem monetary policy can address. Thus, we need powerful and continuing monetary stimulus to move toward maximum employment and price stability. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to The Forecasters Club in New York, New York, on February 21, 2013.

Atif Mian and Amir Sufi
February 11, 2013

What explains the sharp decline in U.S. employment from 2007 to 2009? Why has employment remained stubbornly low? Survey data from the National Federation of Independent Businesses show that the decline in state-level employment is strongly correlated with the increase in the percentage of businesses complaining about lack of demand. While business concerns about government regulation and taxes also rose steadily from 2008 to 2011, there is no evidence that job losses were larger in states where businesses were more worried about these factors.

Rob Valletta
February 4, 2013

U.S. labor market conditions have improved over the past few years. But the average duration of unemployment has remained very high, suggesting that job prospects for the long-term unemployed have stagnated. However, a closer look at the data indicates that the incidence of long-term unemployment has declined over the past few years, and that job prospects for the long-term unemployed are not as downbeat as the average duration data suggest.

John C. Williams
January 21, 2013

The Federal Reserve has taken bold steps this past year, both in the approaches to stimulate the economy and the way it talks about policy. The Fed’s initiatives are working, and represent the best course to move toward maximum employment and price stability. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the Semiconductor Materials and Equipment International (SEMI) 2013 Industry Strategy Symposium, in Half Moon Bay, California, on January 14, 2013.

Galina Hale
January 14, 2013

The countries of the European periphery are experiencing a balance of payments crisis stemming from persistent current account deficits and sharply lower private capital inflows, a condition known as a sudden stop. In countries with fixed exchange rates, sudden stops typically drain foreign reserves, forcing currency depreciation which eventually shifts the current account from deficit to surplus. However, the sudden stop has not prompted the European periphery countries to move toward devaluation by abandoning the euro, in part because capital transfers from euro-area partners have allowed them to finance current account deficits.

2012

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Michael D. Bauer
December 24, 2012

Market expectations about the Federal Reserve’s policy rate involve both the future path of that rate and the uncertainty surrounding that path. Fed policy actions have historically been preceded by high levels of uncertainty, which decline after the policy is made public. Recently, measures of near-term interest rate uncertainty have fallen to historical lows, due partly to a Fed policy rate near zero. Unconventional monetary policies have substantially lowered both expectations and uncertainty about the future path of the Fed’s policy rate.

Mary Daly, Early Elias, Bart Hobijn, and Òscar Jordà
December 17, 2012

In January, the U.S. Bureau of Labor Statistics significantly reduced its projections for medium-term labor force participation. The revision implies that recent participation declines have largely been due to long-term trends rather than business-cycle effects. However, as the economy recovers, some discouraged workers may return to the labor force, boosting participation beyond the Bureau’s forecast. Given current job creation rates, if workers who want a job but are not actively looking join the labor force, the unemployment rate could stop falling in the short term.

Zheng Liu and Mark M. Spiegel
December 13, 2012

China prohibits its private sector from freely trading foreign assets and tightly manages currency exchange rates. In the wake of the recent global financial crisis, interest rates on China’s foreign assets fell sharply, while yields on Chinese domestic assets remained relatively high, posing a challenge for China’s monetary policy. Opening the capital account would improve China’s capacity to weather external shocks, such as sudden declines in foreign interest rates. However, allowing the exchange rate to float without removing capital controls is less effective.

Sylvain Leduc and Daniel Wilson
November 26, 2012

Federal highway grants to states appear to boost economic activity in the short and medium term. The short-term effects appear to be due largely to increases in aggregate demand. Medium-term effects apparently reflect the increased productive capacity brought by improved roads. Overall, each dollar of federal highway grants received by a state raises that state’s annual economic output by at least two dollars, a relatively large multiplier.

John C. Williams
November 13, 2012

After the federal funds rate target was lowered to near zero in 2008, the Federal Reserve has used two types of unconventional monetary policies to stimulate the U.S. economy: forward policy guidance and large-scale asset purchases. These tools have been effective in pushing down longer-term Treasury yields and boosting other asset prices, thereby lifting spending and the economy. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco at the University of California, Irvine, on November 5, 2012.

Fred Furlong and Yelena Takhtamanova
November 5, 2012

Rapid house price appreciation during the housing boom significantly influenced homebuyer selection of adjustable-rate mortgages over fixed-rate mortgages. In markets with high house price appreciation, house price gains directly influenced mortgage choice. But in markets with less appreciation, price gains did not influence borrower choices between adjustable or fixed-rate mortgages. In addition, the influence of fundamental drivers of mortgage choice, such as mortgage interest rate margins, tended to be muted in markets with high price appreciation.

William Hedberg and John Krainer
October 29, 2012

Borrowers who default on mortgages return to the mortgage market at extremely slow rates. Only about 10% of borrowers with a prior serious delinquency regain access to the mortgage market within 10 years of their default. Borrowers who terminate mortgages for reasons other than default return to the market about two-and-a-half times faster than those who default. Renewed access to credit takes even longer for subprime borrowers with a serious delinquency on their record.

Israel Malkin and Mark M. Spiegel
October 15, 2012

Many analysts have predicted that a Chinese economic slowdown is inevitable because the country is approaching the per capita income at which growth in other countries began to decelerate. However, China may escape such a slowdown because of its uneven development. An analysis based on episodes of rapid expansion in four other Asian countries suggests that growth in China’s more developed provinces may slow to 5.5% by the close of the decade. But growth in the country’s less-developed provinces is expected to run at a robust 7.5% pace.

John C. Williams
October 1, 2012

Progress reducing unemployment has nearly stalled, while annual inflation has fallen below the Federal Reserve’s 2% target. To move toward maximum employment and price stability, the Fed recently announced plans to purchase more mortgage-backed securities and extend its commitment to keep its benchmark interest rate exceptionally low through mid-2015. Thanks partly to these actions, the recovery should gain momentum. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco at the City Club of San Francisco on September 24, 2012.

Bharat Trehan and Oskar Zorrilla
September 24, 2012

One measure of a successful monetary policy is its ability to anchor expectations about future inflation rates. Financial crises, such as that of 2008–09, can be considered natural experiments that test this anchoring. The effects of the crisis on inflation expectations were largely temporary in the United States, but longer-lasting in the United Kingdom. That is surprising because the United Kingdom had a formal inflation target during this period. Expectations may have been affected more because inflation stayed above the central bank’s target for extended periods following the crisis.

Sylvain Leduc and Zheng Liu
September 17, 2012

Heightened uncertainty acts like a decline in aggregate demand because it depresses economic activity and holds down inflation. Policymakers typically try to counter uncertainty’s economic effects by easing the stance of monetary policy. But, in the recent recession and recovery, nominal interest rates have been near zero and couldn’t be lowered further. Consequently, uncertainty has reduced economic activity more than in previous recessions. Higher uncertainty is estimated to have lifted the U.S. unemployment rate by at least one percentage point since early 2008.

David Neumark, Jed Kolko, and Marisol Cuellar Mejia
September 4, 2012

Indexes that rank state business climates figure prominently in debates about economic policy. But empirical evidence is rarely examined on which index factors actually correlate with economic growth. A statistical analysis suggests that state business climate indexes that focus on taxes and business costs are more closely associated with growth than indexes that measure productivity and quality of life. However, these business climate elements are less important for growth than nonpolicy factors, such as climate and population density.

Elizabeth Laderman
August 27, 2012

Total business loans under $1 million held by small U.S. banks continue to dwindle. Disproportionate negative growth at financially weak small banks has been an important factor in this decline. Loan volumes at strong small banks actually grew in 2011. The finding supports the view that supply conditions, not just tepid demand for credit, have affected bank lending to small businesses.

John Krainer
August 20, 2012

A key ingredient of an economic recovery is a pickup in household spending supported by increased consumer debt. As the current economic recovery has struggled to take hold, household debt levels have grown little. Some evidence indicates that households adjusted debt in line with house price movements in their local markets. However, the data show that consumer debt cutbacks were largest among households that defaulted on mortgages or had lower credit scores, suggesting that household borrowing also was restricted by tight aggregate credit supply.

Reuven Glick and Mark M. Spiegel
August 13, 2012

In the wake of the global financial crisis of 2007–08, Asia has emerged as a pillar of financial stability and economic growth. A recent San Francisco Federal Reserve Bank conference focused on Asia’s changing role in the global economy. Asia’s relative strength is allowing it to play an expanded part in multilateral responses to the European sovereign debt crisis. And the reforms put in place following the 1997 Asian financial crisis offer models for countries currently trying to stabilize their economies.

Galina Hale and Fernanda Nechio
August 6, 2012

Historically, oil and natural gas prices have moved hand in hand. However, in the past few years, while oil prices climbed to near record peaks, natural gas prices fell to levels not seen since the mid-1970s as a result of new hydraulic fracturing technology. U.S. consumer energy expenditures are still mainly driven by oil prices, so household energy bills got little relief as natural gas prices fell. Moreover, even though the United States has trimmed crude oil imports, they still equal a substantial share of gross domestic product.

John C. Williams
July 23, 2012

The pace of economic growth has been frustratingly slow and the recovery has lost momentum in recent months. The economy is weighed down by the ongoing European sovereign debt crisis and fiscal tightening in our own country. In these circumstances, it is essential that the Federal Reserve provide sufficient monetary accommodation to keep our economy moving towards the central bank’s maximum employment and price stability mandates. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the Idaho, Nevada, and Oregon Bankers Associations on July 9, 2012.

John C. Williams
July 9, 2012

Textbook monetary theory holds that increasing the money supply leads to higher inflation. However, the Federal Reserve has tripled the monetary base since 2008 without inflation surging. With interest rates at historically low levels and the economy still struggling, the normal money multiplier process has broken down and inflation pressures remain subdued. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the Western Economic Association International on July 2, 2012.

Brian Lucking and Dan Wilson
July 2, 2012

Aggregate state, local, and federal fiscal policy was expansionary during the Great Recession and the initial stages of recovery, providing a tailwind to economic growth. Federal fiscal policy in particular was more expansionary than usual, according to a historical analysis, even when the weakness of the economy is taken into account. However, during the past year, aggregate government budgetary policy has reversed course. Over the next few years, as federal fiscal policy shifts toward austerity, it is likely to be a headwind against economic growth.

Marius Jurgilas and Kevin J. Lansing
June 25, 2012

In the aftermath of the global financial crisis and the Great Recession, research has sought to understand the behavior of house prices. A feature of all bubbles is the emergence of seemingly plausible fundamental arguments that attempt to justify the dramatic run-up in prices. Comparing the U.S. housing boom of the mid-2000s with ongoing Norwegian housing market trends again poses the question of whether a bubble can be distinguished from a rational response to fundamentals. Survey evidence on expectations about house prices can be useful for diagnosing a bubble.

Eric Swanson
June 11, 2012

The recent recession and recovery raise important questions about the relative weight of structural and cyclical factors in the economy. A recent San Francisco Federal Reserve Bank conference explored the extent to which different economic variables behaved in a standard cyclical fashion during this episode or were scarred in a more permanent, structural manner. Both cyclical and structural effects appear evident in the recession, suggesting that some features of the U.S. economy can benefit from stimulatory monetary and fiscal policy, while others are more permanently damaged and unlikely to respond to such policies.

Galina Hale, Elliot Marks, and Fernanda Nechio
June 4, 2012

The European sovereign debt crisis has created tensions in the global corporate debt market. Investors increasingly hold international assets and companies issue bonds in many countries. Thus, shocks to the European corporate bond market are readily transmitted to the U.S. corporate bond market. However, the rate of transmission is less than one-to-one. Moreover, different segments of the U.S. market vary in the magnitude of their response to European shocks. In particular, higher-rated nonfinancial borrowers and lower-rated financial borrowers are less affected on average.

Michael D. Bauer
May 21, 2012

Past rounds of large-scale asset purchases by the Federal Reserve have lowered yields not only on the targeted securities, but also on various private borrowing rates. In particular, yields on corporate bonds and primary mortgage rates decreased in response to Fed asset purchase announcements. Notably, however, the link between rates on mortgage-backed securities and actual mortgage rates has weakened in the wake of the financial crisis.

Philip E. Strahan
May 14, 2012

The 2007–08 financial crisis was the biggest shock to the banking system since the 1930s, raising fundamental questions about liquidity risk. The global financial system experienced urgent demands for cash from various sources, including counterparties, short-term creditors, and, especially, existing borrowers. Credit fell, with banks hit hardest by liquidity pressures cutting back most sharply. Central bank emergency lending programs probably mitigated the decline. Ongoing efforts to regulate bank liquidity may strengthen the financial system and make credit less vulnerable to liquidity shocks.

Galina Hale, Bart Hobijn, and Rachna Raina
May 7, 2012

Commodity prices have soared several times in recent years, raising concerns that overall inflation could rise substantially. However, crops, oil, and natural gas make up only about 5% of the cost of U.S. consumer goods and services. Thus, about one percentage point of the 10% cumulative inflation since 2007 reflects price rises in these important commodity categories. When the contribution of these commodities is subtracted from overall inflation, the resulting pattern is remarkably similar to that of core inflation, which excludes food and energy prices.

David Neumark and Rob Valletta
April 30, 2012

Some observers have argued that the nation’s high unemployment rate during the current recovery stems partly from widespread mismatches between the skills of jobseekers and the needs of employers. A recent San Francisco Federal Reserve Bank conference on workforce skills considered evidence that employers have had difficulties finding workers with appropriate skills in recent years. However, these mismatches do not appear to be much more severe than in the past. Overall, the conference proceedings suggested the U.S. economy can still produce good jobs for workers at a variety of skill levels.

Òscar Jordà
April 16, 2012

Credit is a perennial understudy in models of the economy. But it became the protagonist in the Great Recession, reviving a role it had not played since the Great Depression. In fact, the central part played by credit in the downturn and weak recovery of recent years is not unusual. A study of 14 advanced economies over the past 140 years shows that financial crises have frequently led to severe and prolonged recessions. Shining the spotlight on credit turns out to be crucial in understanding recent economic events and the outlook.

John C. Williams
April 9, 2012

States that were hit hard by the housing bust performed worse economically during the recession of 2007-09. However, the close relationship between the fall in home prices and state economic activity has largely disappeared during the recovery. High unemployment, restrained demand, and idle production capacity are national in scope. These are just the sorts of problems monetary policy can address. The following is adapted from a speech by the president and CEO of the Federal Reserve Bank of San Francisco at the University of San Diego on April 3, 2012.

Mary Daly, Bart Hobijn, and Brian Lucking
April 2, 2012

Despite a severe recession and modest recovery, real wage growth has stayed relatively solid. A key reason seems to be downward nominal wage rigidities, that is, the tendency of employers to avoid cutting the dollar value of wages. This phenomenon means that, in nominal terms, wages tend not to adjust downward when economic conditions are poor. With inflation relatively low in recent years, these rigidities have limited reductions in the real wages of a large fraction of U.S. workers.

Galina Hale and Alec Kennedy
March 26, 2012

The overall effect of the global financial crisis on emerging Asia was limited and short-lived. However, the crisis affected some countries in the region more than others. Two main crisis transmission channels, exposure to U.S. financial markets and reliance on manufacturing exports, determined how severely countries in the region were affected. Countries that were relatively less connected to global financial markets and relied less on trade fared better and recovered more quickly than countries that were more dependent on global financial and trade markets.

David Neumark
March 19, 2012

The adverse labor market effects of the Great Recession have intensified interest in policy efforts to spur job creation. The two most direct job creation policies are subsidies that go to workers and hiring credits that go to employers. Evidence indicates that worker subsidies are generally more effective at creating jobs. However, the unique circumstances of recovery from the Great Recession, especially the weak demand for labor, make hiring credits more effective in the short term.

Jens Christensen and James Gillan
March 5, 2012

The second round of Federal Reserve large-scale asset purchases, from November 2010 to June 2011, included regular purchases of Treasury inflation-protected securities, or TIPS. An analysis of liquidity premiums indicates that the functioning of the TIPS market and the related inflation swap market improved both on the days the Fed purchased TIPS and over the course of the LSAP program. Thus, TIPS purchases had liquidity benefits beyond the effect they may have had in reducing Treasury yields.

Israel Malkin and Fernanda Nechio
February 27, 2012

Even in areas that have a common currency, economic conditions can vary greatly from one region to another. So a single uniform monetary policy may not be appropriate. For example, a simple monetary policy rule at times recommends different interest rates for different regions of the United States. Among euro-area countries, such a rule typically recommends an even greater divergence in interest rates, partly due to lower labor mobility, and less use of fiscal transfers to help smooth shocks.

Elizabeth Laderman
February 13, 2012

When the housing boom of the past decade turned into a bust, falling house prices played a primary role in driving up delinquency and foreclosure rates. As housing values fell, distressed borrowers lost equity, which hindered their ability to escape delinquency by prepaying their mortgages by refinancing or selling their homes. Falling house prices may have especially impinged on subprime and adjustable-rate borrowers. These homeowners may have counted on being able eventually to refinance into loans with terms more affordable than those of their original mortgages.

Daniel J. Wilson
February 6, 2012

The severe global economic downturn and the large stimulus programs that governments in many countries adopted in response have generated a resurgence in research on the effects of fiscal policy. One key lesson emerging from this research is that there is no single fiscal multiplier that sums up the economic impact of fiscal policy. Rather, the impact varies widely depending on the specific fiscal policies put into effect and the overall economic environment.

Rob Valletta and Katherine Kuang
January 30, 2012

During the recent recession, unemployment duration reached levels well above those of past downturns. Duration has continued to rise during the uneven economic recovery that began in mid-2009. Elevated duration reflects such factors as changes in survey measurement, the demographic characteristics of the unemployed, and the availability of extended unemployment benefits. But the key explanation is the severe and persistent weakness in aggregate demand for labor.

John C. Williams
January 17, 2012

During the financial crisis of 2007–09, the Federal Reserve took extraordinary steps to stem financial panic. Since then, the Fed has also taken extraordinary action to boost economic growth. The Fed continues to do its level best to achieve its congressionally mandated goals of maximum employment and stable prices. The following is adapted from a speech by the president and CEO of the Federal Reserve Bank of San Francisco at The Columbian’s Economic Forecast Breakfast January 10, 2012, in Vancouver, Washington.

Carolyn L. Evans
January 9, 2012

Since 2001, countries around the world have been working on crafting a new global pact to liberalize trade. Despite the difficulties of completing such a multilateral agreement, it remains a worthwhile goal for two reasons. First, a global pact offers cost and efficiency benefits that can’t be achieved under the kinds of agreements among smaller groups of countries that have proliferated in recent years. Second, a global agreement presents a unique opportunity to optimize the use of the world’s resources, thereby improving well-being around the world.

2011

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John Krainer and James A. Wilcox
December 19, 2011

Real estate prices in a local market can be driven by an identifiable group of purchasers. In Hawaii, residents of both the U.S. mainland and Japan have been significant purchasers of homes. An analysis suggests that house prices in Hawaii were driven primarily by purchasers from the U.S. mainland for most of the 1975–2008 period. But, during Japan’s “bubble economy” in the late 1980s and immediately thereafter, house prices in Hawaii were driven primarily by demand from Japan.

Paul Bergin
December 5, 2011

Before the global financial crisis of 2007-2009, the United States and several other countries posted large current account deficits. Many of these countries also experienced asset price booms. Evidence suggests the two developments were linked. Rising asset values in the United States permitted households to borrow more easily to boost consumption, while the net sale of debt securities abroad financed current account deficits. The fall in some asset prices since the crisis can make it easier to reduce current account imbalances.

Michael Bauer and Glenn Rudebusch
November 21, 2011

Federal Reserve announcements of future purchases of longer-term bonds may affect asset prices by changing market expectations of the future supply of targeted securities. Such announcements may also affect asset prices by signaling that the stance of conventional monetary policy is likely to remain loose for longer than previously anticipated. Research suggests that these signaling effects were a major contributor to the cumulative declines in Treasury security yields following the eight Fed announcements in 2008 and 2009 about its first round of large-scale asset purchases.

Travis J. Berge, Early Elias, and Òscar Jordà
November 14, 2011

In 2010, statistical experiments based on components of the Conference Board’s Leading Economic Index showed a significant possibility of a U.S. recession over a 24-month period. Since then, the European sovereign debt crisis has aggravated international threats to the U.S. economy. Moreover, the Japanese earthquake and tsunami demonstrated that the U.S. economy is vulnerable to outside disruptions. Updated forecasts suggest that the probability of a U.S. recession has remained elevated and may have increased over the past year, in part because of foreign financial and economic crises.

Michael Bauer
November 7, 2011

To understand the effects of news on bond markets, it is instructive to look beyond individual maturities and consider the entire term structure of interest rates. For example, unexpected changes in monthly nonfarm payroll employment numbers cause large movements at short and medium maturities, but do not affect long-term interest rates. Inflation news affects the long end of the term structure. Monetary policy actions vary in their effects on interest rates, but cause volatility at all maturities, including distant forward rates.

Jeremy Gerst and Daniel J. Wilson
October 24, 2011

The payment landscape has changed dramatically in recent years as new technologies have been brought to market. Yet, the demand for U.S. currency—cold, hard cash—shows no sign of fading. An empirical analysis indicates that alternative payment technologies have tended to keep cash growth in check, but other factors have more than offset this. Over the next 10 years, cash volume is projected to grow 1.7% per year.

Liz Laderman and James Gillan
October 17, 2011

Although bank small business loan portfolios continue to shrink, there are hints of possible stabilization. Among smaller banks, small business lending that is not backed by commercial real estate looks slightly healthier than small business lending that is secured by commercial property. Meanwhile, small commercial and industrial loans at larger banks are showing clear signs of a turnaround. Evidence from the 2001 recession as well as loan performance data suggest that small commercial and industrial loans at smaller banks may not be far behind.

John C. Williams
October 3, 2011

Researchers have made great strides in improving our understanding of the effects of unconventional monetary policy. Although further study is needed, the evidence from the past few years demonstrates that both forward guidance and large-scale asset purchases are useful policy tools when short-term interest rates are constrained by the zero bound.

The following is adapted from a presentation made by the president and CEO of the Federal Reserve Bank of San Francisco to the Swiss National Bank Research Conference on September 23, 2011. The full text is available at http://www.frbsf.org/news/speeches/2011/john-williams-0923.html

Rob Valletta and Katherine Kuang
September 26, 2011

Rising layoff rates during the spring of 2011 highlight renewed labor market weakness. Although job cuts among state and local governments have accelerated over the past few years, most of the recent increase occurred among private-sector employers. Following modest improvement in early summer, subsequent labor market performance has been uneven, indicating that labor market conditions remain fragile.

Bart Hobijn, John Krainer and David Lang
September 19, 2011

Commercial real estate capitalization rates have been found to be good indicators of expected returns in commercial properties. Recent declines in these cap rates appear to be signaling a commercial real estate rebound, indicating improved investor expectations of price growth in the market. Movements in national cap rates are the predominant drivers of changes in cap rates in local markets. Therefore, the anticipated commercial real estate rebound is likely to be widespread across many metropolitan areas.

James A. Wilcox and Luis G. Dopico
September 12, 2011

Mergers tend to improve credit union cost efficiency. When the acquirer is much larger than the target credit union, target members benefit in terms of lower loan rates and higher deposit rates, while acquirer members see little change. When merger partners are more equal in size, these benefits are shared more evenly. Over time, credit union mergers have shifted from, on average, only benefiting targets to also benefiting acquirers to some extent.

Òscar Jordà
August 29, 2011

The recent financial crisis showed that a financial institution’s equity may be sufficient to absorb losses during normal times, but insufficient during periods of systemic distress. In recognition of this risk, the Basel III agreement last year introduced a new element of macroprudential regulation called countercyclical buffers, variable capital requirements that shift based on credit growth. These buffers raise the classic regulatory dilemma of safety versus economic growth, but may provide protection against financial calamity at an acceptable cost.

Zheng Liu and Mark M. Spiegel
August 22, 2011

Historical data indicate a strong relationship between the age distribution of the U.S. population and stock market performance. A key demographic trend is the aging of the baby boom generation. As they reach retirement age, they are likely to shift from buying stocks to selling their equity holdings to finance retirement. Statistical models suggest that this shift could be a factor holding down equity valuations over the next two decades.

Galina Hale and Bart Hobijn
August 8, 2011

Goods and services from China accounted for only 2.7% of U.S. personal consumption expenditures in 2010, of which less than half reflected the actual costs of Chinese imports. The rest went to U.S. businesses and workers transporting, selling, and marketing goods carrying the “Made in China” label. Although the fraction is higher when the imported content of goods made in the United States is considered, Chinese imports still make up only a small share of total U.S. consumer spending. This suggests that Chinese inflation will have little direct effect on U.S. consumer prices.

Zheng Liu and and Justin Weidner
August 1, 2011

Recent surges in food and energy prices have pushed up headline inflation to levels well above its underlying trend. In contrast, core inflation, which excludes food and energy prices, has remained low and stable. Historical data suggest that, since the early 1990s, headline inflation has tended to converge toward core inflation. Thus, high inflation is unlikely to persist as long as inflation expectations remain anchored.

William Hedberg and John Krainer
July 25, 2011

Over the past several years, U.S. housing starts have dropped to around 400,000 units at an annualized rate, the lowest level in decades. A simple model of housing supply that takes into account residential mortgage foreclosures suggests that housing starts will return to their long-run average by about 2014 if house prices first stabilize and then begin appreciating, and the bloated inventory of foreclosed properties declines.

James A. Wilcox
July 18, 2011

Small businesses have relied considerably on securitized markets for credit. The recent financial crisis led to a virtual cessation of securitization of some of the loans used by small businesses, such as commercial real estate mortgages, vehicle, and credit card loans. In addition, values of commercial and residential real estate, which small businesses often use as collateral for loans, dropped dramatically. As a consequence, small businesses may have experienced tighter credit conditions than larger businesses, which rely relatively less on those categories of loans and collateral.

Kevin J. Lansing
July 11, 2011

The Great Recession of 2007-2009, coming on the heels of a spending binge fueled by a housing bubble, so far has resulted in over $7,300 in foregone consumption per person, or about $175 per person per month. The recession has had many costs, including negative impacts on labor and housing markets, and lost government tax revenues. The extensive harm of this episode raises the question of whether policymakers could have done more to avoid the crisis.

Fred Furlong
June 27, 2011

Stress testing was a potent tool in the supervision of bank capital during the financial crisis. Stress tests can enhance supervision of bank capital by providing a more forward-looking and flexible process for assessing risks that might not be fully captured by risk-based capital standards. The level and quality of capital among large banking organizations has increased notably since the introduction of stress tests during the financial crisis.

Jens Christensen and James Gillan
June 20, 2011

Estimating market expectations for inflation from the yield difference between nominal Treasury bonds and Treasury inflation-protected securities—a difference known as breakeven inflation—is complicated by the liquidity differential between these two types of securities. Currently, the extent to which liquidity plays a role in determining breakeven inflation remains contentious. Information from the market for inflation swaps provides a range for the possible liquidity premium in TIPS, which in turn suggests a range for estimates of inflation expectations that is well below the widely followed Survey of Professional Forecasters inflation forecast.

Fernanda Nechio
June 13, 2011

The European Central Bank recently raised its target interest rate for the first time since the 2008 financial crisis. When compared with a simple interest rate rule, this rate hike appears consistent with the euro area’s nascent economic recovery and rising inflation. However, economic conditions vary greatly among the countries in the euro area and the ECB’s new target rate may not be suitable for all of them.

John C. Williams
June 6, 2011

Economics education faces a challenge in keeping up with the changes that have swept through monetary policy in recent decades. Many central banking innovations, such as interest on reserves and large-scale asset purchases, aren’t adequately treated in standard textbooks. The following is adapted from a presentation made by the president and CEO of the Federal Reserve Bank of San Francisco to the AEA National Conference on Teaching Economics and Research in Economic Education in San Francisco on June 1, 2011.

Bharat Trehan
May 23, 2011

The University of Michigan survey of consumers shows that expected inflation has moved up noticeably over the past few months, raising concerns that we may be in for a period of rising inflation. However, the increase in expected inflation likely reflects the excess sensitivity of consumers to food and energy prices. Consistent with this hypothesis, household surveys have not forecast inflation well in recent years, a period of volatile food and energy prices.

Titan Alon, John Fernald, Robert Inklaar, and J. Christina Wang
May 16, 2011

Financial institutions often do not charge explicit fees for the services they provide, but are instead compensated by the spread between interest rates on loans and deposits. The lack of explicit fees in lending makes it difficult to measure the output of banks and other financial institutions. Effective measurement should distinguish between income derived from lending services and income derived from portfolio decisions about risk and duration, and should be consistent among bank and nonbank financial institutions.

John C. Williams
May 9, 2011

Inflation has risen of late, reflecting higher prices for many commodities. The inflation rate is likely to peak around the middle of 2011 and then return to an annual level of about 1¼ to 1½%. A sustained period of high inflation is very unlikely and the Fed wi