Economic Letter Countdown: Hot Topics from 2023

Market St, San Francisco

With the new year right around the corner, here’s a countdown of our own to close out 2023. Check out the list of our most popular FRBSF Economic Letter topics of the year, featuring research and insights from SF Fed economists.

5. The Newest Takes on Monetary Policy

Does Monetary Policy Have Long-Run Effects?
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.

Financial Market Conditions during Monetary Tightening
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.

4. Inflation and Tight Labor Markets

How Much Do Labor Costs Drive 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.

The Role of Immigration in U.S. Labor Market Tightness
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.

Reducing Inflation along a Nonlinear Phillips Curve
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.

3. Inflation Ties to Services and Supply Chains

Will a Cooler Labor Market Slow Supercore Inflation?
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.

Global Supply Chain Pressures and U.S. Inflation
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.

2. Inflation and Housing

Where Is Shelter Inflation Headed?
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.

Can Monetary Policy Tame Rent Inflation?
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.

And the #1 topic for 2023 was…

1. Excess Savings following the Pandemic

The Rise and Fall of Pandemic Excess Savings
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.

See updated research in the SF Fed Blog.

Data Revisions and Pandemic-Era Excess Savings
Hamza Abdelrahman and Luiz E. Oliveira
November 8, 2023

U.S. household savings rose and fell at unprecedented rates since the onset of the pandemic recession. Comprehensive data revisions by the Bureau of Economic Analysis show that households continue to hold significantly more savings than previously estimated. Our updated estimates suggest that more than $400 billion of accumulated excess savings remains in the aggregate economy, and those funds are likely to continue being drawn down into the first half of 2024.

See also monthly updates on the data page, Pandemic-Era Excess Savings.

FRBSF Economic Letter returns on January 8 with all-new research insights. We know you have a lot going on this time of year, so join the email list and we’ll let you know when it posts.

Happy New Year!

Market St, San Francisco

The views expressed here do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System.