Economic Letter
Brief summaries of SF Fed economic research that explain in reader-friendly terms what our work means for the people we serve.
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Policymaking in a Time of Uncertainty
Mary C. Daly
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.
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How Strongly Are Local Economies Tied to COVID-19?
Samuel R. Tarasewicz and Daniel J. Wilson
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.
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What Would It Cost to Issue 50-year Treasury Bonds?
Jens H.E. Christensen, Jose A. Lopez, and Paul L. Mussche
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.
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Climate Change Costs Rise as Interest Rates Fall
Michael D. Bauer and Glenn D. Rudebusch
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.
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Is the American Rescue Plan Taking Us Back to the ’60s?
Regis Barnichon, Luiz E. Oliveira, and Adam H. Shapiro
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.
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From Gaps to Growth: Equity as a Path to Prosperity
Mary C. Daly
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.
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How Do Business Cycles Affect Worker Groups Differently?
Evgeniya A. Duzhak
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.
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Effects of Asset Valuations on U.S. Wealth Distribution
Renuka Diwan, Evgeniya A. Duzhak, and Thomas M. Mertens
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.
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How Do Low and Negative Interest Rates Affect Banks?
Mauricio Ulate and Olivia Lofton
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.
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Labor Productivity in a Pandemic
John Fernald, Huiyu Li, and Mitchell Ochse
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.