Economic Letter
Brief summaries of SF Fed economic research that explain in reader-friendly terms what our work means for the people we serve.
-
Unemployment: Lower for Longer?
Nicolas Petrosky-Nadeau and Robert G. Valletta
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.
-
The Brexit Price Spike
Neil Gerstein, Bart Hobijn, Fernanda Nechio, and Adam Shapiro
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.
-
Why Is Inflation Low Globally?
Òscar Jordà, Chitra Marti, Fernanda Nechio, and Eric Tallman
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.
-
How Have Changing Sectoral Trends Affected GDP Growth?
Andrew Foerster, Andreas Hornstein, Pierre-Daniel Sarte, and Mark Watson
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.
-
Is Slow Still the New Normal for GDP Growth?
John Fernald and Huiyu Li
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.
-
Why Is the Fed’s Balance Sheet Still So Big?
Andrew Foerster and Sylvain Leduc
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.
-
Is the Hot Economy Pulling New Workers into the Labor Force?
Regis Barnichon
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.
-
The Risk of Returning to the Zero Lower Bound
Jens H.E. Christensen
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.
-
Improving the Phillips Curve with an Interaction Variable
Kevin J. Lansing
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.
-
The Evolution of the FOMC’s Explicit Inflation Target
Adam Shapiro and Daniel J. Wilson
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.