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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Does the Fed Know More about the Economy?
Pascal Paul
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.
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Banks’ Real Estate Exposure and Resilience
Simon Kwan
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.
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Climate Change and the Federal Reserve
Glenn D. Rudebusch
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.
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Modeling Financial Crises
Pascal Paul
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.
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Inflationary Effects of Trade Disputes with China
Galina Hale, Bart Hobijn, Fernanda Nechio, and Doris Wilson
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.
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Measuring Connectedness between the Largest Banks
Galina Hale, Jose A. Lopez, and Shannon Sledz
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.
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Inflation: Stress-Testing the Phillips Curve
Òscar Jordà, Chitra Marti, Fernanda Nechio, and Eric Tallman
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.
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How Much Could Negative Rates Have Helped the Recovery?
Vasco Cúrdia
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.
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Nonmanufacturing as an Engine of Growth
Huiyu Li
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.
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Does Ultra-Low Unemployment Spur Rapid Wage Growth?
Sylvain Leduc, Chitra Marti, and Daniel J. Wilson
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.