Economic Letter
Brief summaries of SF Fed economic research that explain in reader-friendly terms what our work means for the people we serve.
-
The Economic Recovery: Past, Present, and Future
John C. Williams
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.
-
The Future of Social Security Disability Insurance
Mary C. Daly
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.
-
Fiscal Headwinds: Is the Other Shoe About to Drop?
Brian Lucking and Daniel Wilson
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.
-
Economic Outlook: Moving in the Right Direction
John C. Williams
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.
-
Will Labor Force Participation Bounce Back?
Leila Bengali, Mary C. Daly
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.
-
Crises Before and After the Creation of the Fed
Early Elias and Òscar Jordà
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.
-
Commercial Real Estate and Low Interest Rates
John Krainer
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.
-
Job Growth and Economic Growth in California
David Neumark and Jennifer Muz
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.
-
Can Risk Aversion Explain Stock Price Volatility?
Stephen F. LeRoy
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.
-
Unconventional Monetary Policy and the Dollar
Reuven Glick and Sylvain Leduc
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.