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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Monetary Policy Stance Is Tighter than Federal Funds Rate
Jason Choi, Taeyoung Doh, Andrew Foerster, and Zinnia Martinez
The Federal Reserve’s use of forward guidance and balance sheet policy means that monetary policy consists of more than changing the federal funds rate target. A proxy federal funds rate that incorporates data from financial markets can help assess the broader stance of monetary policy. This proxy measure shows that, since late 2021, monetary policy has been substantially tighter than the federal funds rate indicates. Tightening financial conditions are similar to what would be expected if the funds rate had exceeded 5¼% by September 2022.
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Comparing Measures of Housing Inflation
Leila Bengali
Measuring the price of shelter for homeowners is difficult, even when housing markets are stable. A new measure of shelter price inflation uses mortgage, tax, and insurance payments, rather than the implied rental value of homes used in the consumer price index (CPI). The payments method suggests year-over-year shelter price inflation rose 4.3% nationally in July, compared with the CPI’s 5.8% estimate. Conditions in rental markets likely explain this difference. Comparing the varying results nationally and across regions highlights the challenge of accurately measuring the shelter inflation that homeowners face.
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What If? Monetary Policy in Hindsight
Regis Barnichon
If the Federal Reserve had expected the upcoming inflation surge back in March 2021, would it have acted differently? A new method to tackle such “what if” questions suggests that it may have been preferable to only moderately raise the federal funds rate during 2021, even with perfect foresight. In that case, inflation would have been about 1 percentage point lower as of June 2022, while unemployment would be about 2 percentage points higher. This result reflects the importance of the Fed’s dual mandate of price stability and maximum employment.
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The Singularity of the Dual Mandate
Mary C. Daly
Economic security depends on both jobs and stable prices. Together, these two congressionally mandated goals constitute the Fed’s dual mandate. This mandate is not a choice between two desirable things. It is a balance meant to deliver on a singular goal—a sustainable and expanding economy that works for everyone. The following is adapted from remarks by the president of the Federal Reserve Bank of San Francisco at Boise State University on September 29.
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Remote Work and Housing Demand
Augustus Kmetz, John Mondragon, and Johannes Wieland
The COVID-19 pandemic reshaped the way households work. Nearly a third of employees still worked from home part time or full time as of August 2022. This has significantly increased housing demand and is a key factor explaining why U.S. house prices grew 24% between November 2019 and November 2021. Analysis shows that the shift to remote work may account for more than half of overall house price increases and similar increases in rents. This fundamental evolution in work-related housing demand may be important for future house prices.
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Wage Growth When Inflation Is High
Òscar Jordà, Celeste Liu, Fernanda Nechio, and Fabián Rivera-Reyes
In a tight labor market, workers are able to respond to price increases by bargaining for higher wages. Analyzing conditions since the pandemic shows that, in the recent environment of elevated inflation and low unemployment, wages have become much more sensitive to expected price inflation than in the past. The impact of inflation expectations on wages also appears to have become longer lasting.
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Finding a Soft Landing along the Beveridge Curve
Brandyn Bok, Nicolas Petrosky-Nadeau, Mary Yilma
As U.S. economic growth slows this year, a key question is whether job openings can fall from historical highs without a substantial rise in unemployment. Analyzing the current Beveridge curve relationship between unemployment and job openings presents a meaningful possibility that labor market pressures can ease and achieve a “soft landing” with only a limited increase in unemployment. This view is supported by high rates of job matching in the U.S. labor market in 2022, despite ongoing employment reallocation across industries.
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The Impact of Weather on Retail Sales
Brigitte Roth-Tran
Variation in weather could cause greater disruptions to a range of economic outcomes as severe weather events become more frequent or more extreme. Analyzing daily sales at a national apparel and sporting goods brand’s stores reveals that weather effects on store sales are surprisingly persistent, even after accounting for shoppers simply changing when and where they make their purchases. Moreover, sales at stores that have more experience with adverse weather events have a lower response, suggesting that adaptation may reduce the negative impact of increasingly severe weather on sales.
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Two Years into COVID, What’s the State of U.S. Businesses?
Pascal Paul
More than two years after the outbreak of COVID-19, concerns remain that U.S. businesses are substantially more vulnerable and less productive than in the past. Using extensive data on private and public firms allows for a detailed assessment of these concerns. According to a number of performance measures, businesses borrowing from large U.S. banks appear relatively healthy, increased leverage is concentrated among safer companies rather than riskier ones, and probabilities of default are close to pre-crisis levels.
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Will Workers Demand Cost-of-Living Adjustments?
Reuven Glick, Sylvain Leduc, and Mollie Pepper
Households are currently expecting inflation to run high in the short run but to remain muted over the more distant future. Given this divergence, what role do short-run and long-run household inflation expectations play in determining what workers expect for future wages? Data show that wage inflation is sensitive to movements in household short-run inflation expectations but not to those over longer horizons. This points to an upside risk for inflation, as workers negotiate higher wages that businesses could pass on to consumers by raising prices.