Inflation expectations, foreign investors, etc.

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Growing disparities in household inflation expectations during the pandemic have been driven by increased variation in actual and perceived inflation rates, according to Michael Weber of the University of Chicago, Yuriy Gorodnichenko of the University of California, Berkeley , and Olivier Coibion ​​of the University of Texas, Austin. The authors find that real inflation rose more during the pandemic for black, low-income, and less-educated people, primarily because they spent more on goods that rose in price more. They also find that the pandemic has increased variation between households in perceived inflation, which may differ from actual price changes when, for example, households focus only on price changes of some of the goods they buy. . The authors show that the link between the perception of inflation by households and their expectations of future inflation is significantly stronger than the link between observed inflation and expected inflation. About half of the increase in household disagreement about future inflation can be explained by changing perceptions of inflation. Furthermore, Weber and his co-authors find that many households that anticipate higher future inflation also anticipate higher future unemployment, suggesting that the differences in inflation expectations were partly due to differing views on the severity of the COVID shock.

Foreign investors hold about 35% of outstanding US Treasuries and were a major contributor to the huge Treasury sell-off in March 2020, leading to speculation that Treasuries have lost their safe haven status for global investors. Examining foreign asset flows since March 2020, Colin Weiss of the Federal Reserve Board finds little evidence of a persistent change in the structure of foreign demand for US Treasuries. He also finds that sales of Treasury bills by foreign investors during periods of financial stress are common. The March sell-off was mainly driven by Middle Eastern oil exporters (who faced high oil prices before the global financial crisis (GFC) but a crash in oil prices in the spring of 2020) and emerging market economies in East Asia (which had much less exposure to the global market during the GFC than the COVID-19 pandemic). This suggests that prevailing circumstances rather than a shift in global confidence in Treasuries have been key factors in recent times. Additionally, Treasury purchases resumed pre-H2 2020 and 2021 trends, and the US dollar’s share of foreign exchange reserves has remained stable since June 2020, implying that Treasury bills have retained their status. highly sought-after security.

Employers in each state pay an Unemployment Insurance (UI) tax that is used to fund state unemployment insurance programs. California imposes the tax on the first $7,000 of wages paid annually to each worker, the minimum imposed by the federal government. Washington State imposes the tax on the first $57,200 of salary. Other states have tax bases between these extremes. Using data from the Current Population Survey and exploiting variation in the Unemployment Insurance taxable wage base between states and over 37 years, Mark Duggan of Stanford, Audrey Guo of Santa Clara University, and Andrew C Johnston of the University of California, Merced, find that a larger UI tax base is associated with an increase in part-time work among low-wage workers, driven by an increase in the availability of part-time positions rather than a reduction in full-time work. This is likely because a smaller UI tax base requires higher tax rates to fund UI benefits, making hiring low-wage workers more expensive. , suggest the authors. Noting that variation in the unemployment insurance tax base between states continues to grow, the authors conclude, “it seems likely that a significant increase in the federal unemployment insurance tax base of 7,000 $ is justified, because it has remained unchanged in 39 years”.

Monthly job postings in the United States, from 2012

Chart courtesy of The Wall Street Journal

“[I]It will be important to consider the interaction between reductions in the size of the balance sheet and increases in the policy rate. What we do on the balance sheet will likely affect the path of policy rates and vice versa. For example, a more aggressive action on the balance sheet could allow a less deep trajectory of the key rate. Alternatively, the combination of a relatively steep trajectory of rate hikes with relatively modest balance sheet reductions could flatten the yield curve and distort incentives for private sector intermediation, particularly for community banks, or risk a higher great economic and financial fragility by encouraging long-term, yield-seeking investor behavior,” said Esther George, president of the Federal Reserve Bank of Kansas City.

“In the previous normalization cycle, the FOMC delayed adjusting the size of the balance sheet until normalization of the funds rate was ‘well underway’. The rationale for this schedule was based on the novelty of balance sheet normalization and the desire for space to compensate for any unexpected turbulence. This rationale seems less compelling now and, in my view, ignores the yield curve implications of raising the funds rate while maintaining a large balance sheet. Overall, it might be appropriate to move forward on the balance sheet from the last tightening cycle.”

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