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This edition was written by Sarah Ahmad, Andrew Rosin, Chase Parry, and Louise Sheiner.
Joshua Goodman of Boston University and Joseph Winkelmann of Harvard find that the 13% decline in college enrollment since its 2010 peak has been driven by falling enrollment in community colleges. Using official statistics, the authors find that four-year college enrollment was higher in 2023 than in 2010, while community college enrollment was 37% lower. Some of this apparent shift, however, reflects community colleges being reclassified as four-year institutions after adding a small number of bachelor’s programs. Using a time-invariant classification scheme that avoids this distortion, community college enrollment fell 21% since 2010 while four-year enrollment was essentially flat. The authors attribute over 60% of the decline in first-time community college enrollment to improving labor markets, as stronger job opportunities draw students away from community college, but leave four-year enrollment largely unchanged, suggesting that many students view community college and employment as substitutes.
Rami Najjar and Adam Shapiro of the Federal Reserve Bank of San Francisco find that perceptions of monetary policy’s effectiveness depend on the underlying drivers of inflation. When inflation is led by demand factors, investors expect policy tightening to be more persistent; when supply-side factors dominate, investors expect tightening to be less persistent and less effective at achieving disinflation. The authors show that a 25-basis point tightening in the federal funds rate raised the two-year forward real Treasury yield by 40 basis points on average in periods of demand-driven inflation. At times when the demand-driven contribution to inflation was elevated, the yield increase was 130 basis points. But increases in the federal funds rate had virtually no effect when the supply-side contribution to inflation was above average. This suggests a significant challenge for central banks, as financial markets may only weakly transmit monetary policy into broader credit markets during periods of supply-driven inflation.
Analyzing 8.7 million homeowners’ insurance contracts from 200 insurers, Hyeyoon Jung of the Federal Reserve Bank of New York and Jaehoon Jung of NYU Stern find that insurers mitigate moral hazard – lack of effort by the homeowner to protect against losses – by making households shoulder more risk. Policyholders are exposed to roughly 29% of total expected losses, primarily because contracts are designed such that homeowners absorb losses below the deductible. While deductibles are typically small relative to property values, they are large relative to expected losses, so a substantial portion of damages falls below the deductible. Homeowners with lower credit scores and properties with higher risk of extreme weather-related damages tend to be more exposed to losses. Under a counterfactual in which insurers are required to provide full coverage, the authors find that 46% of contracts would become unprofitable, leading to insurers exiting the market and households losing coverage.
"What we call 'non-banks' is very broad term. It ranges from insurance companies, pension funds and investment funds, to hedge funds or risk funds. And there is a new phenomenon in the form of private equity, private credit, i.e. private markets. Insurance companies and pension funds are regulated and subject to strict supervision. But leverage has increased significantly in hedge funds, and a difficult situation could arise in the event of large redemptions, because of liquidity buffers that remain low," says Luis de Guindos, Vice-President of the European Central Bank.
"Private markets, which are not supervised, are growing in size and there is some opacity in their portfolio valuations. This opacity is reflected in, for example, difficulties in selling their shares. The fundamental warning is in relation to the strong interconnection that exists between private equity, private credit and hedge funds, and the traditional banking sector that has now important exposures to all three non-bank segments on both the asset and liability side of its balance-sheet. Given the lack of strict supervision, high leverage, and problems relating to the opacity and illiquidity of portfolios, an incident could have an impact on the European banking sector, which is nevertheless in a robust position."
"There are a lot of these kinds of funds (non-banks) operating outside Europe. What is needed is global regulation. And, given the interconnectedness with the banking sector, the process of supervising the markets and these types of institutions in Europe should be more integrated. Currently it is in the hands of national securities commissions. We are calling for a single, integrated vision, which is also essential if we want to develop the capital markets union, or, as it’s now called, the savings and investments union."
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