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This edition was written by Sarah Ahmad, Tristan Loa, Chase Parry, and David Wessel.
Eric Engstrom of the Federal Reserve Board finds that the Fed’s quarterly “dot plot” in the Summary of Economic Projections (SEP) has a mixed effect on interest-rate expectations. Generally, these projections have been more accurate than private-sector surveys, simple time-series benchmarks, and some market-based measures. However, the author also finds that forecasters and markets appear to put too much weight on old dot plots even after new information arrives. When current rate forecasts move above the most recent available SEP projection, realized rates tend to come in even higher, and vice versa—a pattern suggesting that forecasters and markets often move in the right direction away from stale dot plots, but not far enough. The result remains after the author controls for macroeconomic conditions, risk premia, and other predictors of interest-rate forecast errors. For example, after the December 2021 “dot plot”, forecasters and markets were slow to adjust to incoming inflation data and Fed communications pointing to much faster rate hikes. This suggests that the “dot plot” can improve average forecast accuracy but also slow the speed at which the private sector adjusts to new information. More frequent updates might reduce that problem, the author says, but could also create more noise or give markets a false sense of confidence about future policy.
The federal tax code subsidizes corporate R&D through deductions and tax credits, but the realized value of these benefits depends on a firm’s tax position. Brandon Pecoraro of the Joint Committee on Taxation and co-authors show that realized benefits diverge substantially from statutory benefits because firms in a loss status cannot immediately use deductions and credits; they must carry them forward, reducing their present value. Using IRS data from 2012 to 2016, the authors find that the average firm generates $0.41 in statutory tax benefits per dollar of R&D investment, with a realized present value of $0.36. Young firms conducting R&D are more likely to operate in a loss for many years. Firms in loss status realize only $0.27 per dollar on average—about one-third less than the statutory level. Making credits refundable would help young firms. But because large firms account for most R&D credit dollars, the authors estimate that most of the fiscal cost of a broad refundability policy would go to accelerating payments to large firms.
Existing studies using community-level data generally conclude that floodplain populations are disproportionately low-income. However, using more granular household and parcel-level data from 1999 to 2023, Suvy Qin of the University of California, Berkeley, and John L. Voorheis of the Census Bureau find the opposite: households exposed to flood risk are disproportionately high-income. The difference arises because flood risk varies within small geographic areas: a Census area can be relatively low-income on average even if the parcels exposed to flood risk within that area are occupied or owned by higher-income households. Comparing households with similar tenure and building type, the authors find little variation in flood exposure across households in the bottom 90% of the income distribution, while those in the top 10% face substantially more, especially at the very top. Nineteen percent of homes owned by the top 1% of earners are situated in a floodplain; the share rises to 27% when second homes are included. However, lower-income, Black, and Hispanic homeowners are more likely to be uninsured against flood risk and face higher potential losses from floods as a share of income.
“First, an increase in the relative price level of energy will lower activity levels in energy-using sectors, with more slack in the economy putting downward pressure on inflation over the medium term. Second, since energy has a high import content, an increase in the relative price level of energy constitutes a deterioration in the terms of trade for a net energy importing region such as the euro area, reducing the real incomes of households and the profits of firms and thereby working against medium-term inflation pressures. Third, if the energy supply shock is the product of geopolitical tensions that might have broad and long-lasting implications for the global economy and international trading system, the associated rise in uncertainty may induce a rise in precautionary saving and delay investment plans. Fourth, if the adverse supply shock also reduces asset prices and causes banks and other financial intermediaries to restrict credit supply, demand will also be lowered through the tightening of financial conditions.
“All else equal, these ‘demand destruction’ channels limit the required adjustment in the monetary stance to ensure the timely return of inflation to the target. Running in the opposite direction, expansionary fiscal measures would reduce the scale of demand destruction and could thereby require a larger monetary policy response...
“It is straightforward that small inflation deviations that are not expected to persist do not call for a monetary policy response. Most obviously, lags in the transmission of monetary policy mean that it would be counterproductive to seek to respond to near-term deviations that are solidly expected to be transitory. Moreover, a small and transitory deviation is unlikely to trigger the adjustment dynamics that can turn temporary deviations into longer-lasting ones.
“However, a sufficiently material and persistent deviation from the target requires a monetary policy response: a mid-size but not-too-persistent overshoot could warrant some measured adjustment of the policy stance, while if the inflation shock is expected to be larger and more persistent, the response must be appropriately forceful or persistent.”
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