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This edition was written by Sam Boocker, Alex Conner, Georgia Nabors, and David Wessel.
Using administrative data on the stock portfolios of Norwegian households, Gabriel Chodorow-Reich of Harvard and co-authors find that an increase in stock market wealth raises the likelihood of starting a business. This effect is particularly pronounced for households with moderate wealth (under 600,000 krone). For these households, a 20 percentage point increase in wealth raises the rate of entry to entrepreneurship by 20%. This effect occurs only during years of strong stock market performance, perhaps because the returns to entrepreneurship are higher then. The authors find that higher initial wealth increases the profitability, capital, sales, employment, and value added of the new business. Further, a rise in stock market wealth produces a nearly equivalent increase in entrepreneurs’ equity in their firms. The authors thus conclude that higher initial stock market wealth eases the financial constraints often present for entrepreneurs.
Donggyu Lee of the Federal Reserve Bank of New York shows that the Federal Reserve’s quantitative easing (QE) during the Global Financial Crisis (GFC) modestly reduced income and wealth inequality. The author identifies two primary mechanisms through which QE affected inequality. It raised inequality by increasing business profits, which go largely to high earners. On the other hand, the aggregate stimulus of QE raised employment, benefiting low-wage workers. Lee finds that the employment effect narrowly dominated the profit effect, meaning QE marginally reduced inequality across all households. Because profits are concentrated at the top of the distribution, the decrease in inequality within the bottom 90% of earners was larger. The author finds that lowering the policy rate (below the effective lower bound) in place of QE would have modestly increased income inequality, suggesting that QE is more progressive than conventional policy when the effective lower bound is binding.
During the post-pandemic inflation period, Republicans’ inflation expectations rose more than those of Democrats, whose expectations remained anchored close to the Fed’s 2% target. Using data from the Michigan Survey of Consumers surrounding CPI releases from 2017 to 2022, Carola Binder of UT Austin, Rupal Kamdar of Indiana University, and Jane Ryngaert of Notre Dame demonstrate that Republicans’ expectations became more responsive to inflation news and energy price shocks. The authors argue that this partial deanchoring of expectations increased overall inflation and estimate that if Democrats’ expectations were as deanchored as those of Republicans, inflation would have been two to three percentage points higher.
"Our restrictive monetary policy stance is helping to bring demand and supply conditions into better balance and to put downward pressure on inflation. The [Federal Open Market] Committee has stated that we do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2%. Incoming data for the first quarter of this year did not support such greater confidence. The most recent inflation readings, however, have shown some modest further progress, and more good data would strengthen our confidence that inflation is moving sustainably toward 2%," says Jerome Powell, Chair of the Federal Reserve Board of Governors.
"We continue to make decisions meeting by meeting. We know that reducing policy restraint too soon or too much could stall or even reverse the progress we have seen on inflation. At the same time, in light of the progress made both in lowering inflation and in cooling the labor market over the past two years, elevated inflation is not the only risk we face. Reducing policy restraint too late or too little could unduly weaken economic activity and employment. In considering adjustments to the target range for the federal funds rate, the Committee will continue its practice of carefully assessing incoming data and their implications for the evolving outlook, the balance of risks, and the appropriate path of monetary policy."
The Hutchins Center on Fiscal and Monetary Policy invites you to attend the 13th annual Municipal Finance Conference on Wednesday, July 17 and Thursday, July 18. The event will be held both online and in person.
