July 03, 2025

The Hutchins Roundup brings the latest thinking in fiscal and monetary policy to your inbox. Have something you'd like us to include in the next Roundup? Email us and we'll take a look.

This edition was written by Sarah Ahmad, Emily Araujo, Tristan Loa, Chase Perry, and Louise Sheiner. 

FCI* as an alternative tool to r* to evaluate monetary policy

The current Federal Reserve monetary policy framework utilizes the neutral rate of interest (r*) as a guidepost to assess whether interest rates are stimulating or restraining the economy. Ricardo Caballero and Tomas Caravello of MIT and Alp Simsek of Yale propose an alternative: the neutral level of financial conditions that is consistent with the expected output gap being zero (FCI*). They argue that FCI* provides a more accurate and stable gauge of monetary policy than r* because r* must adjust to insulate the economy from swings in financial market sentiment, asset prices, or risk premiums — whereas FCI* depends primarily on macroeconomic factors like demand shocks and potential output growth. They show that r* fell persistently from 2008 to 2024, held down by falling asset prices, while FCI* quickly returned to its pre-crisis level, highlighting its greater stability. They also find that the FCI gap—the difference between the observed Financial Conditions Index and FCI*—more accurately tracks the stance of monetary policy than the interest rate gap, because FCI is more sensitive to forward-looking market expectations. For example, in 2022, FCI gaps sharply turned positive, correctly indicating policy tightening, while interest rate gaps remained negative, suggesting continued accommodation well into 2023.

Wage inequality within the office weakens the labor movement

Using three different research methods—a vignette study with labor organizers, an experiment conducted during the 2023 Writer’s Guild of America strike, and the natural experiment created by the prohibition of public-sector collective bargaining in Wisconsin in 2011—Barbara Biasi from Yale and co-authors find that intra-office wage inequality undermines union strength. In particular, it makes unions less likely to highlight pay gaps and more likely to emphasize non-wage demands, leads to smaller, more homogeneous bargaining units, and reduces membership and dues payments—especially among higher earners with strong outside options. They find that the prohibition on collective bargaining in Wisconsin weakened teachers’ unions and led to greater wage inequality among teachers with similar experience and credentials; in turn, areas with less competitive teacher labor markets saw larger increases in pay gaps and greater declines in union revenues, illustrating what the authors describe as a potential “inequality trap” in which rising inequality and weaker unions reinforce each other.

Full-day Kindergarten boosts maternal employment

Between 1992 and 2022, the share of kindergartners enrolled in full-day programs increased by 40 percentage points nationally, with over 80% of kindergartners now enrolled. Using data from state-level policy changes, Chloe Gibbs of the University of Notre Dame, and Riley Wilson and Jocelyn S. Wikle from Brigham Young University find that mothers' labor force participation increases by 5.5 percentage points when their children shift from half-day to full-day kindergarten. They estimate that this expansion accounts for up to 24% of the growth in employment of mothers with kindergarten-aged children over this period. Half-days require parents to find additional childcare or transportation, while full-day programming allows for a reallocation of time and money, suggesting that increasing childcare availability can reduce the employment gap for mothers with children.

FOMC members becoming increasingly wary of inflation

Chart courtesy of Apollo

Quote of the week

Q: "Chair Powell, tariffs are not yet showing up in inflation. Is this forcing you or your staff to rethink what the models say about how much the tariffs will ultimately see through some of the final prices?"

A: "The US economy is in a pretty good position. Inflation has come down close to 2%, we’re at 2.3% headline, 2.7% core. The unemployment rate is at 4.2%. So, we’re healthy overall. If you ignore the tariffs for a second, inflation is behaving pretty much exactly as we had expected and hoped that it would. We haven’t seen effects yet from tariffs and we didn’t expect to by now. We have always said that the timing, amount, and persistence of inflation would be highly uncertain and it’s certainly proved that. We are watching and we are expecting some higher readings over the summer, but we are prepared to learn that it could be higher or lower or later or sooner than we expected," says Jerome Powell, Chair of the Federal Reserve Board (video).

Q: "Would the Fed have cut more by now if it weren’t for the tariffs?"

A: "I think that is right. In effect, we went on hold when we saw the size of the tariffs. All inflation forecasts for the United States went up materially as a consequence of the tariffs. So, we didn’t overreact. In fact, we didn’t react at all. We are simply taking some time. As long as the US economy is in solid shape, we think that the prudent thing to do is to wait and learn more and see what those effects might be. They (effects of tariffs) haven’t really shown up, so we are waiting."

Join us for an event

The Hutchins Center on Fiscal and Monetary Policy invites you to attend the 14th annual Municipal Finance Conference on Tuesday, July 22 and Wednesday, July 23. The event will be held both online and in-person.

About the Hutchins Center on Fiscal and Monetary Policy at Brookings

The mission of the Hutchins Center on Fiscal and Monetary Policy is to improve the quality and efficacy of fiscal and monetary policies and public understanding of them.