January 16, 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 Alex Conner, Tristan Loa, Georgia Nabors, and David Wessel.

Higher bids for gilts by longer-term investors during QE but not in QT

The preferred habitat theory suggests that bond investors favor specific maturity lengths. Pension funds and insurance companies, for example, often prefer longer-term bonds. Iryana Kaminska and Alex Kontoghiorghes of the Bank of England and Walker Ray of the Federal Reserve Bank of Chicago examine the behaviors of these institutional investors during periods of quantitative easing (QE) and quantitative tightening (QT) by the Bank of England. The authors find that dealers who handled more gilts for pension funds and insurers submitted higher bids in QE auctions, especially for longer-term gilts, consistent with the preferred habitat behavior. In QT periods after the COVID-19 pandemic, the authors find no evidence of increased demand from these investors. They attribute this behavior to the increased government bond issuance during the pandemic that had satisfied their demand. The results suggest that the transmission mechanism of QE and QT is asymmetric and behavior dependent, which deviates from past literature.

Composition of ultra-wealthy class changes over time

Do the families at the top of the wealth distribution remain the same over time? Using census data linking individuals and their descendants from 1850 to 1940, Priti Kalsi of the Rochester Institute of Technology and Zachary Ward of Baylor University find that about 85% of the families in the top 0.1% and 72% in the top 1% of the wealth distribution are no longer in the same categories 10 years later. Further, 93% of individuals with a grandfather in the top 1% are not in the 1% themselves. These findings suggest both individual-level and intergenerational downward mobility rather than a fixed ultra-wealthy class. Nonetheless, the authors find that the likelihood of reaching the top 1% increases exponentially for those with grandfathers in the top 0.1%. Roughly 14% of such individuals reach the top 1%, compared to only 4% of those with grandfathers in the top 2%.

Estimating underlying wage growth

Using a new approach to estimate underlying wage growth, Hie Joo Ahn, Lucas Moyon, and Daniel Villar of the Federal Reserve Board find that wage growth fell briefly but sharply at the beginning of the pandemic, surged to almost 6% at an annual rate in 2021 and early 2022, and then returned to pre-pandemic rates by the third quarter of 2024. This measure of wage growth is highly correlated with measures of labor market slack, especially the vacancy-to-unemployment ratio. The authors’ approach combines different estimates of wage growth to reduce measurement error. The method exploits the fact that different measures of wage growth (e.g. average hourly earnings or employment cost index) will probably have different sources of error at the industry level. Therefore the authors can reduce error by finding the extent to which different wage measures agree and recombining the industry-level results to create a high-quality estimate of headline wage growth over the last decade.

Mortgage rates climb to highest since July

Chart courtesy of Freddie Mac

Quote of the week

“We should also consider a counterfactual: how inflation and labor market outcomes would have differed under alternative policy choices. With respect to inflation, it’s true that the prices of many everyday goods soared in the aftermath of the COVID-19 pandemic, placing a major strain on many American households. However, as the supply disruptions that drove much of this inflation abated and labor market disruptions subsided, the pace of inflation cooled dramatically. With respect to the labor market, support from the American Rescue Plan substantially offset the income gaps confronting roughly 10 million people who had become unemployed or had left the labor force by the end of 2020. That both averted significant hardship and supported demand, which allowed Americans to get back to work quickly. The rapid decline in unemployment enabled the United States to avoid labor market scarring—the erosion of skills and reduced employability that can result from long periods of unemployment—and thus avoid an associated reduction in future potential output," says Treasury Secretary Janet Yellen.

"Now, consider the likely consequences of an alternative fiscal response, one solely aimed at preventing the post-pandemic surge in prices without considering the consequences for unemployment. To prevent that inflation surge, fiscal policy would have had to be much tighter. Indeed, a contractionary fiscal policy would likely have been needed to offset the inflationary impact of the pandemic-induced contraction in supply. Such a policy would have withheld critical aid from households and businesses and would likely have led to far lower output and employment. That could have meant millions more people out of work, households without the income to meet their financial obligations, and lackluster consumer spending. 

"An important 'what-if' exercise would ask: how much more unemployment would have resulted from a fiscal contraction sufficient to keep inflation at the Fed’s 2% target? The answer is 'a lot,' although the exact magnitude depends importantly on some key parameter values, particularly the Phillips curve slope, which measures the sensitivity of inflation to a demand-induced contraction in output… [I]t is widely accepted that some increase in unemployment would have been required to offset the pandemic-induced inflation. Estimates from representative models find that the unemployment rate would have had to rise to 10% to 14% to keep inflation at 2% throughout 2021 and 2022. That would have meant an additional 9 to 15 million people out of work.”

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.