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This edition was written by Elijah Asdourian, Alex Conner, Georgia Nabors, and Louise Sheiner.
Manufactured goods inflation reached an all-time high of 18% in mid-2022; it then began declining and turned negative in early 2023. Using census surveys that asked firms whether insufficient orders or insufficient materials caused them to operate below full capacity, Robin Braun, Aaron Flaaen, and Sinem Hacioglu Hoke of the Federal Reserve Board find that post-COVID manufactured goods inflation was initially driven by supply factors but was eventually also driven by increased demand. In 2021, semiconductor chip shortages and freezing temperatures in Texas led to higher prices for cars, electronics, and goods that used petrochemicals. In 2022, supply chain problems continued to fuel inflation, but to a more moderate extent, while stronger consumer demand also boosted prices. In the last year, manufactured goods prices have declined, almost entirely the result of improvements in supply.
N. Meltem Daysal of the University of Copenhagen and co-authors exploit a large administrative dataset and an exogenous change in medical guidelines to estimate the economic and mortality effects of radiotherapy for breast cancer patients in Denmark who already receive chemotherapy. The authors find that women who receive radiotherapy are 10 percentage points less likely to die from breast cancer five to 10 years after diagnosis. They show that women who receive radiotherapy are about 16 percentage points more likely to be employed 10 years after diagnosis, driven largely by a reduction in the likelihood of exiting the labor force. The authors also show that radiotherapy increases earnings and reduces the likelihood of drawing on the social safety net, although they note that the “mortality and economic results are driven by results for more educated women, indicating that equalizing access to treatment may not be sufficient to reduce health inequalities.”
Banks traditionally engage in balance sheet lending by accepting deposits from savers and using these funds to issue loans to borrowers. Analyzing financial data from 1963 to 2023, Greg Buchak of Stanford and co-authors find that balance sheeting lending comprised 60% of total private lending in 1970 but only 35% in 2023. The proportion of household savings held as bank deposits fell from 22% to 13%, and banks reduced the share of assets held as loans from 70% to 55%. The authors attribute these shifts to three factors. First, technological advancements eased the process of issuing securities, which boosted total lending and reduced the share of balance sheet lending. Second, savers’ preferences shifted away from bank deposits toward alternative means of saving such as securitized debt or government bonds. Third, changing federal regulations made it more costly for banks to extend loans. As a result of these changes in bank intermediation, changes in capital and liquidity requirements have a smaller effect on total lending now than in the past, the authors conclude.
Q: "Could you imagine a scenario in which rate hikes would be back on the table? And what would the macro backdrop have to look like for that to be the case?"
A: "That's not my base case, as you know. Rate hikes are not my base case. But clearly, if fundamentally the economic outlook changes in a material, significant way — either with inflation not showing signs of moving toward the 2% longer-run goal on a sustained basis or other indicators that monetary policy is not having the needed or desired effects in order to achieve that goal — then you have to rethink that," says John Williams, President of the New York Federal Reserve.
"Is monetary policy adding enough? Is it restrictive enough to ensure that we get back to the 2% inflation goal? So it would really be looking at the data, looking at all — what is the underlying inflation doing? Is it not continuing to move consistently towards the 2% goal? Again, that's not my base case. It would really be a material change in the economic outlook. But from my point of view, it's absolutely essential that we get inflation back to 2% on a sustained basis and restore price stability. Definitely, there are obviously scenarios where it may be appropriate to tighten policy further to make sure that happens. But again, that's not my base case."
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