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This edition was written by Sarah Ahmad, Chase Parry, Andrew Rosin, and David Wessel.
Even after controlling for a wide range of demographic and educational characteristics, large and persistent differences in post-college earnings by socioeconomic status (SES, as proxied by financial aid receipt) remain. Judith Scott-Clayton of Columbia University and co-authors argue that differences in individuals’ first jobs out of college are a significant driver of this disparity. Low-SES graduates earn about 8% less than their high-SES peers five years after graduation, even after accounting for characteristics observable at the time of graduation. Furthermore, the authors find that the characteristics of graduates’ first jobs—such as one’s starting salary, industry, and wage relative to the firm’s average—are strongly predictive of medium-term earnings outcomes; initial earnings alone explain roughly 27% of the variation in medium-term earnings. The authors conclude that differences in graduates’ first jobs explain two-thirds of the earnings gap between high- and low-SES individuals five years after graduation.
Derek Lemoine of the University of Arizona uses option prices from 1996 to 2023 to assess how traders value data releases from the Bureau of Labor Statistics and the Bureau of Economic Analysis. Because option prices are higher ahead of data releases that traders expect to be informative—and fall when the information resolves that uncertainty—they provide a measure of how much markets value the information contained in government data. The author finds that the release of 13 out of 15 government data products is followed by significant declines in option prices. These effects tend to be larger than those associated with the release of Federal Reserve policy statements and minutes and have grown more important over time, especially during periods of high uncertainty about economic policy. The author concludes that reducing the quality of government data could impair financial markets’ ability to allocate capital efficiently.
Exorbitant privilege refers to the benefits the U.S. enjoys due to the dollar being the international reserve currency. Alexandra M. Tabova of the Federal Reserve and Francis E. Warnock of the University of Virginia reassess this privilege, finding that Americans have not earned higher returns on foreign assets than foreigners have earned on U.S. assets in recent years. Using security-level data from 2003 to 2022, they document three main factors. First, foreigners’ U.S. holdings have shifted from being predominantly low-returning bonds to an equal mix of bonds and high-returning equities, eliminating the earlier compositional advantage of American portfolios. Second, accounting for investors’ buy-and-hold behavior lowers measured returns and reduces the apparent U.S. advantage. Third, using security-level data—rather than aggregated portfolio data—to calculate returns shows that U.S. foreign portfolios earned essentially the same return as foreign investors’ U.S. portfolios during the period studied.
“My base case is that tariffs will increase the price level, but they won’t leave a lasting imprint on inflation. And, given this base case, monetary policy should look through tariff effects on prices ... Here the lessons from economic theory are clear: so long as inflation expectations are anchored, increases in prices due to supply effects do not turn into an inflation problem," said Anna Paulson, President of the Federal Reserve Bank of Philadelphia.
"Going beyond the theory, the data so far have largely been consistent with this view. We are definitely seeing the effects of tariffs in the inflation data—the increase in goods price inflation is clear. But relative to what our analysis predicted, tariff-induced price increases have been somewhat smaller than anticipated. Now, we have seen some strength in service prices as well, and this bears watching—it would be a problem if tariff induced price increases spill over to inflation more generally. That said, I don’t see conditions as supporting problematic spillovers.
First, labor market conditions are very different than they were during the pandemic when turnover was elevated and workers were job hopping to get higher wages. Some of my contacts have described lowering starting wages, for example. This is not what I would expect to hear if the labor market was going to be a force that accelerated inflation. Second, many firms report being focused on preserving market share and this makes them motivated to find creative ways to avoid passing on increased costs. Finally, monetary policy is modestly restrictive and has been restrictive for some time.”
