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This edition was written by Sarah Ahmad, Tristan Loa, Chase Parry, and Louise Sheiner.
Do the rich really save more? Analyzing data on households from the 2022 Survey of Consumer Finances, Elizabeth Llanes of Lake Forest College, Jeffrey Thompson of the Federal Reserve Bank of Boston, and Alice Henrique Volz of the Federal Reserve Board find that they do. The ratio of wealth to lifetime labor earnings for households with respondents aged 48 to 62—a proxy for the lifetime saving rate—is around 0.25 for the bottom six deciles of the lifetime earnings distribution, and rises over the remaining deciles, reaching 0.82 in the top decile. Within the top decile, the ratio is 0.75 for the first 8% and 1.01 for the top 2%. The distribution of lifetime saving rates is only modestly flattened when unrealized capital gains are excluded from wealth, while inheritances can’t explain the distribution at all. Although higher-earning households receive larger inheritances, inheritance accounted for only 2.6% of lifetime earnings for the top 2%, compared to 31% for the second decile and 112% for the lowest decile. Overall, the paper provides new evidence that saving behavior—not inheritances—drives the steep rise in wealth among top earners.
Central banks with strong credibility can adjust monetary policy less aggressively when inflation rises temporarily. Luigi Bocola of Stanford University and co-authors develop a model in which households and firms learn about a central bank’s inflation-fighting resolve—its “type”—by observing how it responds to supply shocks that push up prices. Low credibility central banks must react more forcefully to prevent inflation expectations from drifting up—at the cost of short-term economic pain. Using high-frequency data around policy announcements, the authors estimate how long-run inflation expectations respond to monetary policy surprises across several economies. They find that expectations in Brazil react far more strongly than in other countries, suggesting weaker credibility. These results illustrate why low-credibility central banks have a stronger incentive to tighten policy early after inflationary shocks, a pattern the authors argue helps explain which countries reacted most aggressively to pandemic-era inflation.
One goal of President Trump’s tariff policy is to boost domestic manufacturing output. While building new factories can take years, one immediate pathway is for existing plants to increase production by increasing their utilization of unused production capacity, or spare capacity. However, Robin Braun, Ryan Decker, and Fariha Kamal of the Federal Reserve find no evidence that tariff-protected industries have experienced larger increases in capacity utilization, despite high levels of spare capacity in manufacturing before the recent tariffs. Firm surveys from the Census Bureau suggest that utilization is constrained by weak demand and insufficient labor supply.The authors also note that long production timelines and uncertainty around tariff policies could delay responses. But they find that increasing capacity utilization could have a meaningful impact on production: in a counterfactual, they find that if tariff-protected industries used half of their spare capacity, aggregate manufacturing output would increase by 1.5%.
Q: "I want to make sure I understand. You're watching inflation expectations, but so far, you don't see a problem there. But if you see a problem, you're prepared to act."
Q: "And on the labor market, you're saying, yes, there's some softening. But it doesn't feel like there's a three-alarm fire yet, but you're aware that there's a risk of that?"
A: "Absolutely. There are risks to both sides of the dual mandate....If ever get back in the classroom—I don't want to do so too soon—this is a teachable moment because the dual mandate is in tension. There are risks to both sides. So I'm attentive to both sets of risks, and I will keep monitoring the labor market data we have, the inflation data we have, and [the data] we will obtain. And I hope that will be soon."
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