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This edition was written by Tristan Loa, Georgia Nabors, Jack Spira, and Louise Sheiner.
Does homeownership affect attention to inflation? Jessica Piccolo of the University of Padova and Yuriy Gorodnichenko of the University of California, Berkeley conducted a randomized controlled trial from 2021 to 2023 using a survey on household purchases that exposed respondents to information on past inflation rates, the Federal Reserve’s inflation target, and the Federal Open Market Committee’s inflation forecasts. They find that homeowners’ inflation expectations were little changed by the inflation information provided, suggesting that their expectations already incorporated much of the provided information. Renters, however, made larger adjustments to their inflation expectations when given new information, indicating that they are less familiar with inflation dynamics. Further, the authors find that homeowners increased their spending on durables in response to higher inflation expectations, while renters’ durable consumption was unaffected. They argue that monetary policy communication should be tailored to account for the different levels of inflation awareness across groups.
Roberto Gomez Cram and Howard Kung of the London Business School and Hanno Lustig of Stanford find that bond markets respond to cost estimates of proposed federal legislation. Analyzing all 15,533 Congressional Budget Office cost estimates of bills introduced between 1997 and 2022, they find that cost estimates projecting increased deficits increase yields on Treasury debt, even when controlling for other macroeconomic news such as employment and inflation announcements. Looking in particular at emergency spending bills, which have high probabilities of enactment and therefore add less noise to the market signal, they estimate that a one-time increase of one percentage point in the ratio of projected deficits to GDP increases the 10-year nominal yield by 0.75 basis points within a day and about two basis points within a week. For a persistent shock to deficits, these effects are equivalent to an increase in yields of 6.75 to 18 basis points. Using a model of investor expectations, the authors further find that, over the past 25 years, investors progressively decreased their long-term forecasts of budget surpluses that would pay down the debt and now expect 57 cents of every dollar in current deficits will not be offset by future surpluses.
Q: "In the press conference last week, we saw a lot of questions about why, given the sorts of changes we’ve seen in the outlook and in the projections, did the FOMC set along still saying that the median projection was for two cuts to interest rates by the end of this year? I mean, can you just tell us a little bit more about why the FOMC settled on that and if two cuts was your own view?"
A: "I’m not allowed to speak for anybody else on the committee. So I can’t answer that question in a direct way. My view is [that] when there’s dust in the air, ‘wait and see’ is the correct approach when you face uncertainty," says Austan Goolsbee, President of the Reserve Bank of Chicago.
"But ‘wait and see’ is not free — it comes with a cost . . . You gain the ability to learn new information, [but] you lose some of the capacity to move gradually. You wait to figure out where you are, but it’s worth recognizing that it raises the risk that once you get more resolution, you have to move more quickly than you otherwise might have. I will say, if you look at where people think in their SEP [Summary of Economic Projections] submissions the long run interest rate settles, it’s still a fair bit below where we are today. And though it may be more back loaded, I still think that if we can just get past this dust in the air, the underlying mechanism of getting to where rates are lower — we were on that path, employment is basically at full employment, inflation was on path back to 2%, and as inflation comes back to 2%, I think 12 to 18 months from now, rates are going to be a fair bit lower than where they are today. It’s just they’re going to be more backloaded than front-loaded, because right now, this is my data dog thing, it’s not time for walking, it’s time for sniffing, to figure out what the story is."
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