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 Sarah Ahmad, Alex Conner, Georgia Nabors, and David Wessel.
Ursel Baumann of the European Central Bank (ECB) and coauthors use a large, representative survey of European firms, conducted from June 2023 to September 2024, to analyze whether the recent successful disinflation has helped anchor firms’ inflation expectations. They conclude that it has, with a few caveats. Short-term inflation expectations have moved steadily toward the ECB’s 2% target, but there is substantial disagreement about three- and five-year expectations. The dispersion of inflation expectations remains elevated and simple regressions show that the sensitivity of three- and five-year expectations to movements in one-year expectations has increased. The convergence of short-term expectations is a bright spot for the ECB, but the authors argue that “these indicators of limited anchoring in inflation expectations may warrant attention during the ‘last mile’ of the disinflation and suggest that more time is needed to fully align inflation expectations with central bank objectives.”
Benjamin Bridgman of the Bureau of Economic Analysis examines the longevity of the wealthiest Americans in the 20th century using data from several “rich lists” that track the wealthiest people. He finds that, before World War II, the wealthiest individuals had lower life expectancy than the national average, likely due to urban living conditions, especially poor air quality. Life expectancy at age 40 shifted dramatically for the wealthy, from a 1.9-year penalty in 1900 to a 7.5-year bonus in 1985. This “rich penalty” meant that welfare inequality was lower in the early 20th century, as the wealthiest consumed the most but lived fewer years. The longevity gap was reversed by 1985 when urban health improved, contributing to rising mortality and welfare inequality.
From 1940 to 1960, homeownership rates rose significantly among younger adults, driven largely by the introduction of low-down-payment, government-guaranteed mortgages by the Federal Housing Administration (FHA) and Department of Veterans Affairs (VA). Lisa J. Dettling of the Federal Reserve Board and Melissa Schettini Kearney of the University of Maryland find that access to FHA and VA mortgage loans led to higher birth rates. Using variation across states in the concentration of lenders with expertise in these types of loans to identify the effects of the new programs, they find that for every 1,000 additional mortgages, there were roughly 309 additional births. They estimate that in total, FHA and VA loans originated between 1934 and 1960 resulted in three million additional births, approximately 10% of the excess births of the Baby Boom generation. Among non-white Americans, who were barred from accessing FHA and VA loans due to racial discrimination, there was no significant rise in birth rates as a result of these new programs. The authors conclude that expanded access to homeownership for FHA and VA beneficiaries made it easier to start a family.
"The key theme here is how much activity and risk in core financial markets now largely resides outside the banking system. This is not a new theme, given the post [Global Financial Crisis] GFC changes, and it was the correct response to the dangers realized in the GFC of inappropriate risk inside the banking system. Our assessment is that the pace and scale of change in this direction continues to gather momentum. The footprint of hedge funds and non-bank market makers has grown substantially in recent years. Alongside this, what I will – without in any sense wishing to be disparaging – call the more traditional asset management industry has refocused towards passive investment strategies. Meanwhile, the role of banks has shifted towards providing risk warehousing and financing to markets and NBFIs. These are fundamental changes in the dynamics of markets," says Andrew Bailey, Governor of the Bank of England.
"...Whilst the growing scale of these non-bank exposures has been absorbed by banks acting as prime brokers so far, such trends, if they continue, could have a profound effect on banks' balance sheet capacity in the future. As fund leverage increases and risk asset prices rise inexorably over time, there comes a point at which an inevitable strain is placed upon the system. An excess of demand for financing resources over their supply could lead to repricing, tempting existing players to overreach and take on more risk than they should. Conversely, new entrants which are ill equipped to scale up quickly could be exposed to risks that could be highly damaging.
In sum, the market looks very different to what it was only five years ago. It involves large shifts in leverage, pricing power, speed of trading and liquidity provision. To be clear, these changes are not inherently bad, but they could create a new set of financial stability vulnerabilities which we need to understand and monitor and adapt new tools and approaches where appropriate.”
Call for papers
We are seeking papers on the municipal bond market, state and local fiscal issues, taxes, infrastructure spending, and climate change for the Municipal Finance Conference to be held in-person Tuesday, July 22, 2025 and Wednesday, July 23, 2025 in Washington, D.C.
New paper alert
Louise Sheiner, Wendy Edelberg, and Ben Harris of Brookings assess the likelihood that the federal debt will lead to a crisis. Read it here.
About the Hutchins Center on Fiscal and Monetary Policy at Brookings
