September 3, 2026

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 Chesapeake Dowdy, Chase Parry, Zixun Tan, and  Louise Sheiner 

Fiscal, AI, and monetary news doesn’t explain the recent rise in r*

The natural rate of interest (r*) is the short-term real rate consistent with the economy operating at potential. After falling more than a percentage point over the two decades preceding the COVID-19 pandemic, r* appears to have risen by roughly a percentage point since 2020, according to a range of estimates. Two common explanations for the rise in r* are expectations of rising federal deficits and an AI-driven productivity boom. Jens Christensen of the Federal Reserve Bank of San Francisco and Glenn Rudebusch of Brookings find little support for either of them. Using four different measures of r*, they add up how much each measure moved in three-day windows around 52 fiscal news events and 26 major AI model release dates. Only about one-fifth of the rise in r* occurred around fiscal-news windows, while the cumulative change in r* across the AI-release windows was a decline of 23 to 35 basis points. The authors also examine whether movements around FOMC meetings can account for the recent rise in r*. They find that nearly all of the pre-pandemic decline in r* occurred during three-day windows around FOMC meetings, extending an earlier finding for long-term yields. But since 2020, none of the rise occurred in those windows—r* fell about 25 basis points around FOMC meetings. They conclude that the rise in r* is a puzzle that might be attributable to global forces rather than U.S. news. 

Private lenders may not fill the gap left by new limits on federal graduate loans

For nearly two decades, graduate students could borrow the full cost of attending graduate school from the federal government. The One Big Beautiful Bill Act limited annual federal loans to $20,500 for most graduate students and $50,000 for students in designated professional fields. Sarah Turner of the University of Virginia finds that private lenders may not readily fill the estimated $8.1 billion gap created by the new limits. Doing so would require the private graduate lending market, currently about $1.4 billion annually, to expand six- to-sevenfold. The prospects for private lending vary widely by field. Turner links institution-by-field borrowing data with earnings data and finds that in fields such as law and business, students attending higher-cost programs tend to earn more. That gives lenders information about which programs are likely to produce earnings high enough to support larger loans. By contrast, in social work, counseling psychology, and physical therapy, higher borrowing at more expensive programs is not associated with higher earnings, giving lenders less information about which students could support additional debt. Turner concludes that the new limits could curb borrowing for low-return programs but also make it harder for students without strong credit histories or family resources to finance graduate education that is likely to pay off.

Limited labor mobility may help explain higher eurozone unemployment

Unemployment has been persistently higher and more volatile in the euro area than in the U.S. Workers also move between U.S. states in response to local economic conditions much more readily than workers move between euro-area countries. Erin Gibson of the U.S. International Trade Commission and co-authors find this difference in labor mobility helps explain the differences in unemployment. The authors model an economy in which negative shocks raise unemployment because firms cannot readily cut wages, and unemployment then dissipates gradually as the economy recovers. In this setting, greater worker mobility cushions local downturns and, because downturns have larger effects on unemployment than expansions do, also lowers unemployment on average. The authors calibrate the model to unemployment and migration dynamics in a typical euro-area country and then raise labor mobility to the level observed across U.S. states. The volatility of unemployment falls by 28% and average unemployment rate falls from 4.55% to 3.97%, which corresponds to 1.16 million fewer unemployed workers. Higher mobility also reduces the welfare costs of belonging to a currency union. In a currency union, exchange rates between member countries cannot adjust to local shocks, and downward wage rigidity can produce persistent unemployment. The authors estimate that this costs workers 4.19% of consumption under euro-area levels of mobility, compared with 3.63% if mobility were as high as in the United States.  

Inflation ticking up again

Chart courtesy of Financial Times

Quote of the week

"If stablecoin reserves were predominantly held as wholesale bank deposits, retail funding would give way to concentrated, more rate‑sensitive wholesale liabilities. This would raise banks’ marginal funding costs and thereby tighten lending conditions," says Pablo Hernández de Cos, General Manager of the BIS.

"If reserves were mostly held in short-dated government bills, an additional effect might arise as banks sold bills to stablecoin issuers, reducing their high-quality liquid assets. If reserves, by comparison, were kept to a large extent at the central bank, the expansion of stablecoins would drain central bank reserves from the banking sector.

"In each case, banks’ liquidity metrics would be likely to initially weaken. Over time, banks would respond by repricing loans and tilting their balance sheets towards more liquid assets. The impact would probably be uneven. Distributional effects could weigh more on smaller banks, creating headwinds for lending to small businesses.

"At a conceptual level, two channels pull in opposite directions – a bank lending headwind and a fiscal space tailwind. The former tightens credit as marginal funding costs rise; the latter reflects additional demand for short-dated bills that lowers short-term yields and expands fiscal space. Model-based scenarios from recent BIS research point to a modest net output effect overall, with outcomes shaped by reserve composition, public debt levels and foreign demand for stablecoins.

"The origin of stablecoin demand warrants attention. If stablecoin demand arises domestically, issuers’ purchases of short-dated government bills will largely replace domestic investors as holders, so the net effects on short-term yields are likely to be modest. By contrast, if demand comes from abroad, it will add to net demand for short-dated bills, pushing short-term yields lower and expanding fiscal space.

...

"If runs do occur, fire sales of government bills or a sudden withdrawal of the issuers’ deposits could quickly impinge on core money markets, spreading risks throughout the system."

About the Hutchins Center on Fiscal and Monetary Policy at Brookings

The mission of the Hutchins Center on Fiscal and Monetary Policy is to improve the quality and efficacy of fiscal and monetary policies and public understanding of them.