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This edition was written by Sarah Ahmad, Alex Conner, Tristan Loa, and David Wessel.
Using data from the 2022 Survey of Consumer Finances, Sarena Goodman of the Federal Reserve Board and co-authors find that families’ labor market experiences during the pandemic were strongly linked to their financial outcomes, contributing to significant disparities across the income distribution. These experiences were widespread: one-third of families experienced net employment declines, one-third teleworked, and one-fifth faced significant COVID-19-related health events. The impacts exacerbated existing income disparities, with families with lower income bearing the brunt. For example, those that experienced a net decline in employment had 12% lower income in 2021 and 70% less wealth in 2022 compared to similar families that did not experience a decrease. The findings also show that after excluding unemployment compensation, income growth during the pandemic increased linearly across the income distribution, with the most substantial gains concentrated among households with the highest income.
Marianna Kudlyak and Brandon Miskanic of the Federal Reserve Bank of San Francisco compare consumer and firm perceptions of labor market tightness before and after COVID to actual labor market performance. Before COVID, perceptions closely tracked the unemployment rate. But during the pandemic, both firms and consumers perceived the labor market as tighter than the headline unemployment rate suggested. The authors argue that people experiencing temporary layoffs during COVID, who are counted as unemployed in the headline unemployment rate, cloud the picture because many quickly returned to work and did not contribute to slackness in the labor market. Using a measure of unemployment that excludes temporary layoffs, the authors show that the historical relationship between labor market perceptions and measures of slack holds more closely during COVID. They note that by mid-2024, the relationship between consumer and firm perceptions and measures of labor market tightness has returned to pre-pandemic patterns.
Daniel Ringo of the Federal Reserve Board finds that U.S. monetary policy has large effects on mortgage payments despite the widespread use of fixed-rate mortgages. Inframarginal borrowers—households whose decision to buy a home or refinance is not influenced by changes in monetary policy but whose mortgage payments are—account for much of the pass-through of rate shocks to mortgage payments. In particular, Ringo estimates that a 7-basis-point monetary policy-induced reduction in mortgage rates lowers annual mortgage payments by about $9 billion, with $5 billion from inframarginal borrowers, $2 billion from marginal refinancers, and another $2 billion from borrowers with adjustable-rate mortgages. Because new mortgages represent about 25% of outstanding mortgages, the difference in the effects of monetary policy on fixed-rate and adjustable-rate mortgage regimes may not be as significant as generally perceived, he says. He notes that the effects of monetary policy shocks on mortgage debt service are large enough to explain much of the consumption response to monetary policy shocks.
“All told, labor market conditions are now less tight than just before the pandemic in 2019—a year when inflation ran below 2%. It seems unlikely that the labor market will be a source of elevated inflationary pressures anytime soon. We do not seek or welcome further cooling in labor market conditions," says Jerome Powell, Chair of the Federal Reserve.
"Overall, the economy continues to grow at a solid pace. But the inflation and labor market data show an evolving situation. The upside risks to inflation have diminished. And the downside risks to employment have increased. As we highlighted in our last FOMC statement, we are attentive to the risks to both sides of our dual mandate.
The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.
We will do everything we can to support a strong labor market as we make further progress toward price stability. With an appropriate dialing back of policy restraint, there is good reason to think that the economy will get back to 2% inflation while maintaining a strong labor market. The current level of our policy rate gives us ample room to respond to any risks we may face, including the risk of unwelcome further weakening in labor market conditions.”
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