April 3, 2025

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 Alex Conner, Tristan Loa, Jack Spira, and Louise Sheiner.  

Underlying inflation grew modestly during COVID

Gianni Amisano, Travis Berge, and Simon C. Smith of the Federal Reserve Board construct a measure of underlying inflation – the rate of inflation that would prevail without slack, shocks, or other temporary disturbances – by averaging estimates from seven different models. They find that underlying inflation gradually fell below 2% from 2005 to 2020 before climbing back to 2.1% in 2021 and 2022 where it remains today. The authors show that the distribution of underlying inflation estimates across the models became strongly skewed to the upside in 2022. Over the last two years, the range of underlying inflation estimates has fallen and the estimates have become roughly balanced. These results suggest that inflation may not return to its pre-pandemic lows but should remain consistent with the Fed’s 2% target.

Household consumption is less responsive to interest rates than theory suggests

Although rising real interest rates should, in theory, lead households to spend less today and more tomorrow, Edmund Crawley of the Federal Reserve Board finds little evidence that households shift the timing of their consumption in this way. Using microdata on the intertemporal marginal propensity to consume—the amount by which consumption increases over time with increases in income—and analyzing 10 structural macroeconomic shocks, he decomposes household consumption into its responses to interest rates, labor income, stock prices, and real estate values. He finds that nearly all the response of aggregate consumption to these shocks is explained by changes to the expected path of income, leaving no role for intertemporal substitution. These results suggest that monetary policy may have less of a direct effect on consumption than previously thought.

ACA implementation affected coverage gains

Gabriella Aboulafia and Benjamin D. Sommers of Harvard and Jonathan Gruber of MIT find that, between 2013 and 2023, 55% of people newly insured by Affordable Care Act (ACA)-related coverage gained it through Marketplace subsidies – 37% from the original ACA subsidies and 19% from the American Rescue Plan enhancements – while the remaining 45% gained coverage through Medicaid. Coverage gains differed by presidential administration, with Marketplace subsidies roughly 30% more effective under Presidents Obama and Biden than under President Trump. The authors also found that Marketplace subsidies were more than twice as effective in states with their own Marketplace than in states that rely on the federal Marketplace. They suggest that states with their own Marketplace were more likely to implement outreach and enrollment assistance programs and more likely to enact pro-coverage policies like mandates. Furthermore, these states have greater concentrations of Democrats, who are more likely to enroll in Marketplace coverage than Republicans.

Delinquency rate on business loans ticked upwards

Chart courtesy of Federal Reserve Board

Quote of the week

"Rising geopolitical tensions are reshaping the very foundations of cross-border payments and endangering the global rules-based system," says Piero Cipollone, Member of the European Central Bank's Executive Board. "This could challenge established correspondent banking networks and messaging systems such as Swift.

At a time when we should be integrating payment systems to reduce their complexity and cost for users, separate platforms have sought to create alternatives to existing global infrastructures. This trend began as early as 2013 when Iran, in response to its exclusion from Swift, created its own messaging system. Russia followed suit in 2014 with the System for Transfer of Financial Messages after its annexation of Crimea. China’s Cross-Border Interbank Payment System, launched in 2015, has seen remarkable growth, with over 1,500 financial institutions using it in 2024, a number that has more than doubled since 2018.

The pace of these initiatives has accelerated significantly since Russia’s invasion of Ukraine. In the past two years alone, we have seen nearly 20 new initiatives from countries in emerging markets aimed at bypassing Swift and western correspondent banks. At the BRICS Summit in October 2024, member countries agreed to explore the feasibility of establishing an independent cross-border settlement and depositary infrastructure, BRICS Clear.

These developments raise serious concerns about the potential fragmentation of the global financial system. We could face disrupted international capital flows and reduced efficiency as the system risks being splintered into multiple, non-communicating blocs."

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.