September 7, 2023

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 Elijah Asdourian, Sam Boocker, Lorae Stojanovic, and David Wessel.

Target Date Funds reduced market volatility during the pandemic

Target Date Funds (TDFs)—funds-of-funds that maintain specific proportions of assets in stocks and bonds based on investors’ expected retirement date—account for a quarter of 401(k) assets. Jonathan Parker of the MIT Sloan School of Management and Yang Sun of Brandeis International Business School find that during the pandemic, TDFs stabilized the inflows and outflows from the equity funds they held and even the value of the stocks underlying those equity funds. The authors calculate that TDFs pushed up stock values by 2.13% in the first two months of the COVID-19 crisis, when the stock market fell by 21%. Because TDF portfolios must maintain a certain proportion of asset classes by value, a price drop triggers asset purchases by TDFs, while a price rise triggers sales. TDF portfolios for soon-to-be retirees trade more countercyclically, since they contain a more balanced mix of stocks and bonds than the equity-heavy portfolios of people far from retirement. As a result, the authors predict that as the population ages, the stabilizing effects of these funds on the market will increase.

Profits out-predict models on bank systemic tail risk

Return on equity (ROE) – a measure of bank profitability that accounts for leverage – is a more accurate predictor of systemic tail risk exposure for commercial banks than more often used measures, find Ben Meiselman of the U.S. Treasury and co-authors. Using data on U.S. and European banks during major financial crises since the 1980s, the authors find that a bank’s ROE before a crisis captures vulnerability to tail risk shocks. The authors also find that pre-crisis ROE predicts systemic risk during financial crises better than crisis-specific measures of bank fragility, which become apparent to economists only in retrospect. By using a bank’s profitability in normal times to estimate its exposure to systemic risk during turbulent times, this new method complements traditional model-based approaches while being less susceptible to manipulation by financial institutions; banks often have a vested interest in downplaying their levels of systemic risk when dealing with regulators.

Increasing educational attainment has not reduced occupational segregation

Ashley Jardina of the University of Virginia and co-authors challenge the case that rising education levels among Black workers will significantly reduce racial inequality in the labor market. Using census data from 1980 to 2019, the authors find that for any given level of education, white workers are overrepresented in high-wage occupations while Black workers are overrepresented in low-wage ones. Specifically, in 1990, about 27% of white workers (or 27% of Black workers) would have had to switch jobs for both racial groups to be distributed evenly across occupations. In 2019, a higher percentage of Black Americans had earned bachelor’s degrees, but occupational desegregation still would have required 27% of workers of a given race to switch occupations, suggesting that increasing educational attainment hasn’t changed occupational segregation for the last 30 years.

Suburban rent is rising faster than urban rent

Chart courtesy of the Wall Street Journal

Quote of the week:

"Yeah, that was a hell of a good week of data we got last week. And the key thing out of it is that it’s going to allow us to 'proceed carefully,' as Chair Powell said at Jackson Hole. There’s nothing that is saying we need to do anything imminent anytime soon, so we can just sit there, wait for the data, see if things continue. The biggest thing is just inflation. We got two good reports in a row. We can wait and see what the third one looks like and see if the slow inflation is a trend, or [if] it was just an outlier or a fluke," Christopher Waller, member of the Federal Reserve Board of Governors, said on CNBC.

"I don’t think one more [rate] hike would necessarily throw the economy into a recession if we did feel we needed to do one. But at the same time, like I said, the job market is still pretty strong. These numbers are still near historic lows at 3.8% unemployment. So it’s not obvious that we’re in real danger of doing a lot of damage to the job market, even if we raise rates one more time."