Inflation Exposure Shapes Fed Officials Into Hawks and Doves

Federal Reserve officials are more likely to be hawkish if they've experienced high inflation

Deep Dive Into the Future Path of Fed Policy

Federal Reserve officials are products of their eras. 

A policy maker's hawkish or dovish tilt hinges at least partly on the inflation environment they've experienced, according to new research. That's the leading item in our research wrap this week, and it's followed by a Goldman Sachs analysis of the U.S. economy's neutral interest rate, which is another piece worth reading about ahead of Wednesday's Federal Open Market Committee rate decision. This week's roundup also links to studies on single mothers and the marriage premium and on how immigration status affects wages. Check this column each Tuesday for the latest in policy-relevant or interesting economic research. 

Born this way: hawks vs. doves

Trying to figure out Fed officials' thought process? It might be worth taking a look at their birthdays. The inflation environment Fed officials have experienced influence their policy stance and dissents, based on new research by University of California Berkeley's Ulrike Malmendier and University of Michigan's  Zhen Yan and Stefan Nagel. "FOMC members use a more hawkish tone in their speeches when their lifetime experiences imply a higher experience-based inflation forecast," they find, looking at officials starting from 1951. 

Personal experiences with inflation seem to have also mattered for monetary policy setting. Fed officials have often kept rates 50 to 100 basis points higher in the 2000's than they would have had they relied on staff forecasts, the research shows. "Our results add a twist to the practical notion that the choice of a policymaker can have a long-lasting impact on policy outcomes: To predict a policy makers leanings, it is helpful to look at the person's prior lifetime experiences," the authors write. 

The Making of Hawks and Doves: Inflation Experiences on the FOMC
Published March 2017
Available on the NBER website

Is r* a ceiling? 

Fed officials like to talk about r*, the inflation-adjusted neutral interest rate setting at which the Fed is neither stimulating nor slowing the economy. Fed Chair Janet Yellen gave us an update on her thinking about the theoretical figure when she spoke earlier this month, saying that she still sees it right around zero (so a 2 percent fed funds rate, if you don't subtract inflation).

This has Goldman Sachs wondering: is the Fed ever going to adjust its estimate for this figure, and if not, does that create a low ceiling for the benchmark interest rate?

In a note last week, Goldman economist David Mericle explored the possibilities. If the Fed's other economic forecasts are met, the neutral rate is likely to rise by about 0.3 to 0.4 percentage points, based on a prominent model. "This suggests from the perspective of a standard policy rule, the Fed’s view of the neutral rate is unlikely to be a major constraint on the hiking cycle over the next three years," Mericle writes. 

U.S. Daily: Will the Fed’s Low Neutral Rate Estimate Put the Brakes on Hikes Next Year?
Published March 8, 2017
Available to Goldman Sachs clients

When having married parents gives kids the biggest boost

About 40 percent of U.S. births took place outside of marriage in 2014, making non-marital child-rearing a relevant issue for economic research. The benefit of parents marrying is biggest when mothers are in their early- to mid-twenties or have high school degrees, while it's smaller for children of older mothers with lots of education and teen mothers with little education, this study finds. The premium is measured as the chance that a mother's child finishes high school and avoids poverty at age 25.

What's happening here? When teenage parents marry, it probably doesn't boost resources enough to help the child hugely, and older, more educated moms already have plenty of money at their disposal. "The marriage premium depends crucially on resource context," the authors write. 

The Economics of Non-Marital Childbearing and The “Marriage Premium for Children”

Published March 2017 
Available on the NBER website

Undocumented wages

Undocumented workers' wages probably wouldn't change much if they received legal status, based on new research by prominent Harvard University immigration and labor economist George Borjas. While undocumented workers earn a lot less than their counterparts with work permits, about half of the difference owes to observable characteristics like education level, rather than to their immigration status. What's more, undocumented wages have been rising rapidly over the past decade, so the immigration-status penalty has gotten smaller. "The small magnitude of the current wage penalty suggests that the enactment of a regularization program may only have modest effects on the wage of undocumented workers," Borjas writes. 

The Earnings of Undocumented Immigrants

Published March 2017
Available on the NBER website

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