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Today marks the launch of the monthly publication of the Underlying Inflation Gauge (UIG). We are reporting two UIG measures, described recently on Liberty Street Economics, that are constructed to provide an estimate of the trend, or persistent, component of inflation. One measure is derived using a large number of disaggregated price series in the consumer price index (CPI), while the second measure incorporates additional information from macroeconomic and financial variables.
Consumers, financial market participants, and policymakers are particularly interested in the trend, or persistent, component of inflation. But this variable is not observed, which has resulted in a variety of proposed proxy measures. Because each measure has its own strengths and weaknesses, a consensus about a preferred candidate has not emerged. Here, we introduce the Underlying Inflation Gauge (UIG) as a measure of trend inflation. Among its attractive features, the UIG is derived from a large data set that extends beyond price variables and displays greater forecast accuracy than various measures of core inflation.
Oil prices plunged 65 percent between July 2014 and December of the following year. During this period, the yield spread—the yield of a corporate bond minus the yield of a Treasury bond of the same maturity—of energy companies shot up, indicating increased credit risk. Surprisingly, the yield spread of non‑energy firms also rose even though many non‑energy firms might be expected to benefit from lower energy‑related costs. In this blog post, we examine this counterintuitive result. We find evidence of a liquidity spillover, whereby the bonds of more liquid non‑energy firms had to be sold to satisfy investors who withdrew from bond funds in response to falling energy prices.
In recent months, there have been some high-profile assessments of how far the Federal Reserve has come in terms of communicating about monetary policy since its “secrets of the temple” days. While observers say the transition to greater transparency “still seems to be a work in progress,” they note the range of steps the Fed has taken over the years to shed light on its strategy, including issuing statements to announce and explain policy changes following Federal Open Market Committee (FOMC) meetings, post-meeting press conferences and minutes, FOMC-member speeches and testimony, and “forward guidance” in all its variants.
Olivier Armantier, Giorgio Topa, Wilbert van der Klaauw, and Basit Zafar
The New York Fed started releasing results from its Survey of Consumer Expectations (SCE) three years ago, in June 2013. The SCE is a monthly, nationally representative, internet-based survey of a rotating panel of about 1,300 household heads. Its goal, as described in a series of Liberty Street Economics posts, is to collect timely and high-quality information on consumer expectations about a broad range of topics, covering both macroeconomic variables and the households' own situation. In this post, we look at what drives changes in consumer inflation expectations. Do people respond to changes in recent realized inflation, and to expected and realized changes in prices of salient individual commodities—like gasoline? Understanding what drives inflation expectations is important for the conduct of monetary policy, since it improves a central bank’s ability to assess its own credibility and to evaluate the impact of its policy decisions and communication strategy.
What can disagreement teach us about how private forecasters perceive the conduct of monetary policy? In a previous post, we showed that private forecasters disagree about both the short-term and the long-term evolution of key macroeconomic variables but that the shape of this disagreement differs across variables. In contrast to their views on other macroeconomic variables, private forecasters disagree substantially about the level of the federal funds rate that will prevail in the medium to long term but very little on the rate at shorter horizons. In this post, we explore the possible explanations for what drives forecasts of the federal funds rate, especially in the longer run.
Graham Campbell, Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klaauw
The Federal Reserve Bank of New York’s Center for Microeconomic Data today released its Quarterly Report on Household Debt and Credit for the second quarter of 2016. It showed that overall household debt increased modestly over the period, with subdued mortgage originations and moderate but continued increases in non-housing related credit—particularly auto loans and credit cards. The total outstanding credit card balance now stands at $729 billion, up $17 billion from the first quarter, but still well below the peak of $866 billion reached in the fourth quarter of 2008. Credit card delinquency rates have continued to improve since peaking in 2008. We have previously “looked under the hood” of auto loans, and in this post, we present analysis that provides new insight into credit card debt by examining trends in credit card issuance and usage. The Quarterly Report and the following analyses are based on data from the New York Fed’s Consumer Credit Panel, which is a nationally representative sample drawn from Equifax credit reports.
Tobias Adrian, Richard Crump, Peter Diamond, and Rui Yu
In a previous post, we showed how market rates on U.S. Treasuries violate the expectations hypothesis because of time-varying risk premia. In this post, we provide evidence that term structure models have outperformed direct market-based measures in forecasting interest rates. This suggests that term structure models can play a role in long-run planning for public policy objectives such as assessing the viability of Social Security.
Nicole Dussault, Maxim Pinkovskiy, and Basit Zafar
What is the purpose of health care? What is the purpose of health insurance? When people fall ill, they seek health care in order to get better. But insurance has a slightly different function: Its main role is not to protect our health per se, but to protect our finances. For most people, lifetime health expenditures are quite low. However, some people have enormous health costs owing to major illnesses or health conditions. And this is where health insurance comes in—its goal (like that of any other form of insurance) is to protect these individuals against large, and sometimes ruinous, health expenditures. Has the recent health reform served this purpose?
Liberty Street Economics features insight and analysis from New York Fed economists working at the intersection of research and policy. Launched in 2011, the blog takes its name from the Bank’s headquarters at 33 Liberty Street in Manhattan’s Financial District.
The editors are Michael Fleming, Andrew Haughwout, Thomas Klitgaard, and Asani Sarkar, all economists in the Bank’s Research Group.
The views expressed are those of the authors, and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.
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