Esther George, Speech & Interview: XXV Annual Conference of the Central Bank of Chile

An Academic Conference

Speech

“So my comments here are going to depart from the equations and from the modeling, and I am going to turn to this topic as a consumer of this literature and talk about some of the more qualitative aspects of these idea.”

“I’ll close with this example, I think, because it’s been one that you hear a lot about. It’s very much in the public’s eye and it has to do with how our policy may affect housing markets, particularly in the United States. And I’d start by noting of course we are largely constrained to using blunt policy tools, which limits of course our ability to fine tune policies to particular segments of the population.”

“But still the potential distributional consequences I think cannot be dismissed. And one of those tools that has raised this question has been the use of our balance sheet policies. Even after some recent declines, house prices in the United States remain some 25% above their pre-pandemic trend. This is largely still an issue of supply, a hangover from the 2008 and nine financial crisis. But one could argue it is partly due to the magnitude and duration of quantitative easing implemented by the Fed during the course of the last two years, and especially the purchase of more than a trillion dollars in mortgage back securities.”

“Though the goal of these purchases was not of course to explicitly support housing prices, it has been argued that those actions had that effect. So how are the benefits of supporting housing prices distributed? Of course, people who already own houses who tend to be wealthier and older certainly gain. However, their gain may be at the expense of others who cannot get their foot in the door when prices are extremely high. Even if interest rates are also low loan to income and loan to value limits on mortgages are more likely to bind for people without large down payments. It’s particularly true for young people at the beginning of their careers and others with relatively low incomes.”

Interview

“So as the Federal Reserve tightens monetary policy with the aim of closing the imbalances between demand and supply, that’s pushed up inflation, the dynamics of this excess saving and the distribution of those savings is going to be a key factor, I think shaping the outlook for output for inflation, and certainly for interest rates.”

“Higher saving of course provides an important buffer to households that can ease the adjustment to economic disruptions. However, as we look today, these higher savings could also provide a further impetus to consumption. As the Central Bank slows the pace of demand growth and higher saving, of course, can lessen a precautionary pullback and consumption. It could well take a higher interest rate for some time to convince households to hold onto their savings rather than spend it down. And that of course, adding to inflationary pressure.”

“When we look currently at the data, it suggests that this savings remains elevated across the wealth distribution, but I think more recently, we’ve seen signs that suggest that lower income households are running down their buffers quickly. So monitoring the distribution of that savings is likely to be important as we think about the course of the economy and of course the path for policy.”