Interpreting real-time labor market conditions is challenging because commonly used indicators are noisy, revised over time, and often send conflicting signals. In practice, policymakers and market participants describe labor market developments using a shared narrative language centered on labor demand, labor supply, and matching frictions. In this paper, we show that empirical measures of these narrative concepts can be recovered from latent factors that summarize the joint movements of a broad set of high-frequency U.S. labor-market indicators. We use ninety-four labor-market indicators, over the period from 1960 to 2026, and construct measures for labor demand, long-run labor supply, short-run labor supply, and matching efficiency by selecting the factors that satisfy a limited set of restrictions on how underlying forces map into observed data. We find that labor demand and short-run labor supply account for most of the common variation in labor-market indicators. Our results also show that assigning narrow interpretations to individual indicators can lead to misleading conclusions about underlying labor market conditions. Applying the framework to the post-pandemic period reveals that although labor demand recovered briskly after the acute phase of the pandemic, it cannot account for the large rise in vacancies and quits. Instead, movements in short-run labor supply and matching efficiency play a central role. We also show that the “soft-landing” episode from 2023 through 2025 was characterized by a joint decline in labor demand and short-run labor supply, which slowed payroll growth while generating only a moderate increase in the unemployment rate.

This paper provides theory and evidence that distorted long-term interest rate expectations limit the effectiveness of monetary policy. Beliefs that depart from rational expectations break the tight link between policy rates and long-term interest rates, even when determined by the expectations hypothesis of the yield curve. Because long-term expectations are excessively sensitive to short-term interest rates, optimal policy is less aggressive relative to rational expectations. More aggressive policy leads to suboptimal volatility in long-term interest rates and aggregate demand through standard intertemporal substitution effects. These effects are quantitatively important in the United States over the postwar period.

We model the U.S. macroeconomic and financial sectors using a formal and unified econometric model. Through shrinkage, our Bayesian VAR provides a flexible framework for modeling the dynamics of 31 variables, many of which are tracked by the Federal Reserve. We show how the model can be used for understanding key features of the data, constructing counterfactual scenarios, and evaluating the macroeconomic environment both retrospectively and prospectively. Considering its breadth and versatility for policy applications, our modeling approach gives a reliable, reduced-form alternative to structural models.

Using a New Keynesian Phillips curve, we document the rapid and persistent increase in the natural rate of unemployment, ut∗, in the aftermath of the pandemic and characterize its implications for inflation dynamics. While the bulk of the inflation surge is attributed to temporary supply factors, we also find an important role for current and expected negative unemployment gaps. Through the lens of the model, the 2022–2023 disinflation was driven by the expectation that the unemployment gap will close through a progressive decline in ut∗ and a rise in the unemployment rate. This implies that convergence to long-run price stability depends critically on expectations about labor market tightness. Using a variety of cross-sectional data sources we provide corroborating evidence of unusually tight labor market conditions, consistent with our estimated rise in ut∗.

Inflation expectations can quickly become unanchored if the central bank undermines its commitment to the inflation target. This paper exploits an abrupt change in monetary policy by the Brazilian Central Bank in 2011 and microdata from a daily survey of professional forecasters to establish support for this claim. Reanchoring came only years later, after a regime shift that included a change of government. A simple model with a well-defined concept of (un)anchored inflation expectations provides a coherent explanation and structural interpretation of our empirical findings.

Most macroeconomic models impose a tight link between expected future short rates and the term structure of interest rates via the expectations hypothesis (EH). While the EH has been systematically rejected in the data, existing work evaluating the EH generally assumes either full-information rational expectations or stationarity of beliefs, or both. As such, these analyses are ill-equipped to refute the EH when these assumptions fail to hold, fueling hopes for a “resurrection” of the EH. We introduce a model of expectations formation which features time-varying means and accommodates deviations from rationality. This model tightly matches the entire joint term structure of expectations for output growth, inflation, and the short-term interest rate from all surveys of professional forecasters in the U.S. We show that deviations from rationality and drifting long-run beliefs consistent with observed measures of expectations, while sizable, do not come close to bridging the gap between the term structure of expectations and the term structure of interest rates. Not only is the EH decisively rejected in the data, but model-implied short-rate expectations generally display, at best, only a weak co-movement with the forward rates of corresponding maturities.

We develop a theory of low-frequency movements in inflation expectations, and use it to interpret joint dynamics of inflation and inflation expectations for the United States and other countries over the postwar period. In our theory, long-run inflation expectations are endogenous. They are driven by short-run inflation surprises, in a way that depends on recent forecasting performance and monetary policy. This distinguishes our theory from common explanations of low-frequency properties of inflation. The model, estimated using only inflation and short-term forecasts from professional surveys, accurately predicts observed measures of long-term inflation expectations and identifies episodes of unanchored expectations. (JEL D83, D84, E12, E23, E31, E37, E52)

We study zero interest-rate policy in response to a large negative demand shock when long-run inflation expectations can fall over time. Because falling expectations make monetary policy less effective by raising real interest rates, the optimal forward guidance policy makes large front-loaded promises to stabilize expectations. Policy is too stimulatory in the event of transitory shocks, but provides insurance against persistent shocks. Optimal policy is well-approximated by a constant calendar-based forward guidance, independent of the shock’s realized persistence. This insurance principle qualitatively and quantitatively distinguishes our paper from other recent research on bounded rationality and the forward guidance puzzle.

Bond yields reflect both the expected future path of short-term rates as well as term premiums. We characterize the expected path of nominal and real short rates using a unique data set comprising all available U.S. surveys of professional forecasters and obtain term premiums as the difference between observed government bond yields and survey-based expected short rates. We show that term premiums are the main drivers of bond yields, accounting for the bulk of variation in levels and nearly all of the variation in the changes. Furthermore, term premiums, not expected rates, are the dominant source of co-movement between yields at different maturities as well as the ability of the yield curve to predict real output growth. Macroeconomic factors are important drivers of term premiums, with demand shocks playing a prominent role. Our results therefore show that term premiums are a key feature of the macro-finance nexus..

This paper proposes a new theory of exchange rate determination. Under arbitrary beliefs, the exchange rate is determined by an equilibrium restriction which we call the generalized no-arbitrage condition. The pricing function predicts endogenous departures from the conventional rational expectations uncovered interest parity condition. In an empirical open-economy model with learning, using Canadian and United States data, we evaluate whether learning can account for exchange rate dynamics and reduce reliance on exogenous risk-premium shocks to explain departures from uncovered interest parity. Reminiscent of Justiniano and Preston (2010a), we find learning dynamics help explain the persistence and volatility of exchanges rates but generate counter-factual predictions on international macroeconomic comovement.

We model the United States macroeconomic and financial sectors using a formal and unified econometric model. Through shrinkage, our Bayesian VAR provides a flexible framework for modeling the dynamics of thirty-one variables, many of which are tracked by the Federal Reserve. We show how the model can be used for understanding key features of the data, constructing counterfactual scenarios, and evaluating the macroeconomic environment both retrospectively and prospectively. Considering its breadth and versatility for policy applications, our modeling approach gives a reliable, reduced form alternative to structural models.

Using subjective expectations data from the New York Fed's Survey of Consumer Expectations (SCE), we estimate the elasticity of intertemporal substitution (EIS)-the response of expected consumption growth to changes in the real interest rate. This unique data set allows us to estimate the consumption Euler equation with no auxiliary assumptions on the properties of expectations, which are instead necessary when using choice data. We find a subjective EIS of about 0.5, consistent with the results of much of the literature. In addition, planned consumption displays excess sensitivity to expected income changes, even among households not facing substantial liquidity constraints. (C) 2021 Published by Elsevier B.V.

We study zero interest-rate policy in response to a large negative demand shock when long-run expectations can fall over time. Because falling expectations make monetary policy less effective by raising real interest rates, the optimal forward guidance policy makes large front-loaded promises to stabilize expectations. Policy is too stimulatory in the event of transitory shocks, but provides insurance against persistent shocks. The optimal policy is well-approximated by a constant calendar-based forward guidance, independent of the shock’s realised persistence. The insurance property distinguishes our paper from other bounded rationality papers that solve the forward guidance puzzle and generates important quantitative differences.

Using a unique data set of individual professional forecasts, we document disagreement about the future path of monetary policy, particularly at longer horizons. The stark differences in short rate forecasts imply strong disagreement about the risk-return trade-off of longer-term bonds. Longer-horizon short rate disagreement co-moves with term premiums. We estimate an affine term structure model in which investors hold heterogeneous beliefs about the long-run level of rates. Our model fits Treasury yields and the short rate paths predicted by different groups of investors and thus matches the observed differences in expected return profiles. Investors who correctly anticipated the secular decline in rates became increasingly important for the marginal pricing of risk in the Treasury market. Accounting for heterogeneity in investment performance eliminates the downward trend in the term premium.

This paper bridges the gap between two popular approaches to estimating the natural rate of unemployment, u*. The first approach uses detailed labor market indicators, such as labor market flows, cross-sectional data on unemployment and vacancies, or various measures of demographic changes. The second approach, which employs reduced-form models and DSGE models, relies on aggregate price and wage Phillips curve relationships. We combine the key features of these two approaches to estimate the natural rate of unemployment in the United States using both data on labor market flows and a forward-looking Phillips curve that links inflation to current and expected deviations of unemployment from its unobserved natural rate. We estimate that the natural rate of unemployment was around 4.0 percent toward the end of 2018 and that the unemployment gap was roughly closed. Identification of a secular downward trend in the unemployment rate, driven solely by the inflow rate, facilitates the estimation of u*. We identify the increase in labor force attachment of women, decline in job destruction and reallocation intensity, and dual aging of workers and firms as the main drivers of the secular downward trend in the inflow rate.

This paper bridges the gap between two popular approaches to estimating the natural rate of unemployment, ut . The first approach uses detailed labor market indicators such as labor market flows, cross-sectional data on unemployment and vacancies or various measures of demographic changes. The second approach which comprises reduced form models and DSGE models relies mainly on price and wage Phillips curve relationships, together with model-specific assumptions on aggregate demand. We combine the key features of these two approaches to estimate the natural rate of unemployment in the United States using both data on labor market flows and a forwardlooking Phillips curve linking inflation to current and expected deviations of unemployment from its unobserved natural rate. We estimate that the natural rate of unemployment stood at 4.1% as of the third quarter of 2018 and that the unemployment gap is roughly closed. Identification of a secular downward trend in the inflow rate from detailed unemployment flows facilitates the estimation of ut . We identify the increase in labor force attachment of women, decline in job destruction and reallocation intensity, and dual aging in the labor market of workers and firms as the main drivers of the secular downward trend in the inflow rate. We thank our editors, Jan Eberly and Jim Stock, our discussants, Steve Davis and Giorgio Primiceri, along with Olivier Blanchard, Jason Faberman, Bart Hobjin, Marco Del Negro, Domenico Giannone, and Nora Traum for helpful comments. Rene Chalom, Brendan Moore, and Jin Yan provided excellent research assistance. The views expressed in this paper are those of the authors and do not necessarily represent those of the Federal Reserve Bank of New York, Federal Reserve Bank of Dallas, or the Federal Reserve System. ∗Federal Reserve Bank of New York. †University of Texas at Austin. ‡Federal Reserve Bank of Dallas. §University of Texas at Austin.