Monetary Policy Report

For use at 11:00 a.m. EDT July 5, 2019 M P r onetary olicy ePort July 5, 2019 Board of Governors of the Federal Reserve System L t etter of ransmittaL Board of Governors of the Federal Reserve System Washington, D.C., July 5, 2019 The President of the Senate The Speaker of the House of Representatives The Board of Governors is pleased to submit its Monetary Policy Report pursuant to section 2B of the Federal Reserve Act. Sincerely, Jerome H. Powell, Chairman S L -r g m P S tatement on onger un oaLS and onetary oLicy trategy Adopted effective January 24, 2012; as amended effective January 29, 2019 The Federal Open Market Committee (FOMC) is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society. Inflation, employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee’s policy decisions reflect its longer-run goals, its medium- term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee’s goals. The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee reaffirms its judgment that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate. The Committee would be concerned if inflation were running persistently above or below this objective. Communicating this symmetric inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee’s ability to promote maximum employment in the face of significant economic disturbances. The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee’s policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants’ estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC’s Summary of Economic Projections. For example, in the most recent projections, the median of FOMC participants’ estimates of the longer-run normal rate of unemployment was 4.4 percent. In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee’s assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate. The Committee intends to reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January. C ontents Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Economic and Financial Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Special Topics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Part 1: Recent Economic and Financial Developments . . . . . . . . . . . . . . . . . . . . . 5 Domestic Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Financial Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 International Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Part 2: Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Part 3: Summary of Economic Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49 List of Boxes How Have Lower-Educated Workers Fared since the Great Recession? . . . . . . . . . . . . . . . . . . 8 Developments Related to Financial Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 The Persistent Slowdown in Global Trade and Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . 30 Monetary Policy Rules and Their Interactions with the Economy . . . . . . . . . . . . . . . . . . . . . . 37 Framework for Monetary Policy Implementation and Normalization of the Federal Reserve’s Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 note: This report reflects information that was publicly available as of noon EDT on July 2, 2019. Unless otherwise stated, the time series in the figures extend through, for daily data, July 1, 2019; for monthly data, May 2019; and, for quarterly data, 2019:Q1. In bar charts, except as noted, the change for a given period is measured to its final quarter from the final quarter of the preceding period. For figures 20 and 34, note that the S&P 500 Index and the Dow Jones Bank Index are products of S&P Dow Jones Indices LLC and/or its affiliates and have been licensed for use by the Board. Copyright © 2019 S&P Dow Jones Indices LLC, a division of S&P Global, and/or its affiliates. All rights reserved. Redistribution, reproduction, and/or photocopying in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spdji.com. S&P® is a registered trademark of Standard & Poor’s Financial Services LLC, and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent, and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein. 1 s ummary Economic activity increased at a solid pace these year-over-year declines mainly reflect in the early part of 2019, and the labor soft readings in the monthly price data earlier market has continued to strengthen. However, this year, which appear to reflect transitory inflation has been running below the Federal influences. Survey-based measures of longer- Open Market Committee’s (FOMC) longer- run inflation expectations are little changed, run objective of 2 percent. At its meeting in while market-based measures of inflation June, the FOMC judged that current and compensation have declined recently to levels prospective economic conditions called for close to or below the low levels seen late maintaining the target range for the federal last year. funds rate at 2¼ to 2½ percent. Nonetheless, in light of increased uncertainties around Economic growth. In the first quarter, real gross the economic outlook and muted inflation domestic product (GDP) is reported to have pressures, the Committee indicated that it will increased at an annual rate of 3.1 percent, closely monitor the implications of incoming bolstered by a sizable contribution from net information for the economic outlook and will exports and business inventories. By contrast, act as appropriate to sustain the expansion, consumer spending in the first quarter was with a strong labor market and inflation near lackluster but appears to have picked up in the Committee’s symmetric 2 percent objective. recent months. Meanwhile, following robust gains last year, business fixed investment Economic and Financial slowed in the first quarter, and indicators Developments suggest that investment decelerated further in the spring. All told, incoming data for the The labor market. The labor market has second quarter suggest a moderation in GDP continued to strengthen. Over the first five growth—despite a pickup in consumption— months of 2019, payrolls increased an average as the contributions from net exports and of 165,000 per month. This rate is down inventories reverse and the impetus from from the average pace of 223,000 in 2018, business investment wanes further. but it is faster than what is needed to provide jobs for new entrants into the labor force. Financial conditions. Nominal Treasury yields The unemployment rate moved down from moved significantly lower over the first half 3.9 percent in December to 3.6 percent in of 2019, largely reflecting investors’ concerns May; meanwhile, wage gains have remained about trade tensions and the global economic moderate. outlook, as well as expectations of a more accommodative path for the federal funds Inflation. Consumer price inflation, as rate than had been anticipated earlier. On net, measured by the 12-month change in the price since the end of 2018, spreads of yields on index for personal consumption expenditures, corporate bonds over those on comparable- moved down from a little above the FOMC’s maturity Treasury securities have narrowed, objective of 2 percent in the middle of last year and stock prices have increased. Moreover, to a rate of 1.5 percent in May. The 12-month loans remained widely available for most measure of inflation that excludes food and households, and credit provided by commercial energy items (so-called core inflation), which banks continued to expand at a moderate historically has been a better indicator than the pace. Overall, domestic financial conditions overall figure of where inflation will be in the for businesses and households continued to be future, was 1.6 percent in May—down from supportive of economic growth over the first a rate of 2 percent from a year ago. However, half of 2019. 2 SUMMARy Financial stability. The U.S. financial system Monetary Policy continues to be substantially more resilient than in the period leading up to the financial Interest rate policy. In its meetings over the crisis. Asset valuations remain somewhat first half of 2019, the FOMC judged that the elevated in a number of markets, with stance of monetary policy was appropriate investors continuing to exhibit high appetite to achieve the Committee’s objectives for risk. Borrowing by businesses continues to of maximum employment and 2 percent outpace GDP, with the most rapid increases inflation, and it decided to maintain the target in debt concentrated among the riskiest firms. range for the federal funds rate at 2¼ to In contrast, household borrowing remains 2½ percent. These decisions reflected incoming modest relative to income, and the debt information showing the solid fundamentals growth is concentrated among borrowers with of the U.S. economy supporting continued high credit scores. Key financial institutions, growth and strong employment. For most of including the largest banks, continue to be well this period, the Committee indicated that, capitalized and hold large quantities of liquid in light of global economic and financial assets. Funding risks in the financial system developments and muted inflation pressures, it remain low relative to the period leading up to would be patient as it determines what future the crisis. adjustments to the target range for the federal funds rate may be appropriate. At the June International developments. After slowing in FOMC meeting, however, the Committee 2018, foreign economic growth appears to noted that uncertainties about the global and have stabilized in the first half of the year, domestic economic outlook had increased. In but at a restrained pace. While aggregate light of these uncertainties and muted inflation activity in the advanced foreign economies pressures, the Committee indicated that it will (AFEs) increased slowly from the soft patch act as appropriate to sustain the expansion, of late last year, activity in emerging Asia with a strong labor market and inflation near generally struggled to gain a solid footing, and its symmetric 2 percent objective. several Latin American economies continued to underperform. Growth abroad has been In the most recent Summary of Economic held down in part by a slowdown in the Projections, which was compiled at the time manufacturing sector against the backdrop of the June FOMC meeting, participants of softening global trade flows. With both generally revised down their individual inflation and activity in the AFEs remaining assessments of the appropriate path for subdued, AFE central banks took a more monetary policy relative to their assessments accommodative policy stance. at the time of the March meeting. (The participants’ most recent economic Despite trade tensions that weighed on financial projections—released after the June FOMC markets, financial conditions abroad generally meeting—are discussed in more detail in Part 3 eased in the first half of the year, supported of this report.) However, as the Committee by accommodative communications by major has continued to emphasize, the timing and central banks. On balance, global equity prices size of future adjustments to the target range moved higher, sovereign yields in major foreign for the federal funds rate will depend on economies declined, and sovereign bond the Committee’s assessment of realized and spreads in the emerging market economies expected economic conditions relative to its were little changed. Market-implied paths of objectives of maximum employment and policy rates in AFEs generally declined. 2 percent inflation. MONETARy POLICy REPORT: JULy 2019 3 Balance sheet policy. Over the first half of the developments appear to have lowered trade year, the FOMC made two announcements flows to some extent, while uncertainty regarding the longer-run policy implementa- surrounding trade policy may be weighing tion framework and its plans for normalizing on investment. The global tech cycle and a the balance sheet. Following its January general slowdown in global demand, reflecting meeting, the Committee noted that it decided idiosyncratic factors specific to different to continue to implement monetary policy economies, have also likely weighed on in a regime with ample reserves. Consistent demand for traded goods. (See the box “The with that decision, in March, the Committee Persistent Slowdown in Global Trade and announced plans to conclude the reduction Manufacturing” in Part 1.) of its aggregate securities holdings at the end of September 2019. (See the box “Framework Monetary policy rules. Monetary policy rules for Monetary Policy Implementation and are mathematical formulas that relate a policy Normalization of the Federal Reserve’s interest rate, such as the federal funds rate, to Balance Sheet” in Part 2.) The Committee is a small number of other economic variables, prepared to adjust the details for completing typically including the deviation of inflation balance sheet normalization in light of from its target value and a measure of resource economic and financial developments, slack in the economy. The prescriptions for consistent with its policy objectives of the policy interest rate from these rules can maximum employment and price stability. provide helpful guidance for the FOMC. This discussion presents five policy rules— Special Topics illustrative of the many rules that have received attention in the research literature—and Labor market conditions for lower- and provides examples of two ways to compute higher-educated workers. The labor market historical prescriptions of policy rules. (See has strengthened since the end of the last the box “Monetary Policy Rules and Their recession, but the pattern of recovery has Interactions with the Economy” in Part 2.) varied across workers with different levels of education. Workers with a college degree Monetary policy implementation and balance or more experienced a swifter recovery in sheet normalization. Since the beginning of employment, while those with a high school this year, the FOMC has made important degree or less had a much more delayed decisions regarding its framework for recovery in employment. This pattern is monetary policy implementation and the typical of business cycles, and recent research process of normalizing the size of its balance sheds light on mechanisms that may lead to sheet. The Committee decided to continue to differences in the timing of recovery for lower- implement monetary policy in a regime with and higher-educated workers. (See the box an ample supply of reserves and announced “How Have Lower-Educated Workers Fared that it intends to conclude the reduction since the Great Recession?” in Part 1.) of its aggregate securities holdings in the System Open Market Account at the end of Global manufacturing and trade. Growth in September 2019. (See the box “Framework global trade and manufacturing has for Monetary Policy Implementation and weakened significantly since 2017 even as Normalization of the Federal Reserve’s growth in services has held up. Trade policy Balance Sheet” in Part 2.) 5 P 1 art r e f d eCent ConomiC and inanCiaL eveLoPments Domestic Developments The labor market strengthened further during the first half of 2019 but at a slower pace than last year . . . Labor market conditions have continued to strengthen so far this year but at a pace slower than last year. Total nonfarm payroll 1. Net change in payroll employment employment has averaged gains of about Monthly Thousands of jobs 165,000 per month over the first five months of 2019, according to the Bureau of Labor Total nonfarm (12-month) 300 Statistics. This pace is slower than the average monthly gains in 2018, but it is faster than 250 what is needed to provide jobs for net new 200 entrants into the labor force as the working- age population grows (figure 1).1 150 100 In April and May of this year, the unemployment rate stood at 3.6 percent, Total nonfarm (3-month) 50 ¼ percentage point lower than its level in December 2018 and its lowest level since 1969 2013 2015 2017 2019 (figure 2). In addition, the unemployment rate NOTE: The data are 3-month and 12-month moving averages. SOURCE: Bureau of Labor Statistics via Haver Analytics. is ½ percentage point below the median of Federal Open Market Committee (FOMC) participants’ estimates of its longer-run normal level.2 In May, the labor force participation rate (LFPR) for individuals 16 and over—that is, the share of the population either working or actively seeking work—was 62.8 percent, and it has changed little, on net, since late 2013. The aging of the population is an important contributor to an underlying downward trend 1. Owing to population growth, roughly 115,000 to 145,000 jobs per month need to be created, on average, to keep the unemployment rate constant with an unchanged labor force participation rate. However, the participation rate fell over the December to May period, reducing the number of job gains that would have been needed. There is considerable uncertainty around these estimates, as the difference between monthly payroll gains and employment changes from the Current Population Survey (the source of the unemployment and participation rates) can be quite volatile over short periods. 2. See the most recent economic projections that were released after the June FOMC meeting in Part 3 of this report. 6 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS 2. Measures of labor underutilization Monthly Percent 18 U-6 16 U-4 14 U-5 12 10 8 Unemployment rate 6 4 2 2007 2009 2011 2013 2015 2017 2019 NOTE: Unemployment rate measures total unemployed as a percentage of the labor force. U-4 measures total unemployed plus discouragedworkers, as a percentage of the labor force plus discouraged workers. Discouraged workers are a subset of marginally attached workers who are not currently looking for work because they believe no jobs are available for them. U-5 measures total unemployed plus all marginally attached to the labor force, as a percentage of the labor force plus persons marginally attached to the labor force. Marginally attached workers are not in the labor force, want and are available for work, and have looked for a job in the past 12 months. U-6 measures total unemployed plus all marginally attachedworkers plus total employed part time for economic reasons, as a percentage of the labor force plus all marginally attached workers. The shaded bar indicates a period of business recession as defined by the National Bureau of Economic Research. SOURCE: Bureau of Labor Statistics via Haver Analytics. in the overall participation rate. In particular, 3. Labor force participation rates and members of the baby-boom cohort are employment-to-population ratio increasingly moving into their retirement years, Percent Percent ages when labor force participation typically falls. The flat trajectory in the overall LFPR 85 Labor force participation rate 68 is therefore consistent with strengthening 66 labor market conditions; indeed, the LFPR 84 for prime-age individuals (between 25 and 64 83 54 years old), which is much less sensitive 62 to the effects of population aging, has been 82 60 rising over the past few years (figure 3). 81 58 Combining both the unemployment rate and Employment-to-population ratio Prime-age labor force the LFPR, the employment-to-population 80 participation rate 56 ratio (EPOP) for individuals 16 and over—the 2007 2010 2013 2016 2019 share of that segment of the population who are working—was 60.6 percent in May and NOTE: The data are monthly. The prime-age labor force participation rate is a percentage of the population aged 25 to 54. The labor force has been gradually increasing throughout the participation rate and the employment-to-population ratio are percentages of the population aged 16 and over. expansion. The increase has been considerably SOURCE: Bureau of Labor Statistics via Haver Analytics. larger for those with at least some college education than for those with no more than a high school diploma. (The box “How Have Lower-Educated Workers Fared since the MONETARy POLICy REPORT: JULy 2019 7 Great Recession?” discusses movements in the EPOP by educational level over the current expansion.) Other indicators are also consistent with strong labor market conditions. As reported in the Job Openings and Labor Turnover Survey (JOLTS), the average of the private-sector job openings rate over the first four months of the year was near its historical high, consistent with surveys indicating that businesses see vacancies as hard to fill. Similarly, the quits rate in the JOLTS is also near the top of its historical range, an indication that workers are being bid away from their current jobs or have become more confident that they can successfully switch jobs if they wish to. This interpretation accords well with surveys of consumers that indicate households perceive jobs as plentiful. The JOLTS layoff rate and the number of people filing initial claims for unemployment insurance benefits have both remained quite low. . . . and unemployment rates have fallen for all major demographic groups over the past several years Differences in unemployment rates across ethnic and racial groups have narrowed in recent years, as they typically do during economic expansions, after having widened during the recession (figure 4). However, unemployment rates for African Americans and Hispanics remain substantially above those for whites and Asians. The rise in LFPRs for prime-age individuals over the past few years has also been apparent in each of these racial and ethnic groups (figure 5). Increases in labor compensation have picked up but remain moderate by historical standards . . . Despite strong labor market conditions, the available indicators generally suggest that increases in hourly labor compensation have remained moderate. The employment cost index—a measure of both wages and the cost to employers of providing benefits—was 8 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS How Have Lower-Educated Workers Fared since the Great Recession? A. Prime-age employment and wages by education, 2007–18 Employment-to-population ratios Real wages Annual Percentage point change from 2007 Annual Percent change from 2007 + _0 College plus 3 2 1 1 2 + _0 College plus 3 1 4 2 3 5 4 High school or less 6 High school or less 5 7 6 2008 2010 2012 2014 2016 2018 2008 2010 2012 2014 2016 2018 SOURCE: Staff calculations using the Current Population Survey. The U.S. labor market has been strengthening since The relative underperformance of employment and the end of the Great Recession. Over this period, the wage growth for lower-educated workers has been unemployment rate has fallen roughly 6 percentage a characteristic of all business cycles since at least points, and the employment-to-population ratio (EPOP) 1980. This pattern is likely due, at least in part, to a for individuals between 25 and 54 years old (prime long-term downward trend in the demand for lower- age) has increased about 4¼ percentage points. How- educated workers that is unrelated to the business cycle ever, labor market outcomes during the expansion have and caused, perhaps, by changes in technology and been quite different for lower- and higher-educated globalization.3 To focus on the effects of business cycles individuals. The EPOP for prime-age college graduates distinct from these longer-term trends, we examine declined about 2.5 percentage points during the business cycles at the state level to estimate the recession, but it began a steady and sustained recovery (continued) in 2010 and was nearly at its pre-recession level by 2018 (left panel of figure A). In contrast, the EPOP for prime-age individuals with a high school degree or less fell much more sharply during the recession and lingered near its trough for several years before of Atlanta’s Wage Growth Tracker (WGT), which calculates it began to recover in 2014.1 As of 2018, the EPOP the median, year-over-year percent change in nominal wages of individuals employed 12 months apart. The WGT for lower-educated workers remained well below measure shows that median wage growth for workers with its pre-recession level. In addition, real (or inflation- a high school degree was lower than median wage growth adjusted) hourly wages for lower-educated workers for workers with a college degree through 2015. Since then, fell more over the 2007–13 period than real wages for median wage growth for both groups has been similar. college graduates (right panel of figure A). Real wages 3. The EPOP for lower-educated, prime-age individuals has been trending lower for men since 1950 and for women since subsequently picked up for both groups, but cumulative 2000, largely reflecting the trends in those groups’ labor force real wage gains for lower-educated workers have only participation rates (LFPRs). For an overview of factors affecting recently caught up, in percentage terms, to those for the LFPRs of prime-age individuals, see the box “The Labor workers with college degrees.2 Force Participation Rate for Prime-Age Individuals” in Board of Governors of the Federal Reserve System (2018), Monetary Policy Report (Washington: Board of Governors, July), 1. The analysis excludes those with some college education pp. 8–10, https://www.federalreserve.gov/monetarypolicy/ but not a four-year degree. The labor market experience of files/20180713_mprfullreport.pdf; and Congressional Budget such individuals, though, is similar to that of individuals with a Office (2018), Factors Affecting the Labor Force Participation high school degree or less. of People Ages 25 to 54 (Washington: CBO, February, https:// 2. Another measure of wage growth using the same Current www.cbo.gov/system/files/115th-congress-2017-2018/ Population Survey data source is the Federal Reserve Bank reports/53452-lfpr.pdf). MONETARy POLICy REPORT: JULy 2019 9 “typical” cyclical decline and recovery of employment B. Response of EPOP by education to state-level for both education groups. recessions The typical state-level business cycle shows a starkly different evolution of employment for lower-educated Percentage points workers compared with that for workers with college degrees. Typically in a recession, the EPOP declines immediately for both groups, but the decline is deeper College plus .5 and longer lasting for those with a high school degree + or less (figure B).4 Once that group’s EPOP begins a _0 sustained recovery, though, it increases at a more rapid pace than the EPOP for those with a college degree. .5 These results indicate that the EPOP for lower-educated workers may not fully recover for at least eight years, on average, following the end of a recession. High school or less 1.0 The differences in labor market outcomes over the business cycle for different education groups may in part be due to employers changing their hiring 0 2 4 6 8 10 Year relative to shock standards. Some research shows that employers raise skill requirements for new hires in a recession and then Note: EPOP refers to the employment-to-population ratio. Shaded areas are 95 percent confidence bands. Data extend from 1978 through gradually lower skill requirements as the labor market 2018. recovers.5 Other research suggests that when high- Source: Tomaz Cajner, John Coglianese, and Joshua Montes (2019), “Cyclical Dynamics of the U.S. Labor Market,” unpublished paper, skilled workers lose their jobs during recessions, they Board of Governors of the Federal Reserve System, Division of take jobs that require fewer skills, making these jobs Research and Statistics, March. less likely to be filled by low-skilled individuals.6 This pattern could at least in part explain the differences in labor market outcomes for lower- and higher-educated rate.7 Indeed, real wages for lower-educated workers workers since the most recent recession. rose faster over the past few years as the labor market As the unemployment rate falls and employers relax tightened, and total wage growth for those workers their hiring standards, more opportunities are likely to since 2007 is now close to wage growth for more- open for lower-educated workers. Aaronson and others educated workers (as shown in the right panel of (2019) present some evidence that disadvantaged figure A). Hotchkiss and Moore (2018) find that groups, such as nonwhite individuals and those with exposure to a low-unemployment economy is less education, benefit more from further improvement particularly beneficial for individuals who entered the in the labor market relative to more advantaged groups labor market during periods of high unemployment and when the unemployment rate is below its natural would otherwise face persistently worse labor market outcomes.8 Thus, periods of low unemployment may particularly improve labor market outcomes of lower- educated workers. 4. For ease of interpretation, we define a typical recession as a state experiencing a temporary 1 percent decline in state output growth in a given year, returning to normal growth in the following year. To get the estimated effect of a larger or smaller recession, simply multiply the estimates by the 7. See Stephanie R. Aaronson, Mary C. Daly, William specified decline in output growth. Wascher, and David W. Wilcox (2019), “Okun Revisited: Who 5. See Brad Hershbein and Lisa B. Kahn (2018), “Do Benefits Most from a Strong Economy?” paper presented at Recessions Accelerate Routine-Biased Technological Change? the Brookings Papers on Economic Activity Conference, held Evidence from vacancy Postings,” American Economic Review, at the Brookings Institution, Washington, March 7–8, https:// vol. 108 (July), pp. 1737–72; and Alicia Sasser Modestino, www.brookings.edu/wp-content/uploads/2019/03/Okun- Daniel Shoag, and Joshua Ballance (2016), “Downskilling: Revisited-Who-Benefits-Most-From-a-Strong-Economy.pdf. Changes in Employer Skill Requirements over the Business 8. See Julie L. Hotchkiss and Robert E. Moore (2018), Cycle,” Labour Economics, vol. 41 (August), pp. 333–47. “Some Like It Hot: Assessing Longer-Term Labor Market 6. See Regis Barnichon and yanos Zylberberg (2019), Benefits from a High-Pressure Economy,” Andrew young “Underemployment and the Trickle-Down of Unemployment,” School of Policy Studies Research Paper Series 18-01 (Atlanta: American Economic Journal: Macroeconomics, vol. 11 (April), Georgia State University, February), https://aysps.gsu.edu/ pp. 40–78. files/2018/03/18-01-HotchkissMoore-SomelikeitHot.pdf. 10 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS 4. Unemployment rate by race and ethnicity Monthly Percent 18 Black or African American 16 14 12 Hispanic or Latino 10 White 8 6 Asian 4 2 2007 2009 2011 2013 2015 2017 2019 NOTE: Unemployment rate measures total unemployed as a percentage of the labor force. Persons whose ethnicity is identified as Hispanic or Latino may be of any race. The shaded bar indicates a period of business recession as defined by the National Bureau of Economic Research. SOURCE: Bureau of Labor Statistics via Haver Analytics. 5. Prime-age labor force participation rate by race and 2¾ percent higher in March of 2019 relative to ethnicity its year-earlier level (figure 6). Compensation per hour in the business sector—a broad- Monthly Percent based but volatile measure of wages, salaries, 84 and benefits—rose 1½ percent over the four White 83 quarters ending in 2019:Q1, less than the Asian 82 annual increases over the preceding couple of Hispanic or Latino 81 years. Among measures that do not account 80 for benefits, average hourly earnings rose 79 3.1 percent in May relative to 12 months 78 earlier, a slightly faster rate of increase Black or African American 77 than during the same period of a year ago. 76 According to the Federal Reserve Bank of Atlanta, the median 12-month wage growth 2007 2009 2011 2013 2015 2017 2019 of individuals reporting to the Current NOTE: The prime-age labor force participation rate is a percentage of the population aged 25 to 54. Persons whose ethnicity is identified as Population Survey increased about 3¾ percent Hispanic or Latino may be of any race. The data are seasonally adjusted in May, near the upper portion of its range by Board staff and are 3-month moving averages. The shaded bar indicates a period of business recession as defined by the National over the past couple of years.3 Bureau of Economic Research. SOURCE: Bureau of Labor Statistics via Haver Analytics. 3. The Atlanta Fed’s measure differs from others in that it measures the wage growth only of workers who were employed both in the current survey month and 12 months earlier. MONETARy POLICy REPORT: JULy 2019 11 . . . and likely have been restrained by 6. Measures of change in hourly compensation slow growth in labor productivity over Percent change from year earlier much of the expansion Compensation per hour, Atlanta Fed’s 6 These moderate rates of hourly compensation business sector Wage Growth Tracker gains likely reflect the offsetting influences of 5 a strengthening labor market and productivity 4 growth that has been weak through much 3 of the expansion. From 2008 to 2017, labor 2 productivity increased a little more than Employment cost index, 1 1 percent per year, on average, well below private sector + _0 the average pace from 1996 to 2007 of nearly Average hourly earnings, private sector 1 3 percent and also below the average gain in the 1974–95 period (figure 7). Although 2003 2005 2007 2009 2011 2013 2015 2017 2019 considerable debate remains about the reasons NOTE: Business-sector compensation is on a 4-quarter percent change for the slowdown in productivity growth basis. For the private-sector employment cost index, change is over the 12 months ending in the last month of each quarter; for private-sector over this period, the weakness may be partly average hourly earnings, the data are 12-month percent changes and begin in March 2007; for the Atlanta Fed’s Wage Growth Tracker, the attributable to the sharp pullback in capital data are shown as a 3-month moving average of the 12-month percent investment during the most recent recession change. SOURCE: Bureau of Labor Statistics; Federal Reserve Bank of Atlanta, and the relatively slow recovery that followed. Wage Growth Tracker; all via Haver Analytics. More recently, however, labor productivity rose 1¾ percent in 2018 and picked up 7. Change in business-sector output per hour further in the first quarter of 2019.4 While it is uncertain whether this faster rate of growth Percent, annual rate will persist, a sustained pickup in productivity growth, as well as additional labor market 4 strengthening, would support stronger gains in labor compensation. 3 Price inflation has dipped below 2 2 percent this year Consumer price inflation has moved down 1 below the FOMC’s objective of 2 percent this year.5 As measured by the 12-month change 1948– 1974– 1996– 2001– 2008– 2018 2019 in the price index for personal consumption 73 95 2000 07 17 expenditures (PCE), inflation is estimated to NOTE: Changes are measured from Q4 of the year immediately preceding the period through Q4 of the final year of the period except have been 1.5 percent in May after being at or 2019 changes, which are calculated from 2018:Q1 to 2019:Q1. SOURCE: Bureau of Labor Statistics via Haver Analytics. 4. In the first quarter, labor productivity surged 3½ percent at an annual rate, bringing the four-quarter change to 2½ percent, reflecting a strong pickup in business-sector output and unusual weakness in hours relative to measured gains in payroll employment. This weakness is attributable to a steep decline in a volatile component of hours that is not directly measured in the Bureau of Labor Statistics’ establishment survey. 5. The increases in tariffs on imported goods last year likely provided only a small boost to inflation in 2018 and in the first half of this year. 12 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS 8. Change in the price index for personal consumption above 2 percent for much of 2018 (figure 8). expenditures Core PCE inflation—which excludes consumer food and energy prices that are often quite Monthly 12-month percent change volatile, and which therefore typically provides 3.0 a better indication than the total measure of Trimmed mean where overall inflation will be in the future— Total 2.5 Excluding food and energy also moved lower in recent months and is 2.0 estimated to have been 1.6 percent over the 1.5 12 months ending in May. The slowing in 1.0 core inflation to date reflects particularly low readings in the first three months of the year .5 that appear due to idiosyncratic price declines 0 in a number of specific categories such as apparel, used cars, and banking services and 2012 2013 2014 2015 2016 2017 2018 2019 portfolio management services. Indeed, in SOURCE: For trimmed mean, Federal Reserve Bank of Dallas; for all else, Bureau of Economic Analysis; all via Haver Analytics. April and May, core inflation accelerated, posting larger average monthly gains than in the first quarter. The trimmed mean PCE price index, produced by the Federal Reserve Bank of Dallas, provides an alternative way to purge inflation of transitory influences, and it is less sensitive than the core index to idiosyncratic price movements such as those noted earlier.6 The 12-month change in this measure was 2 percent in May. 9. Spot and futures prices for crude oil Oil prices rebounded through the spring Weekly Dollars per barrel but have moved down recently . . . 130 After dropping sharply late last year, the Brent spot price 120 110 Brent price of crude oil moved up to almost 100 $75 per barrel in mid-April, partly reflecting 90 24-month-ahead declines in production in Iran and Venezuela futures contracts 80 and voluntary supply cuts by other OPEC 70 60 members and partner countries (figure 9). 50 More recently, however, prices have fallen back 40 to around $65 per barrel because of concerns 30 about global growth. The changes in oil prices 20 have contributed to similar movements in 2014 2015 2016 2017 2018 2019 retail gasoline prices, which rose through early NOTE: The data are weekly averages of daily data. The weekly data begin on Thursdays and extend through July 1, 2019. spring but have also fallen back recently. SOURCE: ICE Brent Futures via Bloomberg. 6. The trimmed mean index excludes whichever prices showed the largest increases or decreases in a given month. Note that, since 1995, changes in the trimmed mean index have averaged about 0.3 percentage point above core PCE inflation and 0.2 percentage point above total PCE inflation. MONETARy POLICy REPORT: JULy 2019 13 . . . and prices of imports other than 10. Nonfuel import prices and industrial metals indexes energy fell January 2014 = 100 January 2014 = 100 Nonfuel import prices, before accounting for the effects of tariffs on the price of 120 Industrial metals imported goods, have continued to decline 110 102 from their mid-2018 peak, responding to 100 100 dollar appreciation, lower foreign inflation, 90 and declines in non-oil commodity prices 98 (figure 10).7 In particular, prices of industrial 80 Nonfuel import prices 96 metals have fallen in recent months, partly on 70 concerns about weak global demand. 94 60 Survey-based measures of inflation 2014 2015 2016 2017 2018 2019 expectations have been stable . . . NOTE: The data for nonfuel import prices are monthly. The data for industrial metals are a monthly average of daily data and extend through Expectations of inflation likely influence actual June 28, 2019. SOURCE: For nonfuel import prices, Bureau of Labor Statistics; for inflation by affecting wage- and price-setting industrial metals, S&P GSCI Industrial Metals Spot Index via Haver decisions. Survey-based measures of inflation Analytics. expectations at medium- and longer-term horizons have remained generally stable over 11. Median inflation expectations the past year. In the Survey of Professional Forecasters, conducted by the Federal Percent Reserve Bank of Philadelphia, the median expectation for the annual rate of increase in Michigan survey expectations 4 the PCE price index over the next 10 years for next 5 to 10 years has been very close to 2 percent for the past 3 several years (figure 11). In the University of Michigan Surveys of Consumers, the 2 median value for inflation expectations over SPF expectations the next 5 to 10 years has fluctuated around for next 10 years 1 2½ percent since the end of 2016, though this level is about ¼ percentage point lower than had prevailed through 2014. In the Survey 2005 2007 2009 2011 2013 2015 2017 2019 of Consumer Expectations, conducted by NOTE: The Michigan survey data are monthly and extend through the Federal Reserve Bank of New York, the June 2019. The SPF data for inflation expectations for personal consumption expenditures are quarterly and extend from 2007:Q1 median of respondents’ expected inflation through 2019:Q2. SOURCE: University of Michigan Surveys of Consumers; Federal rate three years hence has fluctuated between Reserve Bank of Philadelphia, Survey of Professional Forecasters (SPF). 2½ percent and 3 percent over the past five years. . . . while market-based measures of inflation compensation have come down since the first half of 2018 Inflation expectations can also be gauged by market-based measures of inflation 7. Published import price indexes exclude tariffs. However, tariffs add to the prices that purchasers of imports actually pay. 14 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS 12. 5-to-10-year-forward inflation compensation compensation. However, the inference is not straightforward, because market- Weekly Percent based measures can be importantly affected by changes in premiums that provide 3.5 Inflation swaps compensation for bearing inflation and 3.0 liquidity risks. Measures of longer-term 2.5 inflation compensation—derived either from differences between yields on nominal Treasury TIPS breakeven rates 2.0 securities and those on comparable-maturity 1.5 Treasury Inflation-Protected Securities (TIPS) or from inflation swaps—tend to fall 1.0 when markets are volatile because of the 2011 2013 2015 2017 2019 incorporation of liquidity risks. Such declines NOTE: The data are weekly averages of daily data and extend through occurred around the turn of the year and June 28, 2019. TIPS is Treasury Inflation-Protected Securities. again in May and June, when market volatility SOURCE: Federal Reserve Bank of New York; Barclays; Federal Reserve Board staff estimates. picked up again. Despite the fluctuations this year, these measures of inflation compensation remain notably below levels that prevailed in the summer of 2018 (figure 12).8 The TIPS- based measure of 5-to-10-year-forward inflation compensation and the analogous measure from inflation swaps are now about 13. Change in real gross domestic product and gross domestic income 1¾ percent and 2 percent, respectively, with both measures below their respective ranges Percent, annual rate that prevailed for most of the 10 years before Gross domestic product the start of the notable declines in mid-2014.9 Gross domestic income 5 Private domestic final purchases Real gross domestic product growth was 4 strong in the first quarter, but there are Q1 recent signs of slowing 3 Real gross domestic product (GDP) rose at an 2 annual rate of 3 percent in 2018 (figure 13). In the first quarter, real GDP again moved 1 up at an annual rate of around 3 percent. 2012 2013 2014 2015 2016 2017 2018 2019 SOURCE: Bureau of Economic Analysis via Haver Analytics. 8. Inflation compensation implied by the TIPS breakeven inflation rate is based on the difference, at comparable maturities, between yields on nominal Treasury securities and yields on TIPS, which are indexed to the total consumer price index (CPI). Inflation swaps are contracts in which one party makes payments of certain fixed nominal amounts in exchange for cash flows that are indexed to cumulative CPI inflation over some horizon. Inflation compensation derived from inflation swaps typically exceeds TIPS-based compensation, but week-to-week movements in the two measures are highly correlated. 9. As these measures are based on the CPI inflation index, one should probably subtract about ¼ percentage point—the average differential with PCE inflation and CPI inflation over the past two decades—to infer inflation compensation on a PCE price basis. MONETARy POLICy REPORT: JULy 2019 15 However, there are indications that growth will moderate in the second quarter.10 Net exports and business inventories provided a sizable boost to first-quarter GDP growth, but their contributions appear to have reversed in the months following. Notably, private domestic final purchases—that is, final purchases by households and businesses, which tend to provide a better indication of future GDP growth than most other components of overall spending—posted only a modest increase in the first quarter. The slowing that occurred in consumer spending appears to have been temporary, but the slowing in business fixed investment appears to be more persistent. Manufacturing output fell in the first quarter, and it moved down further in April before posting a small gain in May. Although lower production levels of motor vehicles and aircraft were important contributors to the weakness, the recent declines in manufacturing were broad based.11 Nevertheless, the economic expansion continues to be abetted by steady job gains, increases in household wealth, expansionary fiscal policy, and still-supportive domestic financial conditions, including moderate borrowing costs and easy access to credit for many households and businesses. 14. Change in real private nonresidential fixed investment Growth in business fixed investment has Percent, annual rate softened after strong gains in 2018 Structures Equipment and intangible capital 20 Investment spending by businesses rose 15 rapidly in 2018 but appears to have decelerated 10 sharply this year. In the first quarter, growth Q1 slowed to an annual rate of 4½ percent, while 5 + new orders for nondefense capital goods, _0 excluding the volatile aircraft category, have 5 declined modestly, on balance, in recent 10 months (figure 14). In addition, forward- 15 10. It is worth noting that gross domestic income 2012 2013 2014 2015 2016 2017 2018 2019 (GDI) has been notably weaker than GDP. GDI is SOURCE: Bureau of Economic Analysis via Haver Analytics. reported to have risen only 1.7 percent in the first quarter relative to the same period of a year ago, 1½ percentage points less than measured GDP growth. GDP and GDI measure the same economic concept, and any difference between the two figures reflects measurement error. 11. Recently, a large aircraft manufacturer slowed its production and temporarily halted deliveries of an aircraft model. This production slowdown lowers manufacturing output and generates a small drag on real GDP growth in the first half of the year. 16 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS 15. Private housing starts and permits looking indicators of business spending such as capital spending plans have deteriorated Monthly Millions of units, annual rate amid downbeat business sentiment and profit Single-family starts expectations from industry analysts, reportedly 1.2 reflecting trade tensions and concerns about 1.0 global growth. .8 Single-family .6 By contrast, activity in the housing sector permits had been declining but recently shows .4 signs of stabilizing .2 Multifamily starts Residential investment fell in 2018 and 0 declined further in the first quarter. More recently, the pace of construction activity 2007 2009 2011 2013 2015 2017 2019 appears to have stabilized as housing starts for SOURCE: U.S. Census Bureau via Haver Analytics. single-family and multifamily housing units 16. New and existing home sales rose, on average, in April and May (figure 15). Existing home sales moved higher as well Millions, annual rate Millions, annual rate over the same period, while new home sales 6.0 Existing home sales 1.2 moved down a bit following a sizable increase in the first quarter (figure 16). Consumers’ 5.5 1.0 perceptions of homebuying conditions and 5.0 .8 housing affordability have improved, which is 4.5 consistent with the declines in mortgage rates .6 4.0 this year and the slowing in growth of home .4 prices (figure 17). 3.5 New home sales 3.0 .2 Ongoing improvements in the labor market and gains in wealth continue to 2007 2009 2011 2013 2015 2017 2019 support household income and consumer NOTE: Data are monthly. New home sales includes only single-family spending . . . sales. Existing home sales includes single-family, condo, townhome, and co-op sales. SOURCE: For new home sales, U.S. Census Bureau; for existing home After increasing at a moderate pace of sales, National Association of Realtors; all via Haver Analytics. 2½ percent in 2018 as a whole, real consumer 17. Mortgage rates and housing affordability spending slowed considerably in the first quarter (figure 18). However, incoming data Percent Index suggest that consumer spending picked up Housing affordability index 205 in recent months, with PCE in May up at 7 an annual rate of 2½ percent relative to the 190 6 average level in the fourth quarter. 175 5 160 Real disposable personal income (DPI), a measure of households’ after-tax purchasing 145 4 power, increased at a solid annual rate of 130 3 percent in 2018; however, so far this year, 3 Mortgage rates 115 growth in real DPI has been more moderate despite strong gains in wage and salary income. 2011 2013 2015 2017 2019 With consumer spending rising more than NOTE: The housing affordability index data are monthly through April 2019, and the mortgage rate data are weekly through June 27, 2019. disposable income so far this year, the personal At an index value of 100, a median-income family has exactly enough saving rate moved down from an average of income to qualify for a median-priced home mortgage. Housing affordability is seasonally adjusted by Board staff. SOURCE: For housing affordability index, National Association of Realtors via Haver Analytics; for mortgage rates, Freddie Mac Primary Mortgage Market Survey. MONETARy POLICy REPORT: JULy 2019 17 6½ percent in the fourth quarter to around 18. Change in real personal consumption expenditures 6 percent in May (figure 19). and disposable personal income Percent, annual rate Ongoing gains in household wealth have likely Personal consumption expenditures continued to support consumer spending. Disposable personal income 6 5 House prices, which are of particular 4 importance for the balance sheet positions of a large portion of households, continued H1 3 2 to increase through May, although at a more 1 moderate pace than in recent years (figure 20). + _0 In addition, U.S. equity prices, which fell 1 sharply at the end of 2018, have rebounded 2 this year. Buoyed by increases in home and 3 equity prices, aggregate household net worth 2013 2014 2015 2016 2017 2018 2019 moved up to 6.8 times household income in NOTE: The values for 2019:H1 are the annualized May/Q4 changes. the first quarter (figure 21). SOURCE: Department of Commerce, Bureau of Economic Analysis via Haver Analytics. . . . and consumer sentiment remains 19. Personal saving rate strong Monthly Percent Consumers have remained upbeat. Although the Michigan index of consumer sentiment 12 dipped at the turn of the year, it has since rallied, and the sentiment measure from the 10 Conference Board survey also climbed in the 8 second quarter from its first-quarter level (figure 22). In June, both the Michigan and 6 the Conference Board indexes of consumer 4 sentiment were about in the middle of their ranges over the past few years. 2 Borrowing conditions for households 2007 2009 2011 2013 2015 2017 2019 remain generally favorable . . . SOURCE: Bureau of Economic Analysis via Haver Analytics. Despite increases in interest rates for consumer 20. Prices of existing single-family houses loans and some reported further tightening Monthly Percent change from year earlier in credit card lending standards, financing conditions for consumers largely remain S&P/Case-Shiller 15 national index supportive of growth in household spending. 10 Consumer credit expanded at a moderate CoreLogic 5 pace in the first quarter, rising faster than price index + disposable income (figure 23). Mortgage _0 5 credit has continued to be readily available Zillow index for households with solid credit profiles but 10 remains noticeably tighter than before the 15 most recent recession for borrowers with 20 low credit scores. Standards for automotive 2009 2011 2013 2015 2017 2019 loans have been generally stable, and overall delinquency rates for these loans NOTE: The data for the S&P/Case-Shiller index extend through April 2019. were little changed in the first quarter at a SOURCE: CoreLogic Home Price Index; Zillow; S&P/Case-Shiller U.S. National Home Price Index. The S&P/Case-Shiller Index is a product of S&P Dow Jones Indices LLC and/or its affiliates. (For Dow Jones Indices licensing information, see the note on the Contents page.) 18 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS 21. Wealth-to-income ratio moderate level. Financing conditions in the student loan market remain firm, with over Quarterly Ratio 90 percent of such credit being extended by the federal government. After peaking in 2013, 7.0 delinquencies on such loans have been gradually declining, reflecting in part the continued 6.5 improvements in the labor market. 6.0 . . . while corporate financing conditions 5.5 tightened somewhat relative to last year but remained accommodative overall 5.0 Aggregate flows of credit to large nonfinancial firms remained strong in the first quarter, 2001 2004 2007 2010 2013 2016 2019 supported in part by relatively low interest NOTE: The series is the ratio of household net worth to disposable personal income. rates and accommodative financing conditions SOURCE: For net worth, Federal Reserve Board, Statistical Release Z.1, “Financial Accounts of the United States”; for income, Bureau of (figure 24). The gross issuance of corporate Economic Analysis via Haver Analytics. bonds, which had fallen substantially in December, rebounded in the first quarter as 22. Indexes of consumer sentiment market volatility receded. After increasing Index Index notably in late 2018, spreads on both investment- and speculative-grade corporate 170 120 Conference Board bonds over comparable-maturity Treasury 150 110 securities have both declined, on net, this 130 100 year as investors’ risk appetite seems to 110 90 have recovered. In April, respondents to the 90 80 Senior Loan Officer Opinion Survey on Bank 70 70 Lending Practices, or SLOOS, reported that 50 60 demand for commercial and industrial loans 30 Michigan survey weakened in the first quarter even as lending 10 50 standards remained unchanged and terms for 2001 2004 2007 2010 2013 2016 2019 such loans eased.12 However, banks reported NOTE: The data are monthly and extend through June 2019. The tightening lending standards on all categories Conference Board data are indexed to 100 in 1985; the Michigan survey data are indexed to 100 in 1966. of commercial real estate loans. Meanwhile, SOURCE: University of Michigan Surveys of Consumers; Conference financing conditions for small businesses have Board. remained generally accommodative, but credit 23. Changes in household debt growth has been subdued. Quarterly Percent change from year earlier Net exports supported GDP growth in 10 the first quarter Consumer credit 8 After being a small drag on U.S. real GDP 6 growth last year, net exports, which can have 4 sizable swings from quarter to quarter, added Sum 2 about 1 percentage point to the rate of growth + in the first quarter. Real U.S. exports increased _0 at an annual rate of about 5½ percent, as Mortgages 2 4 12. The SLOOS is available on the Board’s website at 2007 2009 2011 2013 2015 2017 2019 https://www.federalreserve.gov/data/sloos/sloos.htm. SOURCE: Federal Reserve Board, Statistical Release Z.1, “Financial Accounts of the United States.” MONETARy POLICy REPORT: JULy 2019 19 exports of agricultural products and auto- 24. Selected components of net debt financing for mobiles expanded robustly. Real imports fell nonfinancial businesses 2 percent following solid increases in 2018 Billions of dollars, monthly rate (figure 25). Nominal goods trade data through Commercial paper May suggest that exports edged down in the Bonds 80 second quarter, while imports were about flat. Bank loans Sum 60 The available data suggest that the trade deficit Q1 40 and the current account in the first half of the year were little changed as a percent of GDP 20 + from 2018 (figure 26). _0 20 Federal fiscal policy actions boosted economic growth in 2018 but had a 40 smaller effect on first-quarter real GDP 2007 2009 2011 2013 2015 2017 2019 because of the partial government shutdown . . . SOURCE: Federal Reserve Board, Statistical Release Z.1, “Financial Accounts of the United States.” Fiscal policy at the federal level boosted GDP growth in 2018 because of lower personal and 25. Change in real imports and exports of goods business income taxes from the Tax Cuts and and services Jobs Act of 2017 and because of an increase in Percent, annual rate federal purchases due to the Bipartisan Budget Imports Act of 2018.13 After increasing 2¾ percent in Exports 8 2018, federal government purchases were flat in Q1 6 the first quarter of 2019, reflecting the effects of the partial federal government shutdown 4 (figure 27). The government shutdown, which 2 was in effect from December 22 through + _0 January 25, held down GDP growth in the first 2 quarter, largely because of the lost work of furloughed federal government workers and 4 affected federal contractors. That said, federal 2015 2016 2017 2018 2019 purchases are expected to rebound in the second quarter. SOURCE: Bureau of Economic Analysis via Haver Analytics. The federal unified budget deficit widened in 26. U.S. trade and current account balances fiscal year 2018 to around 4 percent of nominal GDP from 3½ percent of GDP in 2017 Annual Percent of nominal GDP because receipts moved lower, to 16 percent of + _0 GDP (figure 28). Expenditures are currently 1 around 21 percent of GDP, slightly above 2 the level that prevailed in the decade before the start of the 2007–09 recession. The ratio 3 4 Trade 5 13. The Joint Committee on Taxation estimated 6 that the Tax Cuts and Jobs Act would reduce average Current account annual tax revenue by a little more than 1 percent of 7 GDP starting in 2018 and for several years thereafter. This revenue estimate does not account for the potential 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 macroeconomic effects of the legislation. NOTE: GDP is gross domestic product. The dots refer to the current account and trade balances in the first quarter of 2019. SOURCE: Bureau of Economic Analysis via Haver Analytics. 20 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS 27. Change in real government expenditures on of federal debt held by the public to nominal consumption and investment GDP rose to around 77 percent in fiscal 2018 and was quite elevated relative to historical Percent, annual rate norms (figure 29). The Congressional Budget Federal State and local Q1 6 Office projects that this ratio will rise further over the next several years. 4 2 . . . and the fiscal position of most state + _0 and local governments is stable 2 The fiscal position of most state and local 4 governments is stable, although there is a range of experiences across these governments. 6 The revenue of state governments has grown 2012 2013 2014 2015 2016 2017 2018 2019 moderately in recent quarters, as the economic NOTE: The federal value for 2019:Q1 is -0.05. expansion continues to push up income and SOURCE: Bureau of Economic Analysis via Haver Analytics. sales tax collections. At the local level, property 28. Federal receipts and expenditures tax collections continue to rise, pushed higher by past house price gains. Real state and local Annual Percent of nominal GDP government purchases grew modestly last year; however, outlays have surged so far this 26 Expenditures year, driven largely by a boost in construction 24 spending. State and local infrastructure 22 spending was weak for many years, and there Receipts 20 appears to be demand for higher expenditures in this area. State and local government 18 payrolls expanded slowly last year and over 16 the first five months of 2019, and employment 14 by these governments remains below its peak before the current expansion. 1998 2001 2004 2007 2010 2013 2016 2019 NOTE: Through 2018, receipts and expenditures are for fiscal years (October to September); gross domestic product (GDP) is for the four Financial Developments quarters ending in Q3. For 2019, receipts and expenditures are for the 12 months ending in May; GDP is the average of 2018:Q4 and 2019:Q1. Receipts and expenditures are on a unified-budget basis. The expected path of the federal funds SOURCE: Office of Management and Budget via Haver Analytics. rate over the next several years has 29. Federal government debt held by the public moved down Quarterly Percent of nominal GDP Market-based measures of the expected path for the federal funds rate over the next 80 several years have declined substantially since 70 the end of 2018 (figure 30). Various factors 60 contributed to this shift, including increased investor concerns about downside risks to 50 the global economic outlook and rising trade 40 tensions. In addition, investors reportedly 30 interpreted FOMC communications over 20 the first half of 2019 as signaling the Federal Reserve is likely to lower the target range 1969 1979 1989 1999 2009 2019 for the federal funds rate in light of muted NOTE: The data for gross domestic product (GDP) are at an annual rate. Federal debt held by the public equals federal debt less Treasury securities held in federal employee defined benefit retirement accounts, evaluated at the end of the quarter. SOURCE: For GDP, Bureau of Economic Analysis via Haver Analytics; for federal debt, Federal Reserve Board, Statistical Release Z.1, “Financial Accounts of the United States.” MONETARy POLICy REPORT: JULy 2019 21 inflation pressures and uncertainties about the 30. Market-implied federal funds rate path global economic outlook. Quarterly Percent Survey-based measures of the expected path Dec. 28, 2018 2.50 of the policy rate also shifted down relative to the levels observed at the end of 2018. 2.25 According to the results of the most recent 2.00 Survey of Primary Dealers and Survey of Market Participants, both conducted by 1.75 the Federal Reserve Bank of New York just 1.50 before the June FOMC meeting, the median July 1, 2019 of respondents’ modal projections implies a 1.25 declining trajectory for the target range of 2019 2020 2021 2022 2023 the federal funds rate for 2019, which flattens out in 2020. Relative to the December survey, NOTE: The federal funds rate path is implied by quotes on overnight index swaps—a derivative contract tied to the effective federal funds rate. the median of these projections moved down The implied path as of July 1, 2019, is compared with that as of December 28, 2018. The path is estimated with a spline approach, 50 basis points for July 2019 and 100 basis assuming a term premium of 0 basis points. The July 1, 2019, path points for December 2019.14 Additionally, extends through March 2023 and the December 28, 2018, path through December 2022. market-based measures of uncertainty about SOURCE: Bloomberg; Federal Reserve Board staff estimates. the policy rate approximately one to two years ahead increased, on balance, from their levels at the end of last December. 31. Yields on nominal Treasury securities The nominal Treasury yield curve has moved down and continued to flatten Daily Percent Since the end of 2018, the nominal Treasury 6 yield curve shifted down and flattened 5 further, with the 2-, 5-, and 10-year nominal 10-year Treasury yields all declining about 70 basis 5-year 4 points on net (figure 31). The decrease in 3 Treasury yields, which is consistent with the 2 revision in market participants’ expectations for the path of policy rates, largely reflects 2-year 1 FOMC communications as well as investors’ 0 concerns about the global economic outlook 2005 2007 2009 2011 2013 2015 2017 2019 and the escalation of trade disputes. Option- implied volatility on swap rates—an indicator SOURCE: Department of the Treasury via Haver Analytics. of uncertainty about Treasury yields—has increased notably, on net, since the beginning of the year. In particular, measures of near- 14. The results of the Survey of Primary Dealers and the Survey of Market Participants are available on the Federal Reserve Bank of New York’s website at https:// www.newyorkfed.org/markets/primarydealer_survey_ questions.html and https://www.newyorkfed.org/ markets/survey_market_participants, respectively. 22 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS 32. Yield and spread on agency mortgage-backed term interest rate uncertainty have reached the securities levels seen at the end of 2018. Percent Basis points Yields on 30-year agency mortgage-backed 9 300 securities (MBS)—an important factor 8 influencing mortgage interest rates—decreased 250 in line with the decline in the 10-year nominal 7 200 Treasury yield and remained low by historical 6 Spread 150 standards (figure 32). Likewise, yields on both 5 investment-grade and high-yield corporate 100 4 debt declined significantly from the levels 50 3 in late 2018 and stayed very low (figure 33). Yield 2 0 Despite widening in May, the spreads on corporate bond yields over comparable- 2005 2007 2009 2011 2013 2015 2017 2019 maturity Treasury yields have narrowed, on NOTE: The data are daily. Yield shown is for the Fannie Mae 30-year current coupon, the coupon rate at which new mortgage-backed net, over the first half of 2019 and are close to securities would be priced at par, or face, value. Spread shown is to the their historical medians. average of the 5- and 10-year nominal Treasury yields. Data extend through June 26, 2019. SOURCE: Department of the Treasury; Barclays Live. Broad equity price indexes increased on net 33. Corporate bond yields, by securities rating After declining sharply at the end of 2018, broad U.S. stock market indexes have Daily Percentage points recovered, on net, over the first half of 2019 20 (figure 34). The broad rebound in stock 18 prices—which included all major economic 16 sectors—was reportedly supported by Federal 14 Reserve communications that were perceived 12 High-yield 10 as more accommodative than previously 8 anticipated. Stocks fluctuated in May and 6 June as downside risks and trade tensions Investment-grade 4 were offset by further expectations of easier 2 monetary policy. 0 2005 2007 2009 2011 2013 2015 2017 2019 Measures of implied and realized stock price NOTE: Investment-grade is the 10-year triple-B, which reflects the volatility for the S&P 500 index declined effective yield of the ICE BofAML 7-to-10-year triple-B U.S. Corporate Index (C4A4). High-yield is the 10-year high-yield and reflects the notably on net. Following the highs seen at the effective yield of the ICE BofAML 7-to-10-year U.S. Cash Pay High Yield Index (J4A0). Data extend through June 26, 2019. end of 2018, these volatility measures declined SOURCE: ICE Bank of America Merrill Lynch Indices, used with until late April, with the VIX—a measure permission. of implied volatility—returning to near the 10th percentile of its historical distribution and with realized volatility close to the 30th percentile of its historical range (figure 35). At the beginning of May, following the escalation of trade tensions, these volatility measures increased and have remained elevated since then, but they have stayed well below the high levels of December and now stand close to their historical medians. Several measures of financial conditions that aggregate large sets MONETARy POLICy REPORT: JULy 2019 23 of financial data into summary indexes eased 34. Equity prices considerably since the end of 2018 but have Daily December 31, 1999 = 100 tightened a bit since the beginning of May, in line with the decline in stock prices over that 200 month, and have remained relatively elevated Dow Jones bank index 175 since then. (For a discussion of financial S&P 500 index 150 stability issues, see the box “Developments 125 Related to Financial Stability.”) 100 Markets for Treasury securities, mortgage- 75 backed securities, and municipal bonds 50 have functioned well 25 Available indicators of Treasury market 2005 2007 2009 2011 2013 2015 2017 2019 functioning have generally remained stable SOURCE: Standard & Poor’s Dow Jones Indices via Bloomberg. (For since the beginning of 2019, with a variety of Dow Jones Indices licensing information, see the note on the Contents page.) measures—including bid-ask spreads, bid sizes, and estimates of transaction costs—displaying 35. S&P 500 volatility few signs of liquidity pressures. Liquidity conditions in the agency MBS market were Daily Percent also generally stable. Credit conditions in 90 municipal bond markets remained stable as 80 well, with yield spreads on 20-year general 70 obligation municipal bonds over comparable- 60 maturity Treasury securities declining VIX 50 somewhat on net. 40 30 Money market rates were little changed 20 10 Rates across money markets were little Realized volatility 0 changed, on balance, in the first half of 2019. 2005 2007 2009 2011 2013 2015 2017 2019 Conditions in domestic short-term funding NOTE: The VIX is a measure of implied volatility that represents the markets continued to be broadly stable since expected annualized change in the S&P 500 index over the following 30 the end of 2018. Overnight secured and days. For realized volatility, five-minute S&P 500 returns are used in an exponentially weighted moving average with 75 percent of weight unsecured rates declined in line with the distributed over the past 20 days. SOURCE: Cboe Volatility Index® (VIX®) accessed via Bloomberg; technical adjustment announced after the May Federal Reserve Board staff estimates. FOMC meeting, which lowered the interests paid on required and excess reserve balances by 5 basis points. Other short-term interest rates, including those on commercial paper and negotiable certificates of deposit, were also little changed since the beginning of the year. Bank credit continued to expand, and bank profitability remained robust Credit provided by commercial banks to fund businesses as well as commercial and residential real estate continued to grow in 2019, albeit at a slower pace than in the second 24 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS Developments Related to Financial Stability The framework used by the Federal Reserve Board A. Forward price-to-earnings ratio of S&P 500 firms for assessing the resilience of the U.S. financial system focuses on financial vulnerabilities in four broad Monthly Ratio areas: asset valuations, household and business debt, leverage in the financial sector, and funding risks. 30 The Financial Stability Report published on May 6, 2019, presents the most recent, detailed assessment 25 of these vulnerabilities.1 This discussion summarizes 20 its key findings, updated, where appropriate, to reflect + developments since its publication. 15 Asset valuations remain somewhat elevated in a Historical median number of markets. Treasury term premiums are near 10 record lows. Forward-looking measures of Treasury 5 market volatility have recently increased, especially for shorter-dated Treasury securities. Equity prices appear to be somewhat elevated relative to earnings, 1989 1994 1999 2004 2009 2014 2019 with the forward equity price-to-earnings ratio for NOTE: Aggregate forward price-to-earnings ratio of S&P 500 firms. the S&P 500 remaining above the median value of its Data are based on expected earnings for 12 months ahead and extend through June 2019. The plus sign shows daily data corresponding to July historical distribution since the mid-1980s (figure A). 1, 2019. In commercial real estate markets, capitalization SOURCE: Federal Reserve Board staff calculations using Refinitiv (formerly Thomson Reuters), IBES Estimates. rates remain at historically low levels. Residential real estate prices are also somewhat high relative to rents (figure B). Rapid debt growth, while broad based across (accounting for borrowing costs and long-run trends), different parts of the business sector, is concentrated although house price growth slowed materially in the among the riskiest firms, and there are signs that credit past year. valuation pressures in the leveraged loan standards for new leveraged loans are weak and have market eased somewhat in recent months, and the deteriorated further over the past six months. In the spreads on lower-rated leveraged loans are now above corporate bond market, the distribution of credit ratings the median value over the past 20 years. In corporate among investment-grade bonds has worsened, with bond markets, spreads of 10-year corporate bonds the share of bonds rated Baa (or triple-B) reaching over benchmark rates are close to the median of their near-record levels. While broader corporate credit historical distributions. performance remains solid amid a growing economy vulnerabilities associated with total private-sector and debt-service costs are relatively low, a broader credit remain at a moderate level relative to the past repricing of risk or a slowdown in economic activity several decades, and total debt has advanced roughly could pose notable risks to borrowing firms and their in line with economic activity over the past five years. creditors. Such developments could increase the Leverage in the business sector remains near its highest downside risk to economic activity more generally. level in the past 20 years, and business debt has grown In contrast, in the household sector, debt growth is faster than gross domestic product (GDP) since 2012 concentrated among borrowers with high credit scores, and the debt-to-GDP ratio continues to trend down (figure B). 1. See Board of Governors of the Federal Reserve vulnerabilities stemming from leverage at financial System (2019), Financial Stability Report (Washington: institutions remain low. Capital relative to risk-weighted Board of Governors, May), https://www.federalreserve.gov/ publications/2019-may-financial-stability-report-purpose.htm. (continued) MONETARy POLICy REPORT: JULy 2019 25 B. Business- and household-sector credit-to-GDP ratio funding is near its historical lows. Although assets under management at prime money market funds— Ratio Ratio which are more susceptible to runs than government funds—have increased since the U.S. Securities and 1.1 .75 Exchange Commission (SEC) reforms went into place 1.0 Household in 2016, they remain well below their pre-reform .70 .9 levels. Holdings of U.S. corporate bonds by mutual .8 .65 funds increased substantially over the past decade, raising concerns about the mismatch between daily .7 .60 redemptions allowed by these funds and the time .6 .55 required to sell their assets. Rules adopted in 2016 by .5 Business the SEC to strengthen mutual funds’ and exchange- .50 .4 traded funds’ liquidity risk management have started .3 .45 going into effect in the past year.2 Downside risks to U.S. financial stability from 1983198719911995199920032007201120152019 abroad remain moderate, but several near-term risk NOTE: Data are quarterly. The shaded bars indicate periods of events could generate meaningful spillovers to the business recession as defined by the National Bureau of Economic United States. Two prominent European risks are a Research. GDP is gross domestic product. SOURCE: Federal Reserve Board, Statistical Release Z.1, “Financial “no deal” Brexit, which remains a possible outcome Accounts of the United States”; Bureau of Economic Analysis via Haver later in the year, and Italian fiscal challenges. Also, Analytics, national income and product accounts, Table 1.1.5: Gross Domestic Product; Board staff calculations. an escalation of the trade tensions between the United States and its major trading partners, along with financial market reactions, could exacerbate assets at the largest banks has remained largely stable uncertainty and increase the downside risk to global over the past few years. Results of the annual Dodd- economic activity. In China, high levels of nonfinancial- Frank Act Stress Tests, released on June 21, 2019, sector debt expose the financial sector to a slowdown indicate that participating banks are sufficiently resilient in economic growth. The effects of any of these events to continue lending to creditworthy borrowers even on global financial markets could be amplified if they in a severe macroeconomic scenario. The exposure deepen the stresses in already vulnerable emerging of banks to nonbank financial institutions—such as market economies. These dynamics could tighten finance companies, asset managers, securitization financial conditions in the United States and negatively vehicles, and mortgage real estate investment trusts— affect the creditworthiness of U.S. firms. continued to increase in the first quarter of 2019. Some The countercyclical capital buffer (CCyB) is a of those firms are significant business lenders, adding macroprudential tool that the Federal Reserve can use to banks’ exposure to elevated losses in the corporate to increase the resilience of the financial system by sector. Leverage of broker-dealers increased slightly in raising capital requirements on internationally active 2018 but remains near historically low levels. Leverage banking organizations when financial vulnerabilities has also stayed low at life insurance companies and at are meaningfully above normal. On March 6, 2019, the property and casualty insurance firms. At hedge funds, Board voted to maintain the CCyB at 0 percent. leverage increased in the first quarter of 2019 to levels slightly below its 2018 peak. 2. See Securities and Exchange Commission (2016), vulnerabilities stemming from liquidity and maturity “Investment Company Liquidity Risk Management Programs,” mismatches remain low. Banks hold large quantities of final rule, 17 C.F.R. pts. 210, 270, and 274, October 13, liquid assets, and their reliance on short-term wholesale https://www.sec.gov/rules/final/2016/33-10233.pdf. 26 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS 36. Ratio of total commercial bank credit to nominal half of 2018. By contrast, consumer loan gross domestic product growth accelerated since the beginning of the year. In the first quarter of 2019, the pace of Quarterly Percent total bank credit expansion was about in line with that of nominal GDP, leaving the ratio of 75 total commercial bank credit to current-dollar 70 GDP little changed relative to last December (figure 36). Overall, measures of bank 65 profitability remained solid in the first quarter of 2019, supported by wider net interest 60 margins and steady loan growth (figure 37). 55 International Developments 2005 2007 2009 2011 2013 2015 2017 2019 Advanced foreign economies have been SOURCE: Federal Reserve Board, Statistical Release H.8, “Assets and Liabilities of Commercial Banks in the United States”; Bureau of slowly emerging from the recent soft Economic Analysis via Haver Analytics. patch 37. Profitability of bank holding companies After a significant slowdown in the second half of last year, growth picked up in many Percent, annual rate Percent, annual rate advanced foreign economies (AFEs) at the 2.0 30 start of 2019, but at a still restrained pace Return on assets 1.5 20 (figure 38). Notwithstanding continued 1.0 weakness in the manufacturing sector and 10 .5 + + softening external demand, domestic demand _0 _0 in the AFEs generally improved amid rising .5 Return on equity 10 employment and wages as well as easier 1.0 financial conditions. The pickup in growth 20 1.5 also reflected temporary factors. Economic 30 2.0 activity in the euro area was boosted by the fading effects of car production disruptions 2005 2007 2009 2011 2013 2015 2017 2019 in Germany and protests in France in 2018. NOTE: The data are quarterly and are seasonally adjusted. SOURCE: Federal Reserve Board, Form FR Y-9C, Consolidated Growth in the United Kingdom surged as Financial Statements for Bank Holding Companies. expectations of trade disruptions surrounding 38. Real gross domestic product growth in selected the original date of the United Kingdom’s advanced foreign economies exit from the European Union, or Brexit, led to stockpiling by households and firms. Percent, annual rate Economic activity in Canada, by contrast, United Kingdom Japan 4 remained depressed by oil production cuts, but Euro area recent indicators point to a rebound in growth Canada 3 in the second quarter. Q1 2 Core inflation remained low in advanced 1 foreign economies + _0 The rebound in energy prices earlier in the year 1 pushed up consumer price inflation in many AFEs (figure 39). However, despite further 2015 2016 2017 2018 2019 SOURCE: For the United Kingdom, Office for National Statistics; for Japan, Cabinet Office, Government of Japan; for the euro area, Eurostat; for Canada, Statistics Canada; all via Haver Analytics. MONETARy POLICy REPORT: JULy 2019 27 improvement in labor market conditions, 39. Consumer price inflation in selected advanced inflationary pressures remained contained, foreign economies with core inflation readings notably muted in Monthly 12-month percent change the euro area and Japan. In Canada and the United Kingdom, by contrast, core inflation 4 rates moved close to 2 percent. United Kingdom 3 Japan Canada AFE central banks took a more 2 accommodative policy stance 1 + With activity only slowly picking up and core _0 inflation persistently low, European Central Euro area 1 Bank (ECB) communications took a more accommodative tone. In March, the ECB 2015 2016 2017 2018 2019 indicated that it would keep its policy rate in NOTE: The data for the euro area incorporate the flash estimate for negative territory through at least the middle June 2019. of next year and rolled out a new round of SOURCE: For the United Kingdom, Office for National Statistics; for Japan, Ministry of International Affairs and Communications; for the loans for euro-area banks to reduce the risk euro area, Statistical Office of the European Communities; for Canada, Statistics Canada; all via Haver Analytics. of renewed funding pressures. In June, ECB 40. Nominal 10-year government bond yields in President Mario Draghi added that the ECB selected advanced economies would introduce new stimulus measures if the economic outlook did not improve. The Weekly Percent Bank of Canada and Bank of England 3.5 signaled more-gradual increases in interest 3.0 rates, given a moderation in the pace of global United States 2.5 economic activity. The Reserve Bank of United Kingdom 2.0 Australia in June and July cut its policy rate 1.5 in response to below-target inflation and weak Germany 1.0 economic growth. .5 + Japan _0 Central banks’ more accommodative .5 policy stances supported AFE asset prices 2015 2016 2017 2018 2019 The more accommodative policy stance in NOTE: The data are weekly averages of daily benchmark yields. The weekly data begin on Thursdays and extend through July 1, 2019. major AFEs contributed to an overall easing SOURCE: Bloomberg. of financial conditions in the first half of the 41. Equity indexes for selected foreign economies year. Market-implied paths of policy rates and long-term interest rates on sovereign Weekly Week ending January 9, 2015 = 100 bonds have generally fallen sharply, as in 140 the United States (figure 40). Broad stock market indexes across AFEs are up, on net, Euro area 130 since January (figure 41). However, concerns 120 about global growth and rising trade tensions 110 weighed on risky asset prices over the course United Kingdom 100 of May and June. Sovereign bond spreads in Japan Italy fluctuated amid uncertainty about the 90 country’s fiscal outlook. 80 2015 2016 2017 2018 2019 NOTE: The data are weekly averages of daily data. The weekly data begin on Thursdays and extend through July 1, 2019. SOURCE: For euro area, DJ Euro Stoxx Index; for Japan, TOPIX Stock Index; for United Kingdom, FTSE 100 Stock Index; all via Bloomberg. 28 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS 42. Real gross domestic product growth in selected Economic activity in emerging Asia emerging market economies struggled to gain a solid footing Percent, annual rate In China, real GDP growth picked up in the China 12 first quarter, supported in part by fiscal and Korea Mexico 10 monetary policy measures that targeted smaller Brazil Q1 8 businesses and infrastructure spending, as well 6 as by the more favorable financial conditions 4 amid investor optimism on a U.S.–China trade 2 deal (figure 42). Recent activity indicators, + _0 however, suggest that the underlying 2 momentum in the economy remains relatively 4 subdued against the backdrop of reemerging 6 trade tensions, global weakness in trade and 2015 2016 2017 2018 2019 manufacturing, and the Chinese authorities’ NOTE: The data for China are seasonally adjusted by Board staff. The continued caution about providing substantial data for Korea, Mexico, and Brazil are seasonally adjusted by their respective government agencies. further credit stimulus. Amid moderating SOURCE: For China, China National Bureau of Statistics; for Korea, global trade and activity, real GDP growth Bank of Korea; for Mexico, Instituto Nacional de Estadistica y Geografia; for Brazil, Instituto Brasileiro de Geografia e Estatistica; all in other Asian economies in the first quarter via Haver Analytics. generally remained below their 2018 pace, with growth in Korea turning negative (see the box “The Persistent Slowdown in Global Trade and Manufacturing”). Latin American economies continued to underperform In Mexico, real GDP contracted in the first quarter following generally weak performance in the past two years. Tighter fiscal policy and disruptions from labor unrest weighed on activity amid a backdrop of softening U.S. manufacturing demand and persistent declines in petroleum production. Recent indicators suggest some improvement in the second quarter, although uncertainty regarding trade relations with the United States appears to have increased. In Brazil, real GDP also contracted in the first quarter, as a mining disaster and ongoing weakness in the Argentine economy weighed on Brazilian economic activity. Investment continued to decline, held down by uncertainty over whether Brazil’s government would enact major fiscal and other economic reforms. MONETARy POLICy REPORT: JULy 2019 29 Financial conditions in many emerging 43. Emerging market mutual fund flows and spreads market economies improved, on net, Basis points Billions of dollars despite the reemergence of trade tensions Bond fund flows (right axis) 500 Equity fund flows (right axis) 60 Financial conditions in many emerging market economies (EMEs) eased earlier in the year 450 40 in response to the more accommodative 400 20 policy stance of the Federal Reserve and + 350 _0 major AFE central banks. However, in 300 20 recent months, political uncertainties in EMBI+ (left axis) some EMEs and renewed trade tensions 250 40 between the United States and major trading 200 60 partners have weighed on EME asset prices. On net, broad measures of EME sovereign 2015 2016 2017 2018 2019 bond spreads over U.S. Treasury rates are NOTE: The bond and equity fund flows data are quarterly sums of weekly data from January 1, 2015, to June 26, 2019. The fund flows data down a little, while benchmark EME equity exclude funds located in China. The J.P. Morgan Emerging Markets indexes are a bit higher since the beginning Bond Index Plus (EMBI+) data are weekly averages of daily data. The weekly data begin on Thursdays and extend through June 28, 2019. of the year. Flows to dedicated EME mutual SOURCE: For bond and equity fund flows, EPFR Global; for EMBI+, J.P. Morgan Emerging Markets Bond Index Plus via Bloomberg. funds increased earlier in the year but turned negative in the second quarter (figure 43). While deteriorations in asset prices and capital flows have been sizable for some economies, 44. U.S. dollar exchange rate indexes particularly Turkey and Argentina, broad Weekly Week ending January 9, 2015 = 100 indicators of financial stress in EMEs are below those seen during other periods of Dollar appreciation 140 significant stress in recent years. 130 British pound Broad dollar The dollar depreciated a little 120 Over the first half of the year, the foreign 110 exchange value of the U.S. dollar fluctuated Euro 100 but was, on net, a little lower (figure 44). Chinese renminbi Increased investor optimism about prospects 90 for trade negotiations early this year as well 2015 2016 2017 2018 2019 as downward-revised expectations for U.S. interest rates led to a depreciation of the NOTE: The data, which are in foreign currency units per dollar, are weekly averages of daily data. The weekly data begin on Thursdays and dollar. But the more accommodative tone of extend through July 1, 2019. As indicated by the arrow, increases in the data represent U.S. dollar appreciation, and decreases represent U.S. communications from major foreign central dollar depreciation. banks and safe-haven flows—in part in SOURCE: Federal Reserve Board, Statistical Release H.10, “Foreign Exchange Rates.” response to trade tensions and concerns about global growth—helped push the dollar up. In addition, the Chinese renminbi has come under some downward pressure since trade tensions escalated in recent months. 30 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS The Persistent Slowdown in Global Trade and Manufacturing After expanding briskly in 2017, the growth of A. Change in global trade, industrial production, global goods trade and manufacturing, as indicated and GDP by industrial production, has slowed significantly (figure A). Even so, other aspects of economic activity, Quarterly Percent change from year earlier importantly services, have held up. A number of factors 20 are likely contributing to the recent slowdown in trade and manufacturing growth, and disentangling them Global imports 15 is difficult. First, new tariffs appear to have lowered 10 imports and exports in the United States and elsew here, G-20 GDP 5 while uncertainty surrounding trade policy could be + _0 leading firms to delay investment decisions and reduce Global IP 5 capital expenditures. Second, a downturn in global sales for technology goods has restrained trade and 10 manufacturing activity, especially in emerging Asia. 15 Finally, a general slowdown in global demand, reflecting 20 idiosyncratic factors specific to different economies, has likely weighed on demand for traded goods. 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 Regarding the first of these factors, global trade NOTE: Imports and industrial production (IP) are quarterly averages tensions have risen sharply since early 2018, fueled by of monthly data. G-20 GDP is seasonally adjusted gross domestic product (GDP) volume estimates at 2010 purchasing power parities both higher tariffs and uncertainty about the prospects (PPPs) for the Group of 20 economies. for future trade policy. The United States has increased SOURCE: Netherlands Bureau for Economic Policy Analysis via Haver Analytics; Organisation for Economic Co-operation and Development, tariffs on over $250 billion in imports by an average of OECD.Stat. nearly 25 percentage points, and U.S. trading partners have retaliated. Several studies indicate that most of of higher tariffs imposed by foreign countries as well, the cost of these higher tariffs has been passed through these estimates suggest that the overall direct effects of to U.S. importers.1 If we assume a commonly used higher tariffs on global trade flows are, to date, likely elasticity of 1.5 for the response of imports to changes to be material but modest relative to the observed step- in prices, it implies that tariffs may have lowered U.S. down from 5.7 percent growth in 2017 to 1.5 percent imports by about $70 billion, or about 0.5 percent of growth in 2018. world goods imports.2 Taking into account the effect In addition to the direct effect of the tariffs, however, rising uncertainty about the prospects for trade policy 1. For two recent working papers that analyze the effects may also be weighing on trade and manufacturing. of the tariff changes on trade volumes and import prices, Measures of trade policy uncertainty spiked last see Mary Amiti, Stephen J. Redding, and David E. Weinstein year, largely reflecting concerns about current and (2019), “The Impact of the 2018 Trade War on U.S. Prices prospective tariff hikes along with renegotiations of and Welfare,” CEPR Discussion Paper DP13564 (London: trade agreements (figure B). Higher uncertainty may Centre for Economic Policy Research, March), https://cepr. org/sites/default/files/news/FreeDP_Mar05.pdf; and Pablo D. lead businesses to delay investment purchases as they Fajgelbaum, Pinelopi K. Goldberg, Patrick J. Kennedy, and wait for the policy uncertainties to be resolved. Indeed, Amit K. Khandelwal (2019), “The Return to Protectionism,” (continued) NBER Working Paper Series 25638 (Cambridge, Mass.: National Bureau of Economic Research, March). 2. See David K. Backus, Patrick J. Kehoe, and Finn E. Terms of Trade: The J-Curve?” American Economic Review, Kydland (1994), “Dynamics of the Trade Balance and the vol. 84 (March), pp. 84–103. MONETARy POLICy REPORT: JULy 2019 31 B. Trade policy uncertainty April along with exports of electronics in emerging Asia through May. Monthly Index Finally, a regular feature of the data is that trade and manufacturing production move with overall gross 300 domestic product (GDP) growth but with considerably more cyclical volatility (a pattern that can be seen in 250 figure A). Trade and manufacturing production largely 200 consist of durable goods, the purchase of which tends to be especially sensitive to economic conditions. 150 Thus, although global trade and manufacturing slowed 100 much more sharply than GDP last year, part of their sharp slowing likely just reflected a response to a more 50 general slowing in global economic growth. A number 0 of factors have contributed to the step-down in global activity. A deleveraging campaign by China’s authorities 2013 2014 2015 2016 2017 2018 2019 was an important factor in the slowdown of the Chinese NOTE: The data extend through June 2019. At an index value of 100, economy. Growth in Europe has been restrained by 1 percent of news articles contain references to trade policy uncertainty. complications with meeting tighter emissions standards SOURCE: Dario Caldara, Matteo Iacoviello, Patrick Molligo, Andrea Prestipino, and Andrea Raffo (2019), “The Economic Effects of Trade for new motor vehicles in Germany, protests in France, Policy Uncertainty,” manuscript presented at the 91st meeting of the and the ongoing uncertainties associated with Brexit. Carnegie-Rochester-NYU Conference on Public Policy, held at New And financial stresses have weighed on some emerging York University, New York, April 12–13. market economies, especially Argentina and Turkey. investment spending growth has slowed in many areas C. Global semiconductor sales of the global economy since 2017. Although this slowdown may reflect a number of factors, concerns Monthly Billions of dollars about trade policy have been flagged in many recent surveys of business attitudes and intentions, including 45 the Beige Book. 40 The global tech cycle—a synchronized pattern of production and trade in electronics and software across 35 economies—has also contributed to the decline in 30 global trade and manufacturing growth. This cycle is 25 particularly important for emerging Asia, where about one-third of exports are technology related. Global 20 semiconductor sales surged in 2017 but fell sharply in 15 the last months of 2018 (figure C). The fall in large part 10 reflected a contraction in demand in China, particularly evident in mobile phone purchases. Recent data, 2009 2011 2013 2015 2017 2019 however, suggest that this cycle may have bottomed NOTE: The semiconductor data are 3-month moving averages. out, as Chinese mobile phone production picked up in SOURCE: Semiconductor Industry Association via Haver Analytics. 33 P 2 art m P onetary oLiCy The FOMC maintained its target range for near the Committee’s symmetric 2 percent the federal funds rate objective as the most likely outcomes. For much of this period, the Committee indicated From late 2015 through the end of 2018, the that, in light of global economic and financial Federal Open Market Committee (FOMC) developments and muted inflation pressures, it gradually increased its target range for the would be patient as it determines what future federal funds rate as the economy continued adjustments to the target range for the federal to make progress toward the Committee’s funds rate may be appropriate to support these congressionally mandated objectives of outcomes. maximum employment and price stability. In its meetings over the first half of 2019, At the June meeting, however, the Committee the Committee judged that the stance of noted that uncertainties about the outlook monetary policy was appropriate to achieve had increased.15 Since the beginning of its dual mandate, and it decided to maintain May, the tenor of incoming information on the target range for the federal funds rate at economic activity, on balance, has become 2¼ to 2½ percent (figure 45). These decisions somewhat more downbeat, and uncertainties reflected incoming information showing the about the economic outlook have increased. solid fundamentals of the U.S. economy Growth indicators from around the world supporting continued growth and strong have disappointed, on net, raising concerns employment. about the strength of the global economy. Meanwhile, contacts in business and Looking ahead, the FOMC will act as agriculture have reported heightened concerns appropriate to sustain the expansion, over trade developments. In light of these with a strong labor market and inflation uncertainties and muted inflation pressures, near its 2 percent objective At its meetings since the beginning of the year, 15. See the FOMC statement issued after the the Committee stated that it continued to view June meeting, which is available on the Monetary a sustained expansion of economic activity, Policy portion of the Board’s website at https://www. strong labor market conditions, and inflation federalreserve.gov/monetarypolicy.htm. 45. Selected interest rates Daily Percent 5 10-year Treasury rate 4 3 2 2-year Treasury rate 1 0 Target federal funds rate 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 NOTE: The 2-year and 10-year Treasury rates are the constant-maturity yields based on the most actively traded securities. SOURCE: Department of the Treasury; Federal Reserve Board. 34 PART 2: MONETARy POLICy the Committee indicated that it will act as monetary policy involves a systematic appropriate to sustain the expansion, with approach in keeping with key principles of a strong labor market and inflation near its good monetary policy but allows for more objective. The Committee is firmly committed flexibility than is implied by simple policy rules to its symmetric 2 percent inflation objective. (see the box “Monetary Policy Rules and Their In the Committee’s economic projections Interactions with the Economy”). released after the June meeting, participants generally revised down their individual Since the beginning of the year, the assessments of the appropriate path for the FOMC has issued two statements policy rate from their assessments at the time regarding monetary policy of the March meeting (see Part 3 of this report implementation and balance sheet for more details). normalization At its January meeting, the Committee Future changes in the federal funds rate indicated that it intends to continue to will depend on the economic outlook implement monetary policy in a regime in and risks to the outlook as informed by which the provision of an ample supply of incoming data reserves ensures that control over the level of The FOMC has continued to emphasize the federal funds rate and other short-term that the actual path of monetary policy will interest rates is exercised primarily through the depend on the evolution of the economic setting of the Federal Reserve’s administered outlook and risks to the outlook as informed rates, and in which active management of the by incoming data. Specifically, in deciding on supply of reserves is not required.16 After the the timing and size of future adjustments to March FOMC meeting, the Committee issued the target range for the federal funds rate, the a statement indicating that it plans to conclude Committee will assess realized and expected the reduction of the Federal Reserve’s economic conditions relative to its objectives securities holdings at the end of September.17 of maximum employment and symmetric (The box “Framework for Monetary Policy 2 percent inflation. This assessment will take Implementation and Normalization of the into account a wide range of information, Federal Reserve’s Balance Sheet” details the including measures of labor market conditions, recent decision about policy implementation indicators of inflation pressures and inflation and balance sheet normalization.) expectations, and readings on financial and international developments. The Committee is prepared to adjust the details for completing balance sheet In addition to weighing a wide range of normalization in light of economic and economic and financial data and information financial developments, consistent with its received from business contacts and other congressionally mandated objectives of informed parties around the country, maximum employment and price stability. policymakers regularly consult prescriptions for the interest rate arising from various monetary policy rules. These rule prescriptions 16. See the Statement Regarding Monetary Policy can serve as useful guidelines to the FOMC Implementation and Balance Sheet Normalization, in the course of arriving at its policy which is available on the Board’s website at https:// decisions. Nonetheless, numerous practical www.federalreserve.gov/monetarypolicy/policy- normalization.htm. considerations make clear that the FOMC 17. See the Balance Sheet Normalization Principles cannot mechanically set the policy rate by and Plans, which can be found on the Board’s website at following the prescriptions of any specific https://www.federalreserve.gov/monetarypolicy/policy- rule. The FOMC’s framework for conducting normalization.htm. MONETARY POLICY REPORT: JULY 2019 35 46. Federal Reserve assets and liabilities Weekly Trillions of dollars 5.0 4.5 Assets 4.0 Other assets 3.5 3.0 2.5 Agency debt and mortgage-backed securities holdings 2.0 Credit and liquidity 1.5 facilities 1.0 Treasury securities held outright .5 0 Federal Reserve notes in circulation .5 1.0 1.5 Deposits of depository institutions 2.0 2.5 3.0 Capital and other liabilities 3.5 Liabilities and capital 4.0 4.5 5.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 NOTE: “Credit and liquidity facilities” consists of primary, secondary, and seasonal credit; term auction credit; central bank liquidity swaps; support for Maiden Lane, Bear Stearns, and AIG; and other credit facilities, including the Primary Dealer Credit Facility, the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, and the Term Asset-Backed Securities Loan Facility. “Other assets” includes unamortized premiums and discounts on securities held outright. “Capital and other liabilities” includes reverse repurchase agreements, the U.S. Treasury General Account, and the U.S. Treasury Supplementary Financing Account. The data extend through June 26, 2019. SOURCE: Federal Reserve Board, Statistical Release H.4.1, “Factors Affecting Reserve Balances.” The Federal Reserve’s total assets have The Federal Reserve’s implementation of continued to decline from about $4.1 trillion monetary policy has continued smoothly last December to about $3.8 trillion at Since the middle of March, the effective present, with holdings of Treasury securities federal funds rate has traded slightly above at approximately $2.1 trillion and holdings the interest rate paid on reserve balances. At of agency debt and agency mortgage-backed the May meeting, the Federal Reserve made a securities at approximately $1.5 trillion third small technical adjustment to lower the (figure 46). setting of the interest rate on excess reserves As the Federal Reserve has continued to by 5 basis points to a level 15 basis points gradually reduce its securities holdings, the below the top of the target range for the level of reserve balances in the banking system federal funds rate; this adjustment successfully has declined. In particular, the level of reserve fostered trading in the federal funds market at balances has decreased by about $150 billion rates well within the FOMC’s target range.* since the end of last year and by about Overall, rates across money markets were $1.3 trillion since its peak in 2014.18 broadly stable since the beginning of 2019, and the usage of the overnight reverse repurchase Meanwhile, interest income on the Federal agreement facility has remained low. Reserve’s securities holdings has continued to result in sizable remittances to the U.S. The Federal Reserve has started the Treasury. Preliminary data indicate that the review of its strategic framework for Federal Reserve remitted about $27 billion in monetary policy the first half of 2019. With labor market conditions close to maximum employment and inflation near 18. Since the start of the normalization program, reserve balances have dropped by approximately * On July 8, 2019, the sentence was corrected to replace $700 billion. “the Committee” with “the Federal Reserve.” 36 PART 2: MONETARY POLICY the Committee’s 2 percent objective, the groups interested in the U.S. economy. The FOMC judged it an appropriate time for the Federal Reserve System is currently conducting Federal Reserve to conduct a public review a series of Fed Listens events around the of its strategic framework for monetary country, typically with a town hall format, policy—including the policy strategy, tools, to hear perspectives from representatives and communication practices. The goal of of business and industry, labor leaders, this assessment is to identify possible ways community and economic development to improve the Committee’s current policy officials, academics, nonprofit organization framework in order to ensure that the Federal executives, and others. Policymakers plan to Reserve is best positioned going forward to report their findings to the public during the achieve its statutory mandate of maximum first half of 2020. employment and price stability. The review includes outreach to and consultation with a broad range of people and MONETARy POLICy REPORT: JULy 2019 37 Monetary Policy Rules and Their Interactions with the Economy Monetary policy rules are mathematical formulas Economists have analyzed many monetary policy that relate a policy interest rate, such as the federal rules, including the well-known Taylor (1993) rule. funds rate, to a small number of other economic Other rules include the “balanced approach” rule, the variables—typically including the deviation of inflation “adjusted Taylor (1993)” rule, the “price level” rule, and from its target value and a measure of resource slack in the “first difference” rule (figure A).3 These policy rules the economy. The prescriptions for the policy interest embody the three key principles of good monetary rate from these rules can provide helpful guidance for policy and take into account estimates of how far the the Federal Open Market Committee (FOMC). This economy is from the Federal Reserve’s dual-mandate discussion presents five policy rules—illustrative of the goals of maximum employment and price stability. Four many rules that have received attention in the research of the five rules include the difference between the rate literature—and provides examples of two ways to of unemployment that is sustainable in the longer run compute historical prescriptions of policy rules. The and the current unemployment rate (the unemployment two ways differ in terms of whether the implications rate gap); the first-difference rule includes the change of the rule prescriptions feed through to the in the unemployment gap rather than its level.4 In macroeconomy and potentially back to the policy rule (continued on next page) prescriptions themselves. The presentation highlights the uses and limitations of each way for informing the 3. The Taylor (1993) rule was suggested in John B. Taylor FOMC’s systematic conduct of monetary policy. (1993), “Discretion versus Policy Rules in Practice,” Carnegie- Rochester Conference Series on Public Policy, vol. 39 (December), pp. 195–214. The balanced-approach rule was Historical Prescriptions of Policy Rules analyzed in John B. Taylor (1999), “A Historical Analysis of Monetary Policy Rules,” in John B. Taylor, ed., Monetary Policy The effectiveness of monetary policy is enhanced Rules (Chicago: University of Chicago Press), pp. 319–41. The when it is well understood by the public.1 In simple adjusted Taylor (1993) rule was studied in David Reifschneider models of the economy, good economic performance and John C. Williams (2000), “Three Lessons for Monetary can be achieved by following a monetary policy rule Policy in a Low-Inflation Era,” Journal of Money, Credit and Banking, vol. 32 (November), pp. 936–66. A price-level rule that fosters public understanding and that incorporates was discussed in Robert E. Hall (1984), “Monetary Strategy key principles of good monetary policy.2 One such with an Elastic Price Standard,” in Price Stability and Public principle is that monetary policy should respond in a Policy, proceedings of a symposium sponsored by the Federal predictable way to changes in economic conditions. Reserve Bank of Kansas City, held in Jackson Hole, Wyo., August 2–3 (Kansas City: Federal Reserve Bank of Kansas A second principle is that monetary policy should be City), pp. 137–59, https://www.kansascityfed.org/publicat/ accommodative when inflation is below policymakers’ sympos/1984/s84.pdf. Finally, the first-difference rule is longer-run inflation objective and employment is below based on a rule suggested by Athanasios Orphanides (2003), its maximum sustainable level; conversely, monetary “Historical Monetary Policy Analysis and the Taylor Rule,” policy should be restrictive when the opposite holds. A Journal of Monetary Economics, vol. 50 (July), pp. 983–1022. A comprehensive review of policy rules is in John B. Taylor third principle is that, to stabilize inflation, the policy and John C. Williams (2011), “Simple and Robust Rules for rate should be adjusted over time by more than one-for- Monetary Policy,” in Benjamin M. Friedman and Michael one in response to persistent increases or decreases in Woodford, eds., Handbook of Monetary Economics, vol. 3B inflation. (Amsterdam: North-Holland), pp. 829–59. The same volume of the Handbook of Monetary Economics also discusses approaches other than policy rules for deriving policy rate 1. For a discussion of how the public’s understanding of prescriptions. monetary policy matters for the effectiveness of monetary 4. The Taylor (1993) rule represented slack in resource policy, see Janet L. yellen (2012), “Revolution and Evolution utilization using an output gap (the difference between the in Central Bank Communications,” speech delivered at the current level of real gross domestic product (GDP) and the Haas School of Business, University of California at Berkeley, level that GDP would be if the economy were operating at Berkeley, Calif., November 13, https://www.federalreserve.gov/ maximum employment, measured in percent of the latter. newsevents/speech/yellen20121113a.htm. The rules in figure A represent slack in resource utilization 2. For a discussion regarding principles for the conduct using the unemployment gap instead, because that gap better of monetary policy, see Board of Governors of the Federal captures the FOMC’s statutory goal to promote maximum Reserve System (2018), “Monetary Policy Principles and employment. However, movements in these alternative Practice,” Board of Governors, https://www.federalreserve.gov/ measures of resource utilization are highly correlated. For monetarypolicy/monetary-policy-principles-and-practice.htm. more information, see the note below figure A. 38 PART 2: MONETARy POLICy Monetary Policy Rules (continued) A. Monetary policy rules Taylor (1993) rule 93 = + +0.5( − )+( − ) Balanced-approach rule = + +0.5( − )+2( − ) Taylor (1993) rule, adjusted 93 = { 93− , 0} Price-level rule = { + +( − )+0.5( ), 0} First-difference rule = −1 +0.5( − )+( − )−( −4 − −4 ) Note: Rt T93, Rt BA, Rt T93adj, Rt PL, and Rt FD represent the values of the nominal federal funds rate prescribed by the Taylor (1993), balanced-approach, adjusted Taylor (1993), price-level, and first-difference rules, respectively. Rt denotes the actual nominal federal funds rate for quarter t, πt is four-quarter price inflation for quarter t, ut is the unemployment rate in quarter t, and rt LR is the level of the neutral real federal funds rate in the longer run that, on average, is expected to be consistent with sustaining maximum employment and inflation at the FOMC’s 2 percent longer-run objective, πLR. In addition, ut LR is the rate of unemployment in the longer run. Zt is the cumulative sum of past deviations of the federal funds rate from the prescriptions of the Taylor (1993) rule when that rule prescribes setting the federal funds rate below zero. PLgapt is the percent deviation of the actual level of prices from a price level that rises 2 percent per year from its level in a specified starting period. The Taylor (1993) rule and other policy rules are generally written in terms of the deviation of real output from its full capacity level. In these equations, the output gap has been replaced with the gap between the rate of unemployment in the longer run and its actual level (using a relationship known as Okun’s law) in order to represent the rules in terms of the FOMC’s statutory goals. Historically, movements in the output and unemployment gaps have been highly correlated. Box note 3 provides references for the policy rules. addition, four of the five rules include the difference standard Taylor (1993) rule after a recession during between recent inflation and the FOMC’s longer- which the federal funds rate has fallen to its lower run objective (2 percent as measured by the annual bound may therefore not provide enough policy change in the price index for personal consumption accommodation. To make up for the cumulative expenditures (PCE)), while the price-level rule includes shortfall in accommodation, the adjusted rule the gap between the level of prices today and the level prescribes only a gradual return of the policy rate to of prices that would have been realized if inflation had the (positive) levels prescribed by the standard Taylor been constant at 2 percent from a specified starting (1993) rule after the economy begins to recover. year.5 The price-level rule thereby takes account of the Similarly, the price-level rule specified in figure A deviation of inflation from the long-run objective in recognizes that the federal funds rate cannot be earlier periods as well as the current period, whereas reduced materially below zero. If inflation runs below the other rules do not make up past misses of the the 2 percent objective during periods when the inflation objective. price-level rule prescribes setting the federal funds The adjusted Taylor (1993) rule recognizes that rate well below zero, the rule will, over time, call for the federal funds rate cannot be reduced materially more accommodation to make up for the past inflation below zero, and that following the prescriptions of the shortfall. Policymakers regularly examine the historical prescriptions of different policy rules to help understand 5. Calculating the prescriptions of the price-level rule the past stance of monetary policy and to inform their requires selecting a starting year for the price level from which to cumulate the 2 percent annual rate of inflation. current policy decisions. The most straightforward Figure B uses 1998 as the starting year. Around that time, way to compute such prescriptions is to use historical the underlying trend of inflation and longer-term inflation values for the unemployment rate and inflation, as well expectations stabilized at a level consistent with PCE price inflation being close to 2 percent. (continued) MONETARy POLICy REPORT: JULy 2019 39 B. Historical federal funds rate prescriptions from simple policy rules Quarterly Percent 8 Taylor (1993) rule, adjusted 6 Taylor (1993) rule 4 2 + _0 Price-level rule 2 First-difference rule 4 Target federal funds rate Balanced-approach rule 6 8 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 NOTE: The rules use historical values of inflation, the federal funds rate, and the unemployment rate. Inflation is measured as the 4-quarter percent change in the price index for personal consumption expenditures (PCE) excluding food and energy. Quarterly projections of long-run values for the federal funds rate and the unemployment rate are derived through interpolations of biannual projections from Blue Chip EconomicIndicators. The long-run value for inflation is taken as 2 percent. The target value of the price level is the average level of the price indexfor PCE excluding food and energy in 1998 extrapolated at 2 percent per year. The target federal funds rate data extend through 2019:Q2. SOURCE: Federal Reserve Bank of Philadelphia; Wolters Kluwer, Blue Chip Economic Indicators; Federal Reserve Board staff estimates. as estimates of the longer-run value of the interest rate Historical Prescription of the Taylor (1993) and the longer-run value of the unemployment rate, Rule with Feedback in each policy rule.6 The policy prescriptions from the One key consideration in evaluating monetary various rules based on this approach provide different policy rules based solely on historical data is that the prescriptions for the federal funds rate, as shown in policy prescriptions from the rules do not take into figure B. Presented in this way, each point on the lines account the fact that the economy would have evolved in the figure is a snapshot of what the policy rules differently if the federal funds rate had followed the would have prescribed, given the economic conditions alternative paths prescribed by the rules. For example, of that time. Because there is no definitive standard for if the FOMC had followed a policy rule in the past that favoring one rule over another, consulting a range of prescribed higher values for the federal funds rate than rules is generally preferable to relying on any particular actually occurred, the unemployment rate would likely rule. Although almost all of the simple policy rules have been higher and inflation lower than they actually would have called for values for the federal funds rate turned out to be. In turn, these different outcomes for that were increasing in recent years, the prescribed unemployment and inflation would have fed back values vary widely across rules. into the policy rule, resulting in policy prescriptions that differ from those based on the historical data and shown in figure B. Proper consideration of these 6. The Taylor (1993), balanced-approach, adjusted Taylor feedback effects requires using an economic model, (1993), and price-level rules all require an estimate of the which is a mathematical representation of how neutral interest rate in the longer run. In addition, all of the rules use an estimate of the rate of unemployment in the economic activity, inflation, the policy interest rate, and longer run. Both of these objects are determined by structural other variables interact over time. With such a model, features in the economy and are not directly observable. one can assess how inflation and the unemployment The box “Complexities of Monetary Policy Rules” in the rate might have evolved if a particular policy rule had July 2018 Monetary Policy Report describes the complications in assessing simple policy rules that arise from uncertainty been followed over some historical period in a way that about the neutral interest rate in the longer run. See Board of incorporates these feedback effects. Federal Reserve Governors of the Federal Reserve System (2018), Monetary staff regularly use models of the U.S. economy to Policy Report (Washington: Board of Governors, July), study how economic outcomes could have differed if pp. 37–41, https://www.federalreserve.gov/monetarypolicy/ monetary policy had followed various rules. files/20180713_mprfullreport.pdf. The current discussion uses estimates of these objects from survey data. (continued on next page) 40 PART 2: MONETARy POLICy Monetary Policy Rules (continued) Figure C provides one illustrative example of how the limitations in assessing policy rules over history if accounting for feedback effects can alter the the prescriptions from the rules are notably different prescriptions from a particular rule over a given period. from the historical policy rate path and the effects of The figure compares the historical prescriptions of the the prescriptions of such rules for the economy are not Taylor (1993) rule calculated without feedback—as in taken into account. the earlier section—with the prescriptions from the While model simulations can capture the effects of same rule incorporating feedback effects. The rule policy rules on the economy and what those economic prescriptions with feedback effects result from an effects imply for the settings of the policy rate, there are empirical simulation of the FRB/US model.7 The important limitations to such exercises. Each simulation simulation begins in the first quarter of 2001, a period is tied to a particular economic model, and changes in when the prescription of the Taylor (1993) rule without the model can change the prescriptions from the given feedback roughly coincides with the historical value of policy rule. Models are necessarily simplifications the federal funds rate. The three panels in the figure of reality, and there is no agreed-upon “best” model display the paths for the federal funds rate (top panel), representation of the U.S. economy. Indeed, there is the unemployment rate (middle panel), and four-quarter substantial diversity among the models favored by PCE inflation (bottom panel). The historical data are economists for this kind of analysis. Finally, in the real shown by the black lines. The gray dashed line in the world, the structure of the economy changes over time, top panel shows the historical prescription of the Taylor so an economic model used for studying a historical (1993) rule without any feedback, the same as the gray episode such as the one featured here may not be dashed line shown in figure B, and the blue dashed- relevant for future policy considerations. and-dotted line shows the prescriptions with feedback Model-based simulations with feedback add an effects. Because monetary policy affects the economy important dimension to our understanding of the only with a delay, the paths of the unemployment rate effects of policy rules. However, it is important to and the inflation rate are not much different from their stress that the usefulness of such rules for obtaining historical values over the first year of the simulation, and communicating current and future policy rate despite the fact that the Taylor (1993) rule calls for prescriptions is still limited by a range of practical much higher interest rates than actually observed over considerations, even beyond the concerns about which that period. By 2002, however, the higher rate path specific model to use. Monetary policy rules feature under the Taylor (1993) rule causes the economy to only a small number of variables and thus exclude slow, resulting in a higher unemployment rate and many important indicators that are consulted by lower inflation—the blue dashed-and-dotted lines in policymakers. The policy rules here, for example, do the middle and bottom panels of figure C, not include measures of financial and credit market respectively—compared with the historical values. conditions, indicators of consumer and business Consequently, the policy rate path in the simulation sentiment, and data on expectations; these factors diverges from the rate path prescribed when feedback are often very informative for the future course of the effects are not included. Indeed, by the middle of 2003, economy. Moreover, simple policy rules do not take the value of the federal funds rate is substantially higher into account possible risks to the economic outlook, in the calculation without feedback effects than it is in which may justify a policy response over and above the FRB/US model simulation that incorporates what would be implied by the most likely outcomes for feedback from the economy. This difference highlights the economy.8 (continued) 7. FRB/US is a large-scale macroeconomic model developed by the Board’s staff for forecasting, constructing alternative scenarios, and evaluating monetary policy strategies. The 8. The box “Monetary Policy Rules and Their Role in model and related information are available on the Board’s the Federal Reserve’s Policy Process” in the February 2018 website at https://www.federalreserve.gov/econres/us-models- Monetary Policy Report details the limitations of about.htm. An example of the use of FRB/US for monetary monetary policy rules in accounting for a broad set of risk policy analysis can be found in Janet L. yellen (2012), considerations. See Board of Governors of the Federal Reserve “Perspectives on Monetary Policy,” speech delivered at the System (2018), Monetary Policy Report (Washington: Board of Boston Economic Club Dinner, Boston, June 6, https://www. Governors, February), pp. 35–38, https://www.federalreserve. federalreserve.gov/newsevents/speech/yellen20120606a.htm. gov/monetarypolicy/files/20180223_mprfullreport.pdf. MONETARy POLICy REPORT: JULy 2019 41 C. Simple policy rule simulations—Taylor (1993) Federal funds rate Quarterly Percent Federal funds rate 7 6 5 4 Simulation without feedback Simulation with feedback 3 2 1 2000 2001 2002 2003 2004 2005 2006 Unemployment rate Quarterly Percent 7 Simulation with feedback 6 5 Rate of unemployment in the longer run 4 Unemployment rate 3 2000 2001 2002 2003 2004 2005 2006 PCE inflation Quarterly 4-quarter change 3.5 PCE inflation 3.0 2.5 Simulation with feedback 2.0 2% PCE inflation 1.5 1.0 .5 2000 2001 2002 2003 2004 2005 2006 NOTE: Data start in 2000:Q1 and extend through 2006:Q4. SOURCE: Federal Reserve Bank of Philadelphia; Wolters Kluwer, Blue Chip Economic Indicators; Federal Reserve Board staff estimates. 42 PART 2: MONETARy POLICy Framework for Monetary Policy Implementation and Normalization of the Federal Reserve’s Balance Sheet At its meetings in January and March of this year, sheet normalization in light of economic and financial the Federal Open Market Committee (FOMC) made developments. Moreover, the Committee would important decisions regarding its framework for be prepared to use its full range of tools, including monetary policy implementation and the process of altering the size and composition of its balance sheet, normalizing the size of its balance sheet. The issues if future economic conditions were to warrant a more associated with these decisions have been discussed accommodative monetary policy than can be achieved over several FOMC meetings and have been part of an solely by reducing the federal funds rate. ongoing process of the Committee’s deliberations.1 Following the March FOMC meeting, the Committee After indicating in previous communications that, announced that it intends to conclude the reduction in the longer run, the Committee intends to operate of its aggregate securities holdings in the System in a regime in which it holds no more securities than Open Market Account at the end of September 2019.3 necessary to implement monetary policy efficiently and Consistent with its decision at the March FOMC effectively, the FOMC decided at its January meeting meeting, the Committee slowed balance sheet runoff to continue to implement monetary policy in a regime in May by reducing the cap for monthly redemptions with an ample supply of reserves.2 Such a system, of Treasury securities from $30 billion to $15 billion which has been in place since late 2008, does not (left panel of figure A). In connection with its intention require active management of reserves through frequent to cease balance sheet runoff entirely at the end of open market operations. Instead, with ample reserves in September 2019 and consistent with its aim of holding the banking system, the federal funds rate is expected to primarily Treasury securities in the longer run, the settle near the rate of interest paid on excess reserves. Committee also stated that it intends to continue to This system has proven to be an efficient means of allow its holdings of agency securities to decline. controlling the policy rate and effectively transmitting Therefore, beginning in October 2019, principal the stance of policy to a wide array of other money payments received from holdings of agency debt and market rates and to broader financial conditions. In the agency mortgage-backed securities (MBS) will be statement released after its January meeting, the FOMC reinvested in Treasury securities through secondary- also indicated that it continues to view the target range market purchases subject to a maximum amount of for the federal funds rate as its primary tool to adjust the $20 billion per month. Purchases of Treasury securities stance of monetary policy. Nonetheless, the Committee will initially be conducted across a range of maturities is prepared to adjust the details of its plans for balance to roughly match the maturity composition of Treasury securities outstanding.4 Any principal payments from 1. For summaries of these discussions, see the minutes (continued) from the FOMC meetings in November and December of last year as well as the minutes of this year’s January and March 3. See the Balance Sheet Normalization Principles and Plans, meetings, which are available on the Board’s website at https:// which can be found on the Board’s website at https://www. www.federalreserve.gov/monetarypolicy/fomccalendars.htm. federalreserve.gov/monetarypolicy/policy-normalization.htm. 2. See the Statement Regarding Monetary Policy 4. Details on the reinvestment of principal payments from Implementation and Balance Sheet Normalization, which is the Federal Reserve’s holdings of agency securities, including available on the Board’s website at https://www.federalreserve. information on the distribution of Treasury purchases, are gov/monetarypolicy/policy-normalization.htm. available on the Federal Reserve Bank of New york’s website at MONETARy POLICy REPORT: JULy 2019 43 agency securities holdings in excess of the monthly constant for a while. During this period, reserve $20 billion maximum will continue to be reinvested balances will continue to decline gradually as currency into agency MBS (right panel of figure A). and other nonreserve liabilities increase. Once the When the process of normalizing the size of the Committee judges that reserve balances have declined Federal Reserve’s balance sheet concludes at the to the level consistent with the efficient and effective end of September, reserves will likely be somewhat implementation of monetary policy, the FOMC above the level necessary for an efficient and plans to resume periodic open market operations to effective implementation of monetary policy. If so, accommodate the normal trend growth in the demand the Committee plans after September to keep the size for the Federal Reserve’s liabilities.5 of the Federal Reserve’s securities holdings roughly 5. In contrast to the Federal Reserve’s large-scale asset purchases conducted over recent years, these periodic https://www.newyorkfed.org/markets/treasury-reinvestments- technical open market operations would not have any purchases-faq.html. The FOMC will revisit the reinvestment implication for the stance of monetary policy; rather, such plan in connection with its deliberations regarding the operations would be aimed at maintaining a level of reserve longer-run composition of the System Open Market Account balances in the banking system consistent with efficient and portfolio. effective policy implementation. A. Principal payments on SOMA securities Treasury securities Agency debt and mortgage-backed securities Monthly Billions of dollars Monthly Billions of dollars Redemptions Redemptions Reinvestments 80 Reinvestments into mortgage-backed securities 80 Monthly cap Reinvestments into Treasury securities 70 70 Monthly cap 60 60 50 50 40 40 30 30 20 20 10 10 2017 2018 2019 2020 2017 2018 2019 2020 NOTE: Reinvestment and redemption amounts of Treasury securities NOTE: Reinvestment and redemption amounts of agency debt and are projections starting in June 2019. The data extend through mortgage-backed securities are projections starting in June 2019. Starting February 2020. in October 2019, principal payments from holdings of agency securities below $20 billion per month are reinvested into Treasury securities, while SOURCE: Federal Reserve Bank of New York; Federal Reserve those above are reinvested into agency mortgage-backed securities. The Board staff calculations. data extend through February 2020. SOURCE: Federal Reserve Bank of New York; Federal Reserve Board staff calculations. 45 P 3 art s e P ummary of ConomiC rojeCtions In conjunction with the Federal Open real GDP growth to edge down, with the vast Market Committee (FOMC) meeting held majority of participants projecting growth on June 18–19, 2019, meeting participants in 2021 to be at or below their estimates submitted their projections of the most likely of its longer-run rate. All participants who outcomes for real gross domestic product submitted longer-run projections continued (GDP) growth, the unemployment rate, and to expect that the unemployment rate would inflation for each year from 2019 to 2021 run at or below their estimates of its longer- and over the longer run. Each participant’s run level through 2021. Compared with the projections were based on information Summary of Economic Projections (SEP) from available at the time of the meeting, together March 2019, most participants revised down with his or her assessment of appropriate slightly their projections for the unemployment monetary policy—including a path for the rate from 2019 through 2021. All participants federal funds rate and its longer-run value— marked down somewhat their projections for and assumptions about other factors likely 2019 for total inflation, as measured by the to affect economic outcomes.19 The longer- four-quarter percent change in the price index run projections represent each participant’s for personal consumption expenditures (PCE), assessment of the value to which each variable and almost all did so for their projections would be expected to converge, over time, for core inflation. All participants projected under appropriate monetary policy and in the that inflation would increase in 2020 from absence of further shocks to the economy.20 2019, and a majority expected another “Appropriate monetary policy” is defined as slight increase in 2021. The vast majority of the future path of policy that each participant participants expected that inflation would be deems most likely to foster outcomes for at or slightly above the Committee’s 2 percent economic activity and inflation that best objective in 2021. Core PCE price inflation was satisfy his or her individual interpretation of also projected to increase over the projection the statutory mandate to promote maximum period, rising to 2.0 percent in 2021. Table 1 employment and price stability. and figure 1 provide summary statistics for the projections. Participants who submitted longer-run projections generally expected that, under As shown in figure 2, about half of appropriate monetary policy, growth of real participants expected that the evolution GDP in 2019 would run at or somewhat above of the economy, relative to their objectives their individual estimates of its longer-run rate. of maximum employment and 2 percent Thereafter, almost all participants expected inflation, would likely warrant keeping the federal funds rate at its current level through the end of 2019; the same number projected 19. Five members of the Board of Governors were in that a lower level for the federal funds rate office at the time of the June FOMC meeting. would be appropriate by year-end. The 20. One participant did not submit longer-run medians of participants’ assessments of the projections for real GDP growth, the unemployment rate, or the federal funds rate. appropriate level of the federal funds rate in 46 PART 3: SUMMARy OF ECONOMIC PROJECTIONS Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual assessments of projected appropriate monetary policy, June 2019 Percent Median1 Central tendency2 Range3 Variable Longer Longer Longer 2019 2020 2021 2019 2020 2021 2019 2020 2021 run run run Change in real GDP ..... 2.1 2.0 1.8 1.9 2.0–2.2 1.8–2.2 1.8–2.0 1.8–2.0 2.0–2.4 1.5–2.3 1.5–2.1 1.7–2.1 March projection ..... 2.1 1.9 1.8 1.9 1.9–2.2 1.8–2.0 1.7–2.0 1.8–2.0 1.6–2.4 1.7–2.2 1.5–2.2 1.7–2.2 Unemployment rate ..... 3.6 3.7 3.8 4.2 3.6–3.7 3.5–3.9 3.6–4.0 4.0–4.4 3.5–3.8 3.3–4.0 3.3–4.2 3.6–4.5 March projection ..... 3.7 3.8 3.9 4.3 3.6–3.8 3.6–3.9 3.7–4.1 4.1–4.5 3.5–4.0 3.4–4.1 3.4–4.2 4.0–4.6 PCE inflation .......... 1.5 1.9 2.0 2.0 1.5–1.6 1.9–2.0 2.0–2.1 2.0 1.4–1.7 1.8–2.1 1.9–2.2 2.0 March projection ..... 1.8 2.0 2.0 2.0 1.8–1.9 2.0–2.1 2.0–2.1 2.0 1.6–2.1 1.9–2.2 2.0–2.2 2.0 Core PCE inflation4 ..... 1.8 1.9 2.0 1.7–1.8 1.9–2.0 2.0–2.1 1.4–1.8 1.8–2.1 1.8–2.2 March projection ..... 2.0 2.0 2.0 1.9–2.0 2.0–2.1 2.0–2.1 1.8–2.2 1.8–2.2 1.9–2.2 Memo: Projected appropriate policy path Federal funds rate ....... 2.4 2.1 2.4 2.5 1.9–2.4 1.9–2.4 1.9–2.6 2.5–3.0 1.9–2.6 1.9–3.1 1.9–3.1 2.4–3.3 March projection ..... 2.4 2.6 2.6 2.8 2.4–2.6 2.4–2.9 2.4–2.9 2.5–3.0 2.4–2.9 2.4–3.4 2.4–3.6 2.5–3.5 Note: Projections of change in real gross domestic product (GDP) and projections for both measures of inflation are percent changes from the fourth quarter of the previous year to the fourth quarter of the year indicated. PCE inflation and core PCE inflation are the percentage rates of change in, respectively, the price index for personal consumption expenditures (PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated. Each participant’s projections are based on his or her assessment of appropriate monetary policy. Longer-run projections represent each participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy. The projections for the federal funds rate are the value of the midpoint of the projected appropriate target range for the federal funds rate or the projected appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run. The March projections were made in conjunction with the meeting of the Federal Open Market Committee on March 19–20, 2019. One participant did not submit longer-run projections for the change in real GDP, the unemployment rate, or the federal funds rate in conjunction with the March 19–20, 2019, meeting, and one participant did not submit such projections in conjunction with the June 18–19, 2019, meeting. 1. For each period, the median is the middle projection when the projections are arranged from lowest to highest. When the number of projections is even, the median is the average of the two middle projections. 2. The central tendency excludes the three highest and three lowest projections for each variable in each year. 3. The range for a variable in a given year includes all participants’ projections, from lowest to highest, for that variable in that year. 4. Longer-run projections for core PCE inflation are not collected. 2020 and 2021 were close to the median of uncertainty around their unemployment rate their assessments of the longer-run federal projections as being similar to the average of funds rate level. Nearly all participants lowered the past 20 years, and about the same number their projections for the appropriate level of viewed uncertainty as higher. Participants’ the federal funds rate, relative to March, at assessments of risks to their outlooks for some point in the forecast period. Although output growth and the unemployment rate nearly half of the participants revised their shifted notably relative to their assessments in projections for 2019 to levels 25 basis points March. As a result, most participants viewed or 50 basis points below the current level, the the risks for GDP growth as weighted to the median projection for the federal funds rate for downside and the risks for the unemployment the end of 2019 was unchanged. The medians rate as weighted to the upside. About half of for the federal funds rate for 2020 and 2021 participants viewed the risks to inflation as were 50 basis points and 25 basis points lower being broadly balanced, with a similar number than in March, respectively. viewing inflation risks as being weighted to the downside. Most participants regarded the uncertainties around their forecasts for GDP growth, total inflation, and core inflation as broadly similar A more complete description of the SEP will to the average of the past 20 years. About be released with the minutes of the June 18–19, half of the participants viewed the level of 2019, FOMC meeting on July 10. MONETARy POLICy REPORT: JULy 2019 47 Figure 1. Medians, central tendencies, and ranges of economic projections, 2019–21 and over the longer run Percent Change in real GDP Median of projections Central tendency of projections Range of projections 3 Actual 2 1 2014 2015 2016 2017 2018 2019 2020 2021 Longer run Percent Unemployment rate 7 6 5 4 3 2014 2015 2016 2017 2018 2019 2020 2021 Longer run Percent PCE inflation 3 2 1 2014 2015 2016 2017 2018 2019 2020 2021 Longer run Note: Definitions of variables and other explanations are in the notes to the projections table. The data for the actual values of the variables are annual. 48 PART 3: SUMMARy OF ECONOMIC PROJECTIONS Figure 2. FOMC participants’ assessments of appropriate monetary policy: Midpoint of target range or target level for the federal funds rate Percent 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2019 2020 2021 Longer run Note: Each shaded circle indicates the value (rounded to the nearest ⅛ percentage point) of an individual participant’s judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run. One participant did not submit longer-run projections for the federal funds rate. 49 a bbreviations AFE advanced foreign economy CCyB countercyclical capital buffer DPI disposable personal income ECB European Central Bank EME emerging market economy EPOP employment-to-population ratio FOMC Federal Open Market Committee; also, the Committee FRB/US a large-scale macroeconometric model of the U.S. economy GDP gross domestic product IP industrial production JOLTS Job Openings and Labor Turnover Survey LFPR labor force participation rate MBS mortgage-backed securities OPEC Organization of the Petroleum Exporting Countries PCE personal consumption expenditures SEC U.S. Securities and Exchange Commission SLOOS Senior Loan Officer Opinion Survey on Bank Lending Practices TIPS Treasury Inflation-Protected Securities VIX implied volatility for the S&P 500 index For use at 11:00 a.m. EDT July 5, 2019 M P r onetary olicy ePort July 5, 2019 Board of Governors of the Federal Reserve System

Federal Reserve (2019, July 4). Monetary Policy Report. Monetary Policy Reports, Federal Reserve. https://whenthefedspeaks.com/doc/monetary_policy_report_20190705

@misc{wtfs_monetary_policy_report_20190705,
  author = {Federal Reserve},
  title = {Monetary Policy Report},
  year = {2019},
  month = {Jul},
  howpublished = {Monetary Policy Reports, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/monetary_policy_report_20190705},
  note = {Retrieved via When the Fed Speaks corpus}
}