monetary policy reports · February 24, 2022
Monetary Policy Report
For use at 11:00 a.m. EST
February 25, 2022
M P r
onetary olicy ePort
February 25, 2022
Board of Governors of the Federal Reserve System
L t
etter of ransmittaL
Board of Governors of the
Federal Reserve System
Washington, D.C., February 25, 2022
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 reaffirmed effective January 25, 2022
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.
Employment, inflation, and long-term interest rates fluctuate over time in response to economic and financial
disturbances. Monetary policy plays an important role in stabilizing the economy in response to these
disturbances. The Committee’s primary means of adjusting the stance of monetary policy is through changes
in the target range for the federal funds rate. The Committee judges that the level of the federal funds rate
consistent with maximum employment and price stability over the longer run has declined relative to its
historical average. Therefore, the federal funds rate is likely to be constrained by its effective lower bound
more frequently than in the past. Owing in part to the proximity of interest rates to the effective lower bound,
the Committee judges that downward risks to employment and inflation have increased. The Committee is
prepared to use its full range of tools to achieve its maximum employment and price stability goals.
The maximum level of employment is a broad-based and inclusive goal that is not directly measurable
and changes over time owing largely to nonmonetary factors that affect the structure and dynamics of the
labor market. 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 shortfalls of employment from its
maximum level, recognizing that such assessments are necessarily uncertain and subject to revision. The
Committee considers a wide range of indicators in making these assessments.
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 judges that longer-term inflation expectations that are well anchored at 2 percent foster price
stability and moderate long-term interest rates and enhance the Committee’s ability to promote maximum
employment in the face of significant economic disturbances. In order to anchor longer-term inflation
expectations at this level, the Committee seeks to achieve inflation that averages 2 percent over time, and
therefore judges that, following periods when inflation has been running persistently below 2 percent,
appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.
Monetary policy actions tend to influence economic activity, employment, and prices with a lag. In setting
monetary policy, the Committee seeks over time to mitigate shortfalls of employment from the Committee’s
assessment of its maximum level and deviations of inflation from its longer-run goal. Moreover, sustainably
achieving maximum employment and price stability depends on a stable financial system. 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 Committee’s employment and inflation objectives are generally complementary. However, under
circumstances in which the Committee judges that the objectives are not complementary, it takes into account
the employment shortfalls and inflation 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 review these principles and to make adjustments as appropriate at its annual
organizational meeting each January, and to undertake roughly every 5 years a thorough public review of its
monetary policy strategy, tools, and communication practices.
iii
C
ontents
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Recent Economic and Financial Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Special Topics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Part 1: Recent Economic and Financial Developments . . . . . . . . . . . . . . . . . . . . . 5
Domestic Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Financial Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
International Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Part 2: Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
Part 3: Summary of Economic Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47
Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65
List of Boxes
The Limited Recovery of Labor Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Differences in Wage and Employment Growth across Jobs and Workers . . . . . . . . . . . . . . . . 11
How Widespread Has the Rise in Inflation Been? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Supply Chain Bottlenecks in U.S. Manufacturing and Trade . . . . . . . . . . . . . . . . . . . . . . . . . 19
Developments Related to Financial Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Developments in the Federal Reserve’s Balance Sheet and Money Markets . . . . . . . . . . . . . . 44
Forecast Uncertainty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
note: This report reflects information that was publicly available as of noon EST on February 23, 2022
(the one exception is the GDP data published on February 24, 2022). Unless otherwise stated, the time series
in the figures extend through, for daily data, February 22, 2022; for monthly data, January 2022; and, for
quarterly data, 2021:Q4. 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 23 and 35, note that the S&P/Case-Shiller U.S. National Home Price Index, 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 © 2022 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
U.S. economic activity posted further since June and, at 4 percent in January, has
impressive gains in the second half of last reached the median of FOMC participants’
year, but inflation rose to its highest level since estimates of its longer-run normal level.
the early 1980s. The labor market tightened Moreover, unemployment declines have been
substantially further amid high demand for widespread across demographic groups. That
workers and constrained supply, with the said, labor force participation only crept up
unemployment rate reaching the median of last year and remains constrained. The tight
Federal Open Market Committee (FOMC) labor supply, in conjunction with a continued
participants’ estimates of its longer-run surge in labor demand, has resulted in strong
normal level and nominal wages rising at their nominal wage growth, especially for low-wage
fastest pace in decades. With demand strong, workers. Supply bottlenecks also continued
and amid ongoing supply chain bottlenecks to significantly limit activity throughout the
and constrained labor supply, inflation second half, while the Delta and Omicron
increased appreciably last year, running well waves led to notable, but apparently
above the FOMC’s longer-run objective of temporary, slowdowns in activity.
2 percent and broadening out to a wider range
of items. As 2022 began, the rapid spread of Inflation. The personal consumption
the Omicron variant appeared to be causing a expenditures (PCE) price index rose
slowdown in some sectors of the economy, but 5.8 percent over the 12 months ending in
with Omicron cases having declined sharply December, and the index that excludes food
since mid-January, the slowdown is expected and energy items (so-called core inflation)
to be brief. was up 4.9 percent—the highest readings for
both measures in roughly 40 years. Upward
Over the second half of last year, the FOMC pressure on inflation from prices of goods
held its policy rate near zero to support the experiencing both supply chain bottlenecks
continued economic recovery. The Committee and strong demand, such as motor vehicles
began phasing out net asset purchases in and furniture, has persisted, and elevated
November and accelerated the pace of the inflation has broadened out to a wider range
phaseout in December; net asset purchases will of items. Services inflation has also stepped
end in early March. With inflation well above up further, reflecting strong wage growth in
the FOMC’s longer-run objective and a strong some service sectors and a significant increase
labor market, the Committee expects it will in housing rents. While measures of near-term
soon be appropriate to raise the target range inflation expectations moved substantially
for the federal funds rate. higher over the course of last year, measures of
longer-term inflation expectations have moved
Recent Economic and Financial up only modestly; they remain in the range
Developments observed over the decade before the pandemic
and thus appear broadly consistent with the
Economic activity and the labor market. In the FOMC’s longer-run inflation objective of
second half of 2021, gross domestic product 2 percent.
(GDP) growth slowed somewhat from its
brisk first-half pace but nevertheless rose at a Financial conditions. Yields on nominal
solid annualized rate of 4.6 percent. Average Treasury securities across maturities increased
monthly job gains remained robust at 575,000 notably since mid-2021, with much of the
in the second half. The unemployment rate increase having occurred in the past couple
has plummeted almost 2 percentage points of months, as the expected timing for the
2 SUMMARy
beginning of the removal of monetary economies (EMEs). Inflation rose notably in
policy accommodation has moved forward many economies in the second half of last
significantly. Equity prices decreased slightly, year, importantly boosted by higher energy
on net, and corporate bond yields rose but and other commodity prices as well as supply
remain low, with stable corporate credit chain constraints. Several emerging market
quality. Financing conditions for consumer foreign central banks and a few advanced-
credit continue to be largely accommodative economy foreign central banks have raised
except for borrowers with low credit scores. policy rates, though foreign monetary and
Mortgage rates for households remain fiscal policies have generally continued to be
low despite recent increases. Bank lending accommodative.
standards have eased across most loan
categories, and bank credit has expanded. Foreign financial conditions have tightened
All told, financing conditions have been modestly but are generally contained. In
accommodative for businesses and households. advanced foreign economies, sovereign yields
have increased since the first half of last year
Financial stability. While some financial on firming expectations for higher policy rates.
vulnerabilities remain elevated, the large banks The change in financial conditions in EMEs
at the core of the financial system continue to has been relatively muted in the face of the
be resilient. Measures of valuation pressures shift in monetary policy in some advanced
on risky assets remain high compared with economies. The trade-weighted value of the
historical values. Nonfinancial-sector leverage dollar appreciated modestly, on net, over the
has broadly declined, and credit growth in past six months. Recent geopolitical tensions
the household sector has been driven almost related to the Russia–Ukraine situation are a
exclusively by residential mortgages and auto source of uncertainty in global financial and
loans to prime-rated borrowers. Vulnerabilities commodity markets.
from financial-sector leverage are within their
historical range, with relatively lower leverage Monetary Policy
at banks partially offset by higher leverage at
life insurers and hedge funds. Funding markets Interest rate policy. The FOMC has continued
remain stable. Domestic banks continue to to keep the target range for the federal funds
maintain significant levels of high-quality rate at 0 to ¼ percent since the previous
liquid assets, while assets under management Monetary Policy Report. With inflation well
at prime and tax-exempt money market funds above the Committee’s 2 percent longer-run
have declined further since mid-2021. The goal and a strong labor market, the Committee
Federal Reserve continues to evaluate the expects it will soon be appropriate to raise the
potential systemic risks posed by hedge funds target range for the federal funds rate.
and digital assets and is closely monitoring
the transition away from LIBOR. (See the box Balance sheet policy. From June 2020
“Developments Related to Financial Stability” until November 2021, the Federal Reserve
in Part 1.) expanded its holdings of Treasury securities
by $80 billion per month and its holdings
International developments. Foreign GDP of agency mortgage-backed securities by
has continued to recover briskly, on balance, $40 billion per month. In December 2020,
despite successive waves of the pandemic, the Committee indicated that it would
which have been mirrored in slowdowns and continue to increase its holdings of securities
rebounds in economic activity. This recovery at least at this pace until the economy had
has been supported by vaccination rates that made substantial further progress toward its
have steadily increased in both advanced maximum-employment and price-stability
foreign economies and emerging market goals. Last November, the Committee
MONETARy POLICy REPORT: FEBRUARy 2022 3
judged that this criterion had been achieved also affected labor supply through fear of the
and began to reduce the monthly pace of virus or the need to quarantine. Moreover,
its net asset purchases. In December, in savings buffers accumulated during the
light of inflation developments and further pandemic may have enabled some people to
improvements in the labor market, the remain out of the labor force. (See the box
Committee announced it would double the “The Limited Recovery of Labor Supply” in
pace of reductions in its monthly net asset Part 1.)
purchases. At its January meeting, the FOMC
decided to continue to reduce its net asset Wage and employment growth across jobs and
purchases at this accelerated pace, which will workers. Wage and employment gains were
bring them to an end in early March, and widespread across jobs and industries last
issued a statement of principles for its planned year, with the lowest-wage jobs experiencing
approach for significantly reducing the size of the largest gains in both median wages and
the Federal Reserve’s balance sheet.1 A number employment. Wage growth in the leisure and
of participants at the meeting commented that hospitality industry accelerated sharply, which,
conditions would likely warrant beginning to together with a lagging employment rebound
reduce the size of the balance sheet sometime and high job openings, suggests a lack of
later this year.2 available workers in the industry. Median
wages also increased across racial and ethnic
In assessing the appropriate stance of groups, leaving differences in wage levels across
monetary policy, the Committee will continue groups little changed relative to 2019. (See the
to monitor the implications of incoming box “Differences in Wage and Employment
information for the economic outlook. The Growth across Jobs and Workers” in Part 1.)
Committee is firmly committed to its price-
stability and maximum-employment goals and Broadening of inflation. Higher PCE price
is prepared to use its tools to prevent higher inflation broadened out over the course of
inflation from becoming entrenched while 2021, with the share of products experiencing
promoting a sustainable expansion and strong notable price increases moving appreciably
labor market. higher. The broadening was evident in both
goods and services, though most of last year’s
Special Topics very high inflation readings were concentrated
in goods, a reflection of the strong demand
Low labor supply. Labor supply has been and supply bottlenecks that have particularly
slow to rebound even as labor demand has affected these items. (See the box “How
been remarkably strong. The labor force Widespread Has the Rise in Inflation Been?” in
participation rate remains well below estimates Part 1.)
of its longer-run trend, principally reflecting a
wave of retirements among older individuals Supply bottlenecks. Supply chain bottlenecks
and increases in the number of people out have plagued the economy for much of the
of the labor force and engaged in caregiving past year. Against a backdrop of robust
responsibilities. The ongoing pandemic has demand for goods, global distribution
networks have been strained, and domestic
1. See the January 26, 2022, press release regarding the manufacturers have had trouble finding the
Principles for Reducing the Size of the Federal Reserve’s materials and labor needed to fill orders for
Balance Sheet, available at https://www.federalreserve. their products. U.S. ports have been congested
gov/newsevents/pressreleases/monetary20220126c.htm.
amid record volumes of shipping, and delivery
2. The minutes for the January 2022 FOMC meeting
times for materials have remained elevated.
note these comments and are available on the Federal
Supply shortages of semiconductors have been
Reserve’s website at https://www.federalreserve.gov/
monetarypolicy/fomcminutes20220126.htm. particularly acute and have weighed heavily
4 SUMMARy
on motor vehicle production and sales. While changed, on net, reflecting growth in nonreserve
there are some signs of improvement, general liabilities such as currency and overnight
supply chain bottlenecks are not expected to reverse repurchase agreements (ON RRP). The
resolve for some time. (See the box “Supply elevated level of reserves continued to put broad
Chain Bottlenecks in U.S. Manufacturing downward pressure on short-term interest rates,
and Trade” in Part 1.) while the decline in Treasury bill supply over
2021 has contributed to a shortage of short-
Developments in the Federal Reserve’s balance term investments. Amid these developments, the
sheet. The size of the Federal Reserve’s balance ON RRP facility continued to serve its intended
sheet continued to grow, albeit at a slower purpose of helping to provide a floor under
rate given the reduced monthly pace of net short-term interest rates and support effective
asset purchases since November. However, implementation of monetary policy. (See the
reserve balances—the largest liability on the box “Developments in the Federal Reserve’s
Federal Reserve’s balance sheet—were little Balance Sheet and Money Markets” in Part 2.)
5
P 1
art
r e f d
eCent ConomiC and inanCiaL eveLoPments
Domestic Developments
The labor market has continued to 1. Nonfarm payroll employment
recover rapidly
Monthly Millions of jobs
Payroll employment increased by 3.5 million
155
jobs in the second half of 2021, bringing the
gains for the year to a robust 6.7 million. And 150
despite the headwind caused by the Omicron 145
wave, employment growth in January remained
140
robust at 467,000 (figure 1). Payroll gains over
135
the past year have been widespread across
industries, with a particularly large increase 130
in the leisure and hospitality sector as people 125
continued their return to many activities that
2006 2008 2010 2012 2014 2016 2018 2020 2022
had been curtailed by the pandemic.
SOURCE: Bureau of Labor Statistics via Haver Analytics.
Meanwhile, the unemployment rate
continued to move down rapidly, declining 2. Civilian unemployment rate
from 6.7 percent at the end of 2020 to
Monthly Percent
4.0 percent this January (figure 2). Notably,
the nearly 2 percentage point decline in the 16
unemployment rate since June of last year was
14
the fastest half-year decline since the 1950s,
12
apart from the unprecedented rebound when
10
the economy first reopened in 2020. Moreover,
8
this decline was broad based across racial and
ethnic groups and was particularly large for 6
Hispanics and African Americans (figure 3). 4
While these recent declines brought the gaps 2
between Hispanic and African American
2006 2008 2010 2012 2014 2016 2018 2020 2022
unemployment rates and those of whites
and Asians to near historic lows, the gaps
SOURCE: Bureau of Labor Statistics via Haver Analytics.
nevertheless remain and largely reflect long-
standing structural issues.
Labor demand is very strong, but labor
supply remains constrained . . .
Last year’s job gains were driven by an
appreciable and steady rise in labor demand as
the economy reopened and activity bounced
back. By the end of the year, the number of
unfilled job openings was about 60 percent
above pre-pandemic levels and at an all-time
high. However, labor supply struggled to
6 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS
3. Unemployment rate, by race and ethnicity
Monthly Percent
20
18
Black or African American
16
14
12
Hispanic or Latino
10
White 8
6
Asian
4
2
2006 2008 2010 2012 2014 2016 2018 2020 2022
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. Small sample sizes preclude reliable estimates for Native Americans and other groups for which monthly data are not reported by
the Bureau of Labor Statistics.
SOURCE: Bureau of Labor Statistics via Haver Analytics.
4. Labor force participation rate and keep up. In particular, the labor force
employment-to-population ratio participation rate—which measures the share
of people either working or actively seeking
Monthly Percent
work—moved up only a little over the past
68 year and remains below its February 2020
Labor force participation rate 66 level (figure 4).3 Several pandemic-related
64
factors appear to be holding back labor
62
Employment-to-
population ratio 60
58
56 3. The 0.3 percentage point jump in the labor force
participation rate (LFPR) in January 2022 is the result
54
of revisions to the Current Population Survey (CPS)
52
population controls, which introduced a discontinuity
50
in the LFPR between December and January. (The
2006 2008 2010 2012 2014 2016 2018 2020 2022 Bureau of Labor Statistics (BLS) does not revise its
published estimates for December 2021 and earlier
NOTE: The labor force participation rate and the employment-
to-population ratio are percentages of the population aged 16 and over. months.) Population controls—population estimates
SOURCE: Bureau of Labor Statistics via Haver Analytics. for disaggregated demographic groups that are used
to weight the CPS sample to make it representative of
the U.S. population—are updated annually based on
information provided by the Census Bureau. The BLS
has indicated that the LFPR revision was mostly due to
an increase in the size of the population in age groups
that participate in the labor force at high rates (those
aged 35 to 64) and a large decrease in the size of the
population aged 65 and older, which participates at a
low rate.
MONETARy POLICy REPORT: FEBRUARy 2022 7
supply, including a pandemic-induced
surge in retirements, increased caregiving
responsibilities, and fears of contracting
COVID-19. (See the box “The Limited
Recovery of Labor Supply.”) As a result, the
recovery in employment—though rapid—has
been incomplete, with payrolls nearly 3 million
below their pre-pandemic level as of January.
5. Ratio of job openings to job seekers and quits rate
. . . resulting in an extremely tight
Percent of employment Ratio
labor market . . .
3.2 2.1
A wide range of indicators have been pointing
1.8
to a very tight labor market, reflecting robust 2.8
Nonfarm quits rate 1.5
demand for workers and constrained supply. 2.4
There were two job openings per unemployed 1.2
2.0
person at year-end, the highest level on .9
1.6
record (figure 5). Both households’ and small .6
Vacancy-to-
businesses’ perceptions of labor market 1.2 unemployment ratio .3
tightness were near or above the highest levels .8 0
observed in the history of these series. The
share of workers quitting jobs each month, 2005 2007 2009 2011 2013 2015 2017 2019 2021
an indicator of the availability of attractive NOTE: The data are monthly and extend through December 2021. The
vacancy-to-unemployment ratio data are the ratio of job openings to
job prospects, climbed from 2.4 percent to unemployed excluding temporary layoffs.
2.9 percent last year, reaching an all-time high. SOURCE: Bureau of Labor Statistics, Job Openings and Labor
Turnover Survey.
Moreover, employers continued to report
widespread hiring difficulties.
6. Measures of change in hourly compensation
. . . and a broad-based acceleration
in wages Percent change from year earlier
Compensation per hour,
Measures of hourly labor compensation 10
business sector
growth have risen sharply over the past year 8
in nominal terms, reflecting the influences Atlanta Fed’s
Wage Growth Tracker 6
of strong labor demand and pandemic-
4
related reductions in labor supply. Total
hourly compensation as measured by the 2
+
employment cost index, which includes both
_0
Employment cost index, Average hourly earnings,
wages and benefits, rose at an annual rate of
private sector private sector 2
5.2 percent in the second half of 2021, lifting
the 12-month change to 4.4 percent, well above 2014 2016 2018 2020 2022
pre-pandemic rates (figure 6). Wage growth
NOTE: Business-sector compensation is on a 4-quarter percent change
as computed by the Federal Reserve Bank of 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
Atlanta, which tracks the median 12-month average hourly earnings, the data are 12-month percent changes; for the
Atlanta Fed’s Wage Growth Tracker, the data are shown as a 3-month
wage growth of individuals responding to moving average of the 12-month percent change.
the Current Population Survey, has also been SOURCE: Bureau of Labor Statistics; Federal Reserve Bank of Atlanta,
Wage Growth Tracker; all via Haver Analytics.
rising smartly, as have average hourly earnings
and compensation per hour in the business
8 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS
The Limited Recovery of Labor Supply
Although labor demand has bounced back strongly this factor is likely to dwindle as the date when these
over the past year, labor supply has been much slower individuals had previously planned to retire is reached,
to rebound, resulting in an extremely tight labor provided that younger cohorts continue to retire at
market. In particular, the labor force participation expected rates.
rate (LFPR)—the share of working-age adults either
(continued)
employed or actively seeking work—fell early in the
pandemic and changed little last year despite plentiful
A. Change in labor force participation
job openings and rapidly rising wages (fi gure A).1
The behavior of the LFPR refl ects a combination of Monthly
factors that have limited the recovery of labor supply Metric Dec. 2020 June 2021 Dec. 2021
following the pandemic. The most important of these Change since Feb. 2020. . . . . . −1.9 −1.7 −1.5
factors are listed in turn.
Contribution of
Retirements: The retired share of the population is
Retirement . . . . . . . . . . . . . . . . −.8 −1.1 −1.1
now substantially higher than before the pandemic,
accounting for more than two-thirds of the net decline Expected retirement . . . . . . −.3 −.4 −.6
in the LFPR. About half (0.6 percentage point) of this Excess retirements . . . . . . . . −.5 −.7 −.6
increase was to be expected even in the absence of the Caregiving . . . . . . . . . . . . . . . . −.8 −.5 −.4
pandemic, as additional members of the large baby-
Parents of school-age
boom generation have reached retirement age in the children* . . . . . . . . . . . . . . −.3 −.1 −.1
past two years.2 The other half of the increase comes Parents of only young
from excess retirements, above and beyond what would children** . . . . . . . . . . . . . −.1 .0 .0
have been expected in the absence of the pandemic, Nonparents . . . . . . . . . . . . . . −.4 −.4 −.4
due to individuals “pulling forward” their planned
Disability, illness, and
future retirements by a couple of years.3 The effect of schooling . . . . . . . . . . . . . . . .2 .1 .5
Other reasons, including
COVID-19 fears . . . . . . . . . . −.6 −.2 −.4
1. The table shows changes only through December 2021 Note: The data are monthly and extend through December 2021. The data
comprise individuals aged 16 and over. Contributions are derived from Current
to maintain comparability with pre-pandemic data. With the
Population Survey (CPS) non-labor-force participants’ answers to the question
release of January 2022 data, the BLS revised the population “What best describes your current situation at this time?” We break out catego-
base for labor force statistics, which complicates comparisons ries for the answers “in retirement”; “taking care of home or family,” which we
with pre-pandemic data. categorize as caregiving; “ill or disabled” and “in school,” which we combine;
and “other.” Contribution lines are seasonally adjusted by Federal Reserve
2. For estimates of the effects of population aging on the Board staff . Details may not sum to totals due to rounding.
LFPR during the 2020–22 period that predate the pandemic, *Adults with at least one child between ages 6 and 17.
see Joshua Montes (2018), “CBO’s Projection of Labor **Adults with at least one child only between ages 0 and 5.
SourCe: Bureau of Labor Statistics; Federal Reserve Board staff calculations
Force Participation Rates,” Working Paper Series 2018-04
using CPS microdata.
(Washington: Congressional Budget Offi ce, March), https://
www.cbo.gov/publication/53616.
3. Federal Reserve Board staff calculations from the Current
Population Survey indicate that many of the excess retirements beginning of the pandemic, who had likely planned to retire in
are concentrated among individuals aged 71 to 73 at the the next few years.
MONETARy POLICy REPORT: FEBRUARy 2022 9
Caregiving: Many individuals who have left the 3 percent of out-of-work adults reported fear of
labor force have taken on caregiving responsibilities contracting or spreading the virus as their main
during the pandemic, accounting for an additional reason for being out of work; the rate is even higher
0.4 percentage point of the LFPR shortfall as of among individuals with no college education, who
December 2021.4 Caregiving responsibilities among are more likely to work in contact-intensive sectors
parents of school-aged children exerted a large drag when employed.6 This factor may exacerbate other
on labor supply in 2020, when schools were largely labor supply factors, as retirees or caregivers may be
closed. This drag on labor supply eased over the course especially fearful of contracting or spreading the virus.
of 2021 as schools reopened, although the ongoing Additionally, many households built up larger-than-
pandemic may leave parents unsure whether in-person normal savings during the pandemic, which may have
schooling could be disrupted again. Other caregiving enabled workers to retire, spend time on caregiving,
responsibilities (for example, elder care) remain a or remain out of the labor force until virus conditions
drag on labor supply, accounting for nearly all of the subside. Finally, reduced immigration likely has held
negative contribution of this category to the LFPR. back total labor supply, even though the effect on the
Additional factors: Labor supply has also been LFPR is likely to be much smaller.7
held back by other short-term factors related to the
pandemic, including fear of contracting the virus and—
especially during the Omicron wave—high numbers of
quarantining workers.5 As of early January 2022, nearly
workers are counted as employed in the Current Population
Survey, these absences do not affect the LFPR. In addition,
some vaccine-hesitant workers who are subject to vaccine
mandates may have left the labor force and may be reluctant
to return.
6. See the data from week 41 of the Household Pulse
Survey, which can be found on the Census Bureau’s website
4. The contribution of caregiving responsibilities is at https://www.census.gov/data/tables/2021/demo/hhp/hhp41.
measured by the increase in nonparticipants in the Current html#tables.
Population Survey who report “taking care of home or family” 7. Slower immigration during the pandemic period has
as their current situation. Note that this question refers to the reduced population growth—and labor force growth—since
respondent’s current situation rather than the causal reason 2019, lowering the foreign-born working-age population in
why they left the labor force; nonetheless, it is reasonable to the United States by about 2 million people, according to
infer that caregiving responsibilities are an important factor one estimate. See Giovanni Peri and Reem Zaiour (2022),
contributing to the net decline in LFPR. “Labor Shortages and the Immigration Shortfall,” Econofact,
5. Many workers have had to quarantine during the January 11, https://econofact.org/labor-shortages-and-the-
Omicron wave, resulting in the number of workers absent immigration-shortfall. Although foreign-born individuals
from work due to illness being more than 600,000 higher in tend to have higher LFPRs than the overall population, the
December 2021 than is typical for this time of year and about difference is not large enough for the reduced immigration to
2.5 million higher in January 2022. However, because these have a substantial effect on the (overall) LFPR.
10 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS
sector.4 Indeed, nominal wages are increasing
at the fastest pace in at least 20 years. This
wage growth has been widespread across most
sectors and particularly large in the leisure
and hospitality sector and for lower-wage
workers. (See the box “Differences in Wage
and Employment Growth across Jobs and
Workers.”) Even so, in the aggregate, these
wage gains did not keep pace with the rise in
prices last year.
Labor productivity also appears to have
accelerated
7. Change in business-sector output per hour The extent to which sizable wage gains raise
firms’ costs and act as a source of inflation
Percent, annual rate
pressure depends importantly on the pace
of productivity growth. In that regard, the
4
behavior of labor productivity since the start
of the pandemic has been encouraging. Over
3
the 2020–21 period, productivity growth in the
2 business sector averaged 2.3 percent per year—
about 1 percentage point faster than its average
1 pace since the mid-2000s (figure 7). Some of
this acceleration in productivity might
0
be the result of transitory factors. For
example, worker effort, which surged in
1949–73 1974–95 1996– 2004–19 2020–
response to employment shortages and hiring
2003 21
NOTE: Changes are measured from Q4 of the year immediately difficulties, appears to be elevated, possibly
preceding the period through Q4 of the final year of the period. above sustainable levels.5 But other pandemic-
SOURCE: Bureau of Labor Statistics via Haver Analytics.
related developments could have a more
persistent effect on productivity growth. For
example, the pandemic has resulted in a high
4. The average hourly earnings and compensation per
hour measures are no longer likely to be as significantly
affected by changes in the composition of the workforce
as they were early in the pandemic, when job losses were
much larger for lower-wage workers, which raised average
wages and measured wage growth. This process then
reversed as many lower-wage workers, particularly in
services, were rehired, thus lowering average wages and
measured wage growth. The employment cost index and
Federal Reserve Bank of Atlanta wage growth measure
are largely free of such composition effects.
5. The November 2021 Beige Book—in which the
Federal Reserve reports on discussions with our business
and other contacts throughout the country—reported
that many employers were planning to increase hiring
because of concerns that their current workforce was
being overworked.
MONETARy POLICy REPORT: FEBRUARy 2022 11
Differences in Wage and Employment Growth across
Jobs and Workers
Wages have increased strongly during the past The industry-specifi c effects of the pandemic are
year, especially for workers in lower-paying jobs also apparent in the patterns of employment and wages
and industries. For example, fi gure A shows that for lower-paying jobs relative to higher-paying jobs. As
compensation growth for leisure and hospitality jobs as shown in fi gure B, job losses initially aligned closely
measured by the employment cost index was stronger with workers’ level of earnings, with the lowest-wage
than for goods-producing and service-producing jobs (which are disproportionately found in service-
industries overall in the second half of 2021. The leisure producing industries) experiencing the greatest
and hospitality industry was substantially affected by employment declines. As the economy has reopened,
social distancing earlier in the pandemic, leading to lower-wage employment has rebounded more.
outsized employment losses relative to other industries Consistent with the rebound in labor demand for these
and a much weaker recovery. However, job openings for jobs coupled with hiring diffi culties, fi gure C shows
this industry are very high, which, in combination with that wage growth has been especially strong for lower-
strong wage growth, indicates that the comparatively wage jobs.
weak employment rebound in leisure and hospitality
(continued on next page)
now largely refl ects a lack of available workers.
A. Hourly compensation, by industry B. Employment, by wage quartile
Quarterly Percent change from year earlier Weekly Week ending February 15, 2020 = 100
8
110
7 Top
100
6
Leisure and hospitality 5 Top-middle 90
4
Bottom-middle 80
3
70
Goods production 2 Bottom
Services production 1 60
2017 2018 2019 2020 2021 2020 2021 2022
NOTE: The data are the employment cost index for total NOTE: Series are adjusted to make total employment consistent with
compensation. Current Employment Statistics private employment. Wage quartile
SOURCE: Bureau of Labor Statistics via Haver Analytics. cutoffs are adjusted for wage growth over time. The data extend through
January 15, 2022.
SOURCE: Federal Reserve Board staff calculations using ADP, Inc.,
Payroll Processing microdata.
12 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS
Differences in Wage and Employment Growth (continued)
C. Median wage growth, by quartile Finally, fi gure D illustrates how wages have evolved
across racial and ethnic groups over the course of
Weekly Percent change from year earlier the pandemic. In 2019, median hourly wages were
around $1 higher for Asian and white workers relative
to Black and Hispanic workers. From 2019 to 2021,
10
median wages increased between $1.10 and $1.90 for
Bottom all groups, leaving the disparities in wage levels across
8
these groups little changed relative to 2019.1
Bottom-middle
6
Top-middle 4 1. The wage estimates in fi gure D are only for workers
paid hourly and exclude the incorporated self-employed.
Top
Because hourly wages for demographic groups are published
2 at only an annual frequency by the Bureau of Labor Statistics,
it is not possible to infer from these data whether some
demographic groups experienced faster wage gains more
2020 2021 2022 recently (for example, whether wage growth has been faster
NOTE: Quartiles are defined by hourly wage distribution from base for demographic groups with lower median wages in the
period of year-over-year calculations. Wages are measured as hourly second half of 2021, mirroring the more rapid wage growth for
earnings, excluding tips, overtime, and other forms of compensation. The lower-paying jobs, as illustrated in fi gure C).
data extend through January 15, 2022.
SOURCE: Federal Reserve Board staff calculations using ADP, Inc.,
Payroll Processing microdata.
D. Median hourly earnings, by race and ethnicity, wage and salary workers
D1. Annual median, 2019 and 2021 D2. Change in annual median, 2019 to 2021
Dollars Change, 2019 to 2021 Dollars
2019
2021 20 2.0
16 1.6
12 1.2
8 .8
4 .4
0 0
White Black or Asian Hispanic White Black or Asian Hispanic
African American or Latino African American or Latino
NOTE: The data exclude incorporated self-employed.
SOURCE: Bureau of Labor Statistics.
MONETARy POLICy REPORT: FEBRUARy 2022 13
rate of new business formation, the widespread
adoption of remote work technology, and a
wave of labor-saving investments. Nevertheless,
Differences in Wage and Employment Growth (continued)
it is too early to tell what the ultimate effect of
C. Median wage growth, by quartile Finally, fi gure D illustrates how wages have evolved the pandemic will be on productivity growth in
across racial and ethnic groups over the course of coming years.
Weekly Percent change from year earlier the pandemic. In 2019, median hourly wages were
around $1 higher for Asian and white workers relative Inflation increased significantly
to Black and Hispanic workers. From 2019 to 2021,
10 last year . . .
median wages increased between $1.10 and $1.90 for
Bottom 8 all groups, leaving the disparities in wage levels across Consumer prices posted further sizable
these groups little changed relative to 2019.1
Bottom-middle increases in the second half of 2021.
6 Monthly increases in personal consumption 8. Change in the price index for personal consumption
expenditures (PCE) prices averaged about the expenditures
Top-middle 4 1. The wage estimates in fi gure D are only for workers
paid hourly and exclude the incorporated self-employed. same in the second half as in the first half,
Top Because hourly wages for demographic groups are published Monthly Percent change from year earlier
2 at only an annual frequency by the Bureau of Labor Statistics, bringing the 12-month change in December 6.0
it is not possible to infer from these data whether some to 5.8 percent—far above the Federal Open
5.5
demographic groups experienced faster wage gains more Market Committee’s (FOMC) longer-run 5.0
2020 2021 2022 recently (for example, whether wage growth has been faster
NOTE: Quartiles are defined by hourly wage distribution from base for demographic groups with lower median wages in the objective of 2 percent (figure 8). The core 4 4 . . 0 5
period of year-over-year calculations. Wages are measured as hourly second half of 2021, mirroring the more rapid wage growth for PCE price index, which excludes the more
3.5
earnings, excluding tips, overtime, and other forms of compensation. The lower-paying jobs, as illustrated in fi gure C).
data extend through January 15, 2022. volatile food and energy prices categories, Trimmed mean 3.0
Excluding food
SOURCE: Federal Reserve Board staff calculations using ADP, Inc.,
rose 4.9 percent last year as supply chain and energy
2.5
Payroll Processing microdata. 2.0
bottlenecks, hiring difficulties, and other 1.5
capacity constraints amid strong demand Total 1.0
D. Median hourly earnings, by race and ethnicity, wage and salary workers .5
exerted pervasive upward pressure on prices.
D1. Annual median, 2019 and 2021 D2. Change in annual median, 2019 to 2021 0
Notably, these were the largest price increases
Dollars Change, 2019 to 2021 Dollars 2014 2015 2016 2017 2018 2019 2020 2021
since the early 1980s. In January, a further
2019 NOTE: The data extend through December 2021.
2021 20 2.0 sizable rise in the consumer price index (CPI) SOURCE: For trimmed mean, Federal Reserve Bank of Dallas; for all
indicated that price pressures had not yet else, Bureau of Economic Analysis; all via Haver Analytics.
16 1.6
begun to abate.
12 1.2
. . . and became more broad based in the
8 .8
second half . . .
4 .4
Whereas the sizable price increases seen last
0 0 spring were concentrated in a few key items,
inflationary pressures broadened over the
White Black or Asian Hispanic White Black or Asian Hispanic
African American or Latino African American or Latino second half of 2021. As an illustration, the
NOTE: The data exclude incorporated self-employed. Federal Reserve Bank of Dallas trimmed mean
SOURCE: Bureau of Labor Statistics.
index, which removes the PCE categories with
the largest price increases and decreases each
month, rose only modestly in the first half of
last year but picked up in the second half and
increased 3.1 percent for the year as a whole—
its highest reading since 1991.
The broadening of price inflation is further
evident when examining the price indexes for
major PCE categories (figure 9). In the first
half of 2021, rising inflation was driven by
14 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS
9. Personal consumption expenditures price indexes
Percent change from year earlier Percent change from year earlier Monthly Percent change from year earlier
40 8 8
30 6
6
20 Food and 4 Housing
beverages services 4
10 2
+ + Services 2
_0 _0
an
ex
d
.
h
e
o
n
u
er
s
g
in
y
g +
10 2
_0
Energy
Goods ex. food,
20 4 beverages, and 2
energy
2018 2019 2020 2021 2018 2019 2020 2021
NOTE: The data are monthly and extend through December 2021. NOTE: The data extend through December 2021.
SOURCE: Bureau of Economic Analysis via Haver Analytics. SOURCE: Bureau of Economic Analysis via Haver Analytics.
sharp increases in prices for certain goods
such as motor vehicles, which experienced
strong demand coupled with severe supply
chain bottlenecks; a recovery in demand
for nonhousing services, where many prices
rebounded after having softened earlier in
the pandemic; and rapid increases in energy
prices. In the second half, prices of those items
continued to move higher, and prices began to
rise more rapidly for food and beverages (as
increases in the costs of food commodities,
labor, and transportation were passed on to
consumers) as well as for housing services
(as rents began to reflect the large increase
in housing demand). (See the box “How
10. Spot prices for commodities Widespread Has the Rise in Inflation Been?”)
Week ending January 3, 2014 = 100 Dollars per barrel
. . . with further upward pressure on
inflation from rising commodity and
160 120
import prices
Brent oil Industrial metals
140 100
Oil prices continued climbing over the
120 80 second half of last year and into this year,
reaching their highest level in over seven years
100 60
(figure 10). Demand for oil rose as the global
80 40 economy recovered further, and oil supply was
Agriculture
and livestock constrained by U.S. oil production disruptions
60 20
due to Hurricane Ida and by only modest
production increases by OPEC (Organization
2014 2015 2016 2017 2018 2019 2020 2021 2022
NOTE: The data are weekly averages of daily data and extend through of the Petroleum Exporting Countries) and
February 18, 2022. its partners. Geopolitical tensions with Russia
SOURCE: For oil, ICE Brent Futures via Bloomberg; for industrial
metals, S&P GSCI Industrial Metals Index Spot via Haver Analytics; for have also contributed to higher energy prices,
agriculture and livestock, S&P GSCI Agriculture & Livestock Spot Index
via Haver Analytics. including oil and natural gas.
MONETARy POLICy REPORT: FEBRUARy 2022 15
How Widespread Has the Rise in Infl ation Been?
Consumer price infl ation increased markedly in was stable at around 35 percent between 2016
2021, with the price index for personal consumption and 2019—close to the average share observed
expenditures (PCE) rising 5.8 percent over the since the mid-1990s—and continued to be stable
12 months through December, following a subdued in 2020. However, the share of products with more
increase of 1.3 percent in 2020. In the fi rst half of last than 3 percent infl ation increased last year to above
year, the increase in infl ation was driven by a fairly 60 percent. And, as is evident from the black line, the
small number of categories. In contrast, over the second share of categories with price increases of more than
half of the year, relatively high price increases became 3 percent (annual rate) over a three-month window
more widespread, suggesting that broader-based increased gradually over the course of the year. As
infl ationary pressures had taken hold. This discussion shown by the left panel, the share of product categories
reviews how infl ation evolved across a comprehensive with infl ation above 3 percent temporarily reached a
set of product categories last year to help shed light on similar level on two other occasions since the 1990s
the forces generating higher infl ation. (in 2001 and 2007), but this share is still notably lower
Although price increases driven by bottlenecks and than that in the high-infl ation regime of the 1970s.
production constraints have been more concentrated As seen in fi gure B, which reports the shares of
in a relatively small set of product categories that have product categories with 12-month price changes
been particularly affected by these supply–demand above 3 percent separately for goods and services, the
imbalances, labor shortages, rising wages, and other increase in the breadth of large price increases was
broad-based cost pressures likely contributed to a pickup especially unusual for goods. yet the share of higher
in infl ation across a wide range of goods and services. infl ation in services has also been moving up in the
Figure A divides PCE into 146 product categories past few months, likely in part because of mounting
and presents the share of those categories for which infl ation pressures from the labor market.
prices were increasing by over 3 percent.1 This share (continued on next page)
1. The fi gure presents the consumption-weighted share of
product categories with 12-month price changes—and, for the infl ation but is somewhat more volatile. A price increase
recent period, annualized three-month price changes—over of 3 percent is one standard deviation above the mean of
3 percent. The calculation based on three-month changes annualized price increases for the different PCE product
provides a timely account of broadening in total PCE price categories from 2016 to 2019.
A. Share of personal consumption expenditures product categories with inflation over 3 percent
Monthly Percent Monthly Percent
100 100
90 90
80 80
70 70
60 60
3-month changes
50 50
40 40
30 30
20 12-month changes 20
10 10
0 0
1976 1981 1986 1991 1996 2001 2006 2011 2016 2021 2018 2019 2020 2021
NOTE: Each series is created from 146 product categories. Each product category is weighted by its expenditure share in personal consumption expenditures. Series are
derived from 12-month price changes, except where otherwise indicated. The data extend through December 2021. The flat line in each panel marks where 50 percent of
product categories experience inflation over 3 percent.
SOURCE: Bureau of Economic Analysis; Federal Reserve Board staff calculations.
16 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS
How Widespread Has the Rise in Infl ation Been? (continued)
B. Share of personal consumption expenditures goods and services categories with inflation over 3 percent
Monthly Percent Monthly Percent
100 100
90 90
Services
80 80
70 70
60 Services 60
50 50
40 40
30 30
20 20
Goods
10 10
Goods
0 0
1976 1981 1986 1991 1996 2001 2006 2011 2016 2021 2018 2019 2020 2021
NOTE: The series for goods is created from 81 product categories, and the series for services is created from 65 product categories. Each product category is weighted by its
expenditure share in personal consumption expenditures (PCE) goods or PCE services. Series are derived from 12-month price changes. The data extend through December
2021. The flat line in each panel marks where 50 percent of product categories experience inflation over 3 percent.
SOURCE: Bureau of Economic Analysis; Federal Reserve Board staff calculations.
While robust price increases became more prevalent distribution of price changes for different products and
across product categories in the past year, the size of further emphasizes the different roles being played by
price increases still varied signifi cantly across product prices of goods versus services in explaining changes in
categories. To better understand the drivers of the high this distribution compared with the 2016–19 period.
aggregate infl ation last year, fi gure C presents the full In fi gure C, the blue line depicts the distribution of
annualized monthly price changes observed from 2016
to 2019, while the black line depicts the dist rib ution in
C. Distribution of inflation across personal consumption 2021.2 In both periods, this distribution is very wide,
expenditures product categories
refl ec t ing the sizable heterogeneity in price behavior
across items. The higher and broader infl ation during 2021
Share of PCE in each bin
is refl ected in the chart as a rightward shift in the dis trib u-
2016 to 2019 16 tion of price changes relative to the 2016–19 period.3
2021
14 (continued)
12
10
8 2. For each of the 146 disaggregated product categories
mapped back to 1972, the chart presents one-month
6
annualized infl ation rates for each of the months indicated in
4 the legend. From 2016 to 2019 there are 7,008 observations
2 (48 months times 146 categories) sorted into 51 bins (negative
25 or lower, negative 24, . . . , negative 1, 0, 1, . . . , 24, and
0 25 or higher), while in 2021 there are 1,752 observations
(12 months times 146 categories). The product categories
25 20 15 10 5 –0+ 5 10 15 20 25 are weighted according to their share in overall PCE. The
Annualized monthly price change for a given product category
comparison shown in fi gure C does not importantly depend
NOTE: The height of each line indicates the share of personal on the length of the pre-pandemic comparison period; for
consumption expenditures (PCE) spent on product categories whose example, the distribution of price changes over 2000 to 2019
annualized monthly price changed by the percentage indicated on the looks similar to the distribution over 2016 to 2019.
horizontal axis. Values on the horizontal axis are binned in unit
3. As the price change distribution shifts rightward and
increments and are truncated at positive and negative 25 percent. Blue
shading indicates that the PCE spending share was greater in 2016 to infl ation becomes more broadly experienced across product
2019 than in 2021 for the associated values of price change on the categories, a greater percent of spending occurs on products
horizontal axis. Gray shading indicates that the PCE spending share was with infl ation exceeding 3 percent, as depicted in fi gure A.
greater in 2021 than in 2016 to 2019 for the associated values of price However, by combining all increases of at least 3 percent,
change on the horizontal axis. The histogram includes 146 product
fi gure A does not portray the marked increase in the number
categories over the periods indicated.
SOURCE: Bureau of Economic Analysis; Federal Reserve Board staff of very large price increases, particularly for goods affected by
calculations. supply chain disruptions.
MONETARy POLICy REPORT: FEBRUARy 2022 17
Four aspects of the change in the distribution are worth in the blue shading). These observations are consistent
noting: with the very large price increases in goods categories
(1) fewer items with price decreases, which are such as motor vehicles and other categories disrupted
depicted in the blue shaded areas below zero on by supply constraints against the backdrop of strong
the horizontal axis demand as consumption shifted away from services
(2) a notable decline in the occurrence of price during the pandemic.
increases of between 1 and 4 percent, shown by the Second, the right panel of fi gure D shows the
blue shaded area in the middle of the distribution contribution of services to the total price change
(3) more items with infl ation between 5 and distribution. Services account for the vast majority of
12 percent as well as slightly more with infl ation the shift from the middle of the distribution of price
between 13 and 24 percent, shown in the gray shaded changes (the blue shaded area) to infl ation between
area in those ranges on the horizontal axis 5 and 12 percent (the gray shaded area), while they
(4) a striking 6 percentage point increase at the very account for less than one-third of the increase in the
top of the distribution, indicated by the large (gray spike at the top of the distribution.
shaded) spike in the share of items with price increases In summary, the share of products experiencing
of at least 25 percent notable price increases moved appreciably higher
These features of the distribution of price changes in 2021, with the broadening due to both goods and
can be better understood by considering the services prices. That said, most of last year’s very high
contributions of goods and services to the changes. infl ation readings were concentrated in goods—a
First, the left panel of fi gure D shows the contribution refl ection of strong demand in the face of supply
of goods to the total price change distribution between bottlenecks that have particularly affected these items.
2016 and 2019 (the blue line) and 2021 (the black Finally, although currently more widespread than in
line). Goods account for about 4 percentage points recent history, large price increases were considerably
of the 6 percentage point increase in the spike at the less widespread than was seen during the high-infl ation
top of the price change distribution in fi gure C as well regime of the 1970s. In the period ahead, the large
as nearly all of the rightward shift in the price change price changes in goods may ease once supply chain
distribution in excess of 12 percent infl ation. Moreover, disruptions fi nally resolve, but, if labor shortages
the increased occurrence of high infl ation for goods continue and wages rise faster than productivity in a
is a stark departure from small positive or slightly broad-based way, infl ation pressures may persist and
negative price changes between 2016 and 2019 (seen continue to broaden out.
D. Distribution of inflation across personal consumption expenditures product categories
D1. Contribution of goods D2. Contribution of services
Share of PCE in each bin Share of PCE in each bin
2016 to 2019 16 2016 to 2019 16
2021 2021
14 14
12 12
10 10
8 8
6 6
4 4
2 2
0 0
25 20 15 10 5 –0+ 5 10 15 20 25 25 20 15 10 5 –0+ 5 10 15 20 25
Annualized monthly price change for a given product category Annualized monthly price change for a given product category
Note: The height of each line indicates the share of personal consumption expenditures (PCE) spent on product categories whose annualized monthly
price changed by the percentage indicated on the horizontal axis. Values on the horizontal axis are binned in unit increments and are truncated at positive
and negative 25 percent. Blue shading indicates that the PCE spending share was greater in 2016 to 2019 than in 2021 for the associated values of price
change on the horizontal axis. Gray shading indicates that the PCE spending share was greater in 2021 than in 2016 to 2019 for the associated values of
price change on the horizontal axis. The histograms include 81 product categories for goods (left panel) and 65 product categories for services (right
panel) over the periods indicated.
Source: Bureau of Economic Analysis; Federal Reserve Board staff calculations.
18 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS
Nonfuel commodity prices have risen with the
global economic recovery since the first half
of last year, reflecting considerable increases
in the prices of both industrial metals and
agricultural commodities. Although still
below their peak last year, lumber prices have
increased sharply again in recent months
because of elevated demand from residential
construction and supply disruptions.
Import prices and the cost of transporting
11. Nonfuel import price index imported goods—a cost not included
in measured import prices—are rising,
Monthly 12-month percent change
and bottlenecks in supply chains have
exacerbated the rise (see the box “Supply
8
Chain Bottlenecks in U.S. Manufacturing
6
and Trade”). Import price inflation has also
4
remained elevated largely because of continued
2 increases in commodity prices, bringing the
+
_0 12-month change through January 2022 to
6.9 percent (figure 11).
2
4 Measures of near-term inflation
expectations rose notably, but longer-
2014 2015 2016 2017 2018 2019 2020 2021 2022
term expectations moved up less
SOURCE: Bureau of Labor Statistics via Haver Analytics.
Inflation expectations likely influence actual
inflation by affecting wage- and price-setting
decisions. In the University of Michigan
12. Measures of inflation expectations
Surveys of Consumers, households’
Percent expectations for inflation over the next
12 months continued to climb, reaching
5.5
M ne ic x h t i 1 g 2 a n m s o u n r t v h e s y, 5.0 levels that are among the highest observed
Michigan survey, 4.5 since the early 1980s (figure 12). In contrast,
next 5 to 10 years 4.0 expectations for average inflation over the next
3.5 5 to 10 years from the same survey flattened
3.0 out in the second half of 2021 after having
2.5 moved up modestly in the first half, and
2.0
they now stand near levels observed about a
CIE, projected onto SPF, 10 years ahead 1.5 decade ago. Meanwhile, 10-year PCE inflation
10-year SPF CIE, projected onto Michigan 1.0
expectations in the Survey of Professional
2006 2008 2010 2012 2014 2016 2018 2020 2022 Forecasters edged up, on net, since mid-2021
NOTE: The Survey of Professional Forecasters (SPF) data are and stood at 2.2 percent in the first quarter
quarterly, begin in 2007:Q1, and extend through 2022:Q1. The Index of
Common Inflation Expectations (CIE) data are quarterly and extend of this year. That increase was driven by
through 2022:Q1. The Michigan survey data are monthly and extend higher expectations for the next five years,
through February 2022; the February data are preliminary.
SOURCE: University of Michigan Surveys of Consumers; Federal with expectations for inflation remaining at
Reserve Bank of Philadelphia, SPF; Federal Reserve Board, CIE;
Federal Reserve Board staff calculations. 2 percent over years 6 through 10.
MONETARy POLICy REPORT: FEBRUARy 2022 19
Supply Chain Bottlenecks in U.S. Manufacturing and Trade
Over the past year, global transportation and The combined ports of Los Angeles and Long Beach
distribution networks have been overwhelmed, and have faced substantial congestion, with the number of
manufacturers have struggled to fi nd the materials ships waiting for a berth recently reaching an all-time
and labor needed to meet demand for their products. high.1 Elevated levels of port congestion in the United
Demand for goods has been notably boosted, States and abroad have caused on-time arrivals of
as ongoing concerns about COvID-19 have led global shipping vessels to plunge and have resulted in
consumers and businesses to shift spending away from dramatic increases in charter rates for container ships
services, such as travel, in favor of goods, such as (fi gure B). Moreover, once goods arrive in port, major
those related to increased time at home. While some bottlenecks in U.S. trucking and rail transportation have
distribution and production bottlenecks showed signs further delayed their movement. Trucking cargo rates
of improvement toward the end of last year, other have risen sharply since mid-2020, and some measures
bottlenecks are expected to remain for some time. are now more than 15 percent above the levels
The surge in demand for imports has strained prevailing in 2019.
shipping networks worldwide, and U.S. ports have (continued on the next page)
been particularly congested. About one-third of all
U.S. goods imports (by value) arrive via seaborne
containers, and, consistent with the strength in imports
1. Though primarily driven by strong demand for goods,
of consumer and capital goods in 2021, the number of
the congestion has been worsened by COvID-19 outbreaks
containers processed at domestic ports last year was in emerging Asia, where port delays have tied up vessels and
signifi cantly higher than in any previous year (fi gure A). containers, sending ripple effects through the global network.
A. U.S. imports B. Developments in shipping
2019:Q4 = 100 Percent of vessels on schedule December 2019 = 100
100 1,000
140 Cost of chartering
a container ship
80 800
120
Real goods imports 60 Vessel schedule 600
100 reliability
40 400
80
Seaborne containers 20 200
60 0 0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2019 2020 2021 2022
NOTE: The seaborne containers data are monthly, are not seasonally NOTE: “On schedule” is defined as a vessel arriving within 1 day of its
adjusted, and extend through December 2021. The real goods imports listed schedule. The shipping data are monthly averages of daily data and
data are quarterly and are seasonally adjusted. extend through February 22, 2022. Vessel reliability data are monthly
SOURCE: Bureau of Economic Analysis; Maryland Port and extend through December 2021.
Administration; Virginia Port Authority; South Carolina Ports Source: NewConTex, © VHSS e.V., Hamburg and Bremen
Authority; Port of Houston Authority; Port of Los Angeles; Port of Shipbrokers’ Association; Sea-Intelligence (2021), Global Liner
Long Beach; Port of New York and New Jersey; Port of Oakland; Performance, issue 125 (January).
Georgia Ports Authority; Northwest Seaport Alliance; all via Haver
Analytics; Federal Reserve Board staff calculations.
20 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS
Supply Chain Bottlenecks (continued)
Distribution problems have also weighed heavily D. Suppliers’ delivery times and order backlogs
on domestic production. In 2021, a record number
of manufacturers reported that an insuffi cient supply Monthly Diffusion index
of materials was one reason they were unable to
produce at full capacity (fi gure C). Together with 80
Delivery
increasingly strong demand for goods, these limitations times
70
on production led to backlogs of orders and to supplier
delivery times well above historical norms (fi gure D). 60
With supply unable to satisfy demand, prices for a
50
wide range of goods increased last year, sometimes
sharply. Indeed, the producer price index for overall 40
Order backlogs
manufacturing was more than 15 percent higher in
30
the fourth quarter of 2021 than its year-earlier level
( fi gure E). 20
Domestic production has been further hampered
by manufacturers’ inability to hire and retain skilled 2007 2012 2017 2022
(continued) NOTE: Values greater than 50 indicate that more respondents reported
longer delivery times or order backlogs relative to a month earlier than
reported shorter delivery times or order backlogs.
C. Reasons for operating below capacity
SOURCE: Institute for Supply Management, ISM Manufacturing
Report on Business.
Quarterly Percent of responses
E. Producer price index for manufacturing
50
45
Monthly Percent change from year earlier
Insufficient supply of labor
40
35
20
30
Insufficient supply 25 15
Logistics/transportation of materials
constraints 20 10
15
10 5
+
5
_0
0
5
2001 2006 2011 2016 2021
10
NOTE: Gaps in series represent the end of the Annual Survey of Plant
Capacity in 2006 and the start of the Quarterly Survey of Plant Capacity
in 2008. Survey respondents are given the choice of many reasons for 2017 2018 2019 2020 2021 2022
operating below capacity and may select more than one reason.
SOURCE: Census Bureau, Survey of Plant Capacity Utilization. SOURCE: Bureau of Labor Statistics via Haver Analytics.
MONETARy POLICy REPORT: FEBRUARy 2022 21
labor. Despite adding about 350,000 workers in 2021, industry executives suggest that they expect production
by the end of the year manufacturing employment was bottlenecks to continue well into this year.
still about 250,000 below where it was just before Outside the auto sector, supply chain bottlenecks
the pandemic. Although manufacturers have long show some signs of improvement. Capacity expansion
noted diffi culties in fi nding workers, labor market at some ports in late 2021 and waning seasonal
conditions were particularly tight in 2021. At the end demand likely contributed to recent declines in
of the year, factory workers were quitting their jobs at the cost of shipping. Additionally, inland rail hubs
near-record rates, and manufacturing plants had listed have decongested somewhat, facilitating the fl ow
approximately 850,000 job openings—about twice as of containers inland. Also, late last year, domestic
many openings as in the 2017–19 period. manufacturers saw slower increases in the price of
The motor vehicle sector has faced a particularly inputs, improving delivery times, and fewer items in
acute and well-publicized shortage of semiconductor short supply than they had earlier. A few commodities
chips, refl ecting a combination of factors. On the have experienced a notable increase in availability.
demand side, consumers’ appetite for cars and One example is steel, for which delivery times and
trucks has remained remarkably strong, and the chip prices have fallen sharply after having been elevated for
content per vehicle has increased.2 Meanwhile, the much of last year.
supply of semiconductors was disrupted by COvID-
induced shutdowns in foreign countries—such as
F. Light motor vehicle production
Malaysia and vietnam—that are major players in the
semiconductor supply chain. Even when enough Millions of units, annual rate
of certain types of chips have been available, an
undersupply of complementary chips has, at times, 14
created problems for manufacturers. These chip
12
shortages have led to widespread shutdowns and
production slowdowns at U.S. motor vehicle assembly 10
plants. Without an ample supply of new vehicles, many
8
dealerships sold off remaining inventories and raised
prices. The lean inventories and high prices weighed 6
heavily on vehicle sales for much of 2021. Recently,
4
however, semiconductor shortages have begun to
ease somewhat, as indicated by an increase in U.S. 2
vehicle production (fi gure F). Nevertheless, these
shortages have persisted, and statements by some auto 2015 2016 2017 2018 2019 2020 2021 2022
NOTE: The data are quarterly averages and are adjusted using Federal
Reserve Board seasonal factors. The dot represents the monthly value for
2. Although the chip content per vehicle has been rising January 2022.
for a while, demand for some vehicles particularly rich
SOURCE: Ward’s Automotive Group, AutoInfoBank and Intelligence
Data Query; Chrysler Group LLC, North American Production Data;
in semiconductors—notably, electric vehicles and luxury General Motors Corporation, GM Motor Vehicle Assembly Production
models—has risen especially sharply during the pandemic. Data.
22 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS
Market-based measures of inflation
compensation, which are based on financial
instruments linked to inflation, are sending a
similar message. A measure of CPI inflation
compensation over the next five years implied
by Treasury Inflation-Protected Securities
13. Inflation compensation implied by Treasury (TIPS) continued to rise, on net, through the
Inflation-Protected Securities second half of 2021, reaching its highest level
over the past decade.6 In contrast, the TIPS-
Daily Percent
based measure of CPI inflation compensation
3.5 5 to 10 years ahead rose over the first half of
5-to-10-year 3.0 2021 but has settled around 2¼ to 2½ percent
2.5 since then (figure 13). While elevated relative
to pre-pandemic levels, this measure is well
2.0
within the range of values observed in the first
1.5
5-year half of the previous decade and, because CPI
1.0
inflation tends to run around ¼ percentage
.5
point above PCE price inflation, it suggests
0 inflation compensation close to 2 percent on a
PCE basis.
2010 2012 2014 2016 2018 2020 2022
NOTE: The data are at a business-day frequency and are based on
smoothed nominal and inflation-indexed Treasury yield curves. The common inflation expectations (CIE)
SOURCE: Federal Reserve Bank of New York; Federal Reserve Board index constructed by Federal Reserve Board
staff calculations.
staff combines a wide variety of inflation
expectations measures—including the
measures cited earlier—into a single indicator
that is rescaled to match the level and volatility
of existing inflation expectation indicators.7
6. Inflation compensation implied by the yields
on Treasury securities, known as the TIPS breakeven
inflation rate, is defined as the difference between yields
on conventional Treasury securities and yields on TIPS,
which are linked to actual outcomes regarding headline
CPI inflation. Inferring inflation expectations from such
market-based measures of inflation compensation is not
straightforward, because these measures are affected
by changes in premiums that provide compensation for
bearing inflation and liquidity risks. These measures
likely also capture shifts in the demand and supply of
TIPS relative to those of nominal Treasury securities.
7. The CIE is estimated using a dynamic factor
model. The level of the model’s estimated factor does
not have an economic interpretation and therefore must
be rescaled to match an existing indicator of inflation
expectations to yield a level interpretation. For more
details, see Hie Joo Ahn and Chad Fulton (2021),
“Research Data Series: Index of Common Inflation
Expectations,” FEDS Notes (Washington: Board of
Governors of the Federal Reserve System, March 5),
https://doi.org/10.17016/2380-7172.2873.
MONETARy POLICy REPORT: FEBRUARy 2022 23
The measures used in the CIE differ along
several key dimensions—the type of economic
agent, data source (survey- or market-based
measure), time horizon, and inflation measure.
Both CIE indexes shown in figure 12 look
most similar to the measures of longer-term
expectations: They trended up in the first half
of last year, reversing the downward drift
observed in the years before the pandemic, but
then flattened out at a level similar to those
observed roughly a decade ago.
Gross domestic product growth stepped 14. Real gross domestic product
down modestly in the second half of
Quarterly Trillions of chained 2012 dollars
last year . . .
The level of real gross domestic product 20.0
(GDP) recovered further in the second half 19.5
of 2021, but growth was somewhat slower,
19.0
on average, than in the first half (figure 14).
18.5
GDP growth is reported to have slowed
notably to 2.3 percent at an annual rate in 18.0
the third quarter but rebounded to a brisk 17.5
7 percent in the fourth quarter. Despite the
17.0
solid average growth in the second half, several
factors—including last summer’s Delta wave 2015 2017 2019 2021
and waning fiscal stimulus—likely weighed
SOURCE: Bureau of Economic Analysis via Haver Analytics.
on demand growth. Moreover, supply chain
bottlenecks, hiring difficulties, and other
capacity constraints continued to significantly
restrain economic activity. While there have
been some recent signs of these constraints
easing, the time frame for further improvement
is highly uncertain. All told, at the end of 2021
GDP stood 3 percent above its level in the
fourth quarter of 2019, before the pandemic
began, but 1.5 percent below its level if growth
had continued at its average pace over the five
years before the pandemic.
. . . while the rapid spread of the
Omicron variant appears to have slowed
the pace of economic activity early
this year
Fueled by the highly transmissible Omicron
variant, new cases of COVID-19 began
rising sharply in mid-December, peaked in
mid-January with daily cases about three
times as high as last winter’s surge, and have
24 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS
fallen quickly since then. Although Omicron
appears to cause less severe symptoms than
previous variants, several indicators suggest
it has damped the pace of economic activity
early this year. High-frequency indicators
reveal that flight cancellations, school closures,
and temporary closings of small businesses
jumped as the new year began, while demand
for COVID-sensitive services like air travel,
lodging, and restaurant meals flagged.
Nevertheless, with cases rapidly declining
and spending indicators having rebounded,
Omicron seems likely to cause the continued
reopening of the economy to slow only briefly.
Real consumer spending
growth eased . . .
15. Real personal consumption expenditures Consumer spending on goods edged lower,
on balance, over the second half of 2021 as
Trillions of chained 2012 dollars Trillions of chained 2012 dollars
the boost from fiscal stimulus waned and
6.0 9.5 low inventories held back purchases of some
goods, particularly motor vehicles. Even so,
5.5
9.0
goods spending remains quite elevated relative
5.0
8.5 to its pre-pandemic trend (figure 15). The
4.5
8.0 further reopening of the economy boosted
Goods
4.0
spending on services in the second half, albeit
7.5
3.5 at a less rapid pace than last spring, as the
3.0 Services 7.0 Delta wave weighed on demand for in-person
2.5 6.5 services in the summer and the Omicron wave
began to do so late in the year. Despite the
2005 2007 2009 2011 2013 2015 2017 2019 2021
continued recovery in services spending, this
NOTE: The data are monthly and extend through December 2021. spending remains well below its pre-pandemic
SOURCE: Bureau of Economic Analysis via Haver Analytics.
trend. In all, the data over the second half
of 2021 indicate only a moderate amount
of rebalancing of consumer demand toward
services and away from goods.
. . . as higher prices damped otherwise
healthy income and wealth positions . . .
Real consumer spending has been supported
by further gains in household income and
wealth, but that support was curbed by the
marked rise in prices over the past year,
especially for households that have not
benefited from higher asset prices. Household
disposable income in nominal terms has
proven resilient due to the improving labor
market, even as fiscal stimulus has waned,
MONETARy POLICy REPORT: FEBRUARy 2022 25
but after factoring in the higher prices, real 16. Personal saving rate
disposable incomes edged lower over the year.
Monthly Percent
Nevertheless, also supporting consumption,
in the aggregate, are the substantial savings 36
households have accumulated from curtailed 32
services spending and historic levels of 28
household-focused fiscal stimulus distributed 24
20
earlier in the pandemic, as evidenced by a
16
personal saving rate that, while no longer
12
elevated, has not fallen below its pre-pandemic
8
trend (figure 16). Furthermore, as a result of
4
the large gains in home and equity prices since
0
mid-2020, the wealth position of households
2005 2007 2009 2011 2013 2015 2017 2019 2021
that own these assets remains very solid
(figure 17). NOTE: The data extend through December 2021.
SOURCE: Bureau of Economic Analysis via Haver Analytics.
. . . and contributed to declining
17. Wealth-to-income ratio
consumer sentiment
Quarterly Ratio
Amid the continued acceleration in prices
in the second half of last year and despite
8.0
solid household balance sheets, a closely
7.5
watched index of consumer sentiment
plunged (figure 18). Since the middle of 7.0
2021, the University of Michigan index 6.5
fell below the levels seen at the onset of the
6.0
pandemic, as survey respondents’ concerns
5.5
over inflation weighed heavily on their
outlooks. The Conference Board index, an 5.0
alternative measure of consumer sentiment,
2005 2007 2009 2011 2013 2015 2017 2019 2021
also deteriorated but, in contrast to the
Michigan index, remains well above its earlier
NOTE: The series is the ratio of household net worth to disposable
personal income. The data extend through 2021:Q3.
pandemic lows. SOURCE: For net worth, Federal Reserve Board, Statistical Release
Z.1, “Financial Accounts of the United States”; for income, Bureau of
Economic Analysis via Haver Analytics.
Meanwhile, consumer credit conditions
continued to normalize
18. Indexes of consumer sentiment
Financing has been generally available to
Monthly 2018 average = 100
support these gains in consumer spending.
110
Standards for consumer loans, which banks Michigan survey
100
reported eased in 2021 relative to 2020, are
90
now generally in line with the standards 80
that persisted before the pandemic; as a 70
result, financing conditions are now largely 60
Conference Board
50
accommodative for borrowers with high
40
credit scores, though lending standards and
30
terms remain somewhat tighter than pre-
20
pandemic levels for borrowers with low credit 10
scores. After initial declines at the onset of
2006 2008 2010 2012 2014 2016 2018 2020 2022
the pandemic, the growth rate of consumer
NOTE: The data extend through February 2022. The February data for
the Michigan survey are preliminary.
SOURCE: University of Michigan Surveys of Consumers; Conference
Board.
26 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS
19. Consumer credit flows credit recovered strongly in 2021, driven by
the continued expansion of auto loans and an
Billions of dollars, monthly rate
appreciable rebound in credit card balances
Student loans 40 (figure 19). Delinquency rates for nonprime
Auto loans
Credit cards auto and credit card borrowers remained well
30
below pre-pandemic levels, likely stemming
20
from forbearance programs and fiscal support.
10
+ Housing construction fell as supply
_0
constraints held back activity . . .
10
Residential investment is well above pre-
20
pandemic levels but fell back somewhat last
2009 2011 2013 2015 2017 2019 2021 year, as construction was limited by persistent
NOTE: The data are seasonally adjusted by the Federal Reserve Board. bottlenecks that led to materials shortages. In
SOURCE: Federal Reserve Board, Statistical Release G.19, “Consumer
recent months, the sector has shown signs of
Credit.”
a rebound, as single-family permits have risen
steadily (figure 20). Nevertheless, the timing
20. Private housing starts and permits of the resolution of these supply constraints
remains highly uncertain. Prices of lumber and
Monthly Millions of units, annual rate
other materials have moved up appreciably,
2.0 and shortages of other construction inputs—
1.8 such as labor and lots ready for development—
1.6
remain acute.
Single-family starts 1.4
1.2
. . . amid surging demand for housing . . .
1.0
.8
Demand for housing surged earlier during the
Single-family .6
permits pandemic and has remained strong, with home
.4
.2 sales well above levels seen in the years before
Multifamily starts
0 the pandemic despite very tight inventory of
homes available for sale (figure 21). This surge
2006 2008 2010 2012 2014 2016 2018 2020 2022
in demand is likely due to a combination of
SOURCE: Census Bureau via Haver Analytics.
factors, including increased work-from-home
arrangements; shifts away from other types
21. New and existing home sales of consumer spending, such as travel and
leisure; and mortgage rates that remain low
Millions, annual rate Millions, annual rate
despite notable recent increases (figure 22).
7.0 Meanwhile, mortgage credit remained
1.4
6.5 broadly available for a wide range of potential
1.2
6.0 Existing home sales borrowers. Although mortgage credit for
5.5 1.0 borrowers with low credit scores remained
5.0 .8 tighter than before the pandemic, it eased over
4.5 the second half of last year.
.6
4.0
.4 . . . which has contributed to record
3.5
New home sales .2 house price growth
3.0
As a result of supply constraints and surging
2006 2008 2010 2012 2014 2016 2018 2020 2022
demand, house price growth reached record
NOTE: The data are monthly. New home sales include only
single-family sales and extend through December 2021. Existing home
sales include single-family, condo, and co-op sales.
SOURCE: For new home sales, Census Bureau; for existing home sales,
National Association of Realtors; all via Haver Analytics.
MONETARy POLICy REPORT: FEBRUARy 2022 27
levels, and, even after adjusting for overall 22. Mortgage rates
inflation, home prices have surpassed their
Weekly Percent
peak of the mid-2000s (figure 23). According
to data from Zillow, national house prices
5.5
rose almost 20 percent last year. Moreover,
5.0
strong house price growth has been widespread
across the United States, as nearly 80 percent 4.5
of metropolitan areas experienced annual 4.0
house price increases of at least 10 percent.
3.5
Homebuying sentiment, as measured by the
3.0
Michigan survey, remains depressed, reflecting
the low inventory of homes and high prices. 2.5
Business investment slowed in response 2012 2014 2016 2018 2020 2022
to supply constraints . . . NOTE: The data are contract rates on 30-year, fixed-rate conventional
home mortgage commitments and extend through February 17, 2022.
SOURCE: Freddie Mac Primary Mortgage Market Survey.
Investment in equipment and intangibles
grew at an annual rate of just 4 percent in the 23. Real prices of existing single-family houses
second half of last year, a marked step-down
Quarterly 2005:Q1 = 100
from the nearly 14 percent pace in the first
half. As with other sectors of the economy, 130
investment demand has remained strong, while 120
supply constraints have limited spending,
110
Zillow index
as evidenced by shipments of capital goods
S&P/Case-Shiller 100
increasingly lagging orders and equipment national index
90
prices rising sharply. Supply bottlenecks in the
80
motor vehicle sector have been particularly
CoreLogic
acute, and business spending on vehicles price index 70
declined appreciably in the second half of 60
2021. Investment in nonresidential structures
2005 2007 2009 2011 2013 2015 2017 2019 2021
declined further last year despite a sharp
NOTE: Series are deflated by the personal consumption expenditures
rebound in oil drilling and remains well below price index.
pre-pandemic levels (figure 24). This sector SOURCE: Bureau of Economic Analysis via Haver Analytics;
CoreLogic Home Price Index; Zillow, Inc., Real Estate Data;
typically lags in recoveries, and shortages of 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.
building materials may be further restraining (For Dow Jones Indices licensing information, see the note on the
Contents page.)
activity.
24. Real business fixed investment
. . . while financing conditions remain
accommodative Billions of chained 2012 dollars Billions of chained 2012 dollars
Equipment and 2,600
Corporate financing conditions through capital 650 intangible capital
2,400
markets remained broadly accommodative 600
2,200
for nonfinancial firms and continued to be
550
2,000
supported by corporate bond yields that
500 1,800
remain very low by historical standards. Amid
1,600
these low yields and ample investor demand, 450
gross issuance of corporate bonds continued at 1,400
400
a robust pace, albeit down from the exceptional 1,200
Structures
350
pace seen in 2020. In contrast, bank lending 1,000
to businesses was, on net, subdued last year.
2006 2009 2012 2015 2018 2021
NOTE: Business fixed investment is known as “private nonresidential
fixed investment” in the national income and product accounts. The data
are quarterly.
SOURCE: Bureau of Economic Analysis via Haver Analytics.
28 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS
While commercial real estate loans grew at a
modest pace similar to the years just before
the pandemic, commercial and industrial
loan balances contracted as a result of loan
forgiveness associated with the Paycheck
Protection Program (PPP), elevated paydowns,
and generally weak borrower demand.
Meanwhile, financing conditions for small
businesses have improved notably over the past
year and have generally been stable in recent
months. Lending standards have eased, and
loan origination volumes are in line with pre-
pandemic levels, though loan demand remains
weak for the smallest firms. Moreover, default
and delinquency rates are now within their pre-
pandemic range. Nevertheless, the pandemic
25. Real imports and exports of goods continues to negatively affect the operations of
and services
small businesses, especially in the most affected
industries (accommodation and food services,
Quarterly Billions of chained 2012 dollars
arts, entertainment, and recreation).
3,750
3,500 The strong U.S. demand has partly been
Imports 3,250
met through a rapid rise in imports
3,000
2,750 Driven by the strength in U.S. economic
Exports 2,500 activity, particularly the strong demand for
2,250 goods and a desire to restock inventories, U.S.
2,000
imports have continued to increase at a notable
1,750
pace. High levels of imported goods have
1,500
kept international logistics channels operating
2007 2009 2011 2013 2015 2017 2019 2021 under high pressure, which has continued to
SOURCE: Bureau of Economic Analysis via Haver Analytics. impair the timely delivery of goods to U.S.
customers. By contrast, U.S. exports increased
modestly over the second half of 2021 and
26. U.S. trade and current account balances
remain below pre-pandemic levels (figure 25).
Quarterly Percent of nominal GDP Given the relative strength in imports
+ compared with exports, both the nominal
_0
trade deficit and the current account deficit
1 have increased as a share of GDP relative to
2 2019 (figure 26).
3
Federal fiscal actions provided a
4
Trade
diminishing degree of support to
5
economic activity . . .
6
Current account In response to the pandemic, the federal
7
government enacted a historic set of fiscal
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 policies to ameliorate hardship caused by
NOTE: GDP is gross domestic product. Current account balance data the viral outbreak and support the economic
extend through 2021:Q3.
SOURCE: Bureau of Economic Analysis via Haver Analytics. recovery. Policies such as stimulus checks,
MONETARy POLICy REPORT: FEBRUARy 2022 29
supplemental unemployment insurance,
and child tax credit payments have aided
households; grants-in-aid have supported state
and local governments; and business support
programs such as the PPP have helped sustain
firms. Although these temporary policies
continue to support the level of GDP, they
have begun to unwind and are now likely
imposing a drag on GDP growth as the effects
on spending wane over time. In addition to
pandemic-support policies, the Infrastructure
Investment and Jobs Act will gradually boost
spending on infrastructure over the next
10 years and is only partially offset by new
revenues and other spending reductions.
. . . while significantly raising the budget
deficit and federal debt
Overall, the Congressional Budget Office
estimates that fiscal policies enacted since
the start of the pandemic—including the
infrastructure bill—will increase federal
deficits by roughly $5.4 trillion by the end
of fiscal year 2030, with the largest deficit
effects in fiscal 2020 and 2021.8 These policies,
combined with the effects of automatic
stabilizers—the reduction in tax receipts
and increase in transfers that occur as a
consequence of depressed economic activity—
caused the federal deficit to surge to 15 percent
of nominal GDP in fiscal 2020 and remain 27. Federal receipts and expenditures
elevated at 12½ percent in fiscal 2021. But with
Annual Percent of nominal GDP
fiscal support fading, the deficit is expected to
fall sharply this year to a level closer to that 32
30
observed in the years just before the pandemic
28
(figure 27).
26
Expenditures
24
8. For more information, see Congressional Budget 22
Office (2020), “The Budgetary Effects of Laws Enacted in Receipts 20
Response to the 2020 Coronavirus Pandemic, March and 18
April 2020,” June, https://www.cbo.gov/system/files/2020-
16
06/56403-CBO-covid-legislation.pdf; Congressional
14
Budget Office (2021), “The Budgetary Effects of Major
Laws Enacted in Response to the 2020–21 Coronavirus 1997 2002 2007 2012 2017 2022
Pandemic, December 2020 and March 2021,” September, NOTE: The receipts and expenditures data are on a unified-budget
https://www.cbo.gov/system/files/2021-09/57343- basis and are for fiscal years (October through September); gross
domestic product (GDP) data are on a 4-quarter basis ending in Q3. The
Pandemic.pdf; and Congressional Budget Office
dots represent fiscal year 2022 projections for receipts and expenditures
(2021), “Senate Amendment 2137 to H.R. 3684, the from the Congressional Budget Office’s July 2021 report, An Update to the
Infrastructure Investment and Jobs Act, as Proposed on Budget and Economic Outlook: 2021 to 2031.
SOURCE: Department of the Treasury, Financial Management Service;
August 1, 2021,” August 9, https://www.cbo.gov/system/ Office of Management and Budget and Bureau of Economic Analysis via
files/2021-08/hr3684_infrastructure.pdf. Haver Analytics.
30 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS
28. Federal government debt and net interest outlays As a result of the unprecedented fiscal support
over the past two years, federal debt held by
Percent of nominal GDP Percent of nominal GDP
the public jumped to around 100 percent of
Net interest outlays nominal GDP in 2020—the highest debt-
3.5 on federal debt 120
to-GDP ratio since 1947—and remained
3.0 100
at a similar level in 2021. Nevertheless, net
2.5 80 interest outlays—primarily reflecting debt
2.0 60 service payments—have remained relatively
flat over the past two years due to historically
1.5 40
low interest rates on government borrowing
1.0 20
Debt held by (figure 28).
the public
.5 0
State and local government finances have
1901 1921 1941 1961 1981 2001 2021
been bolstered by federal aid and strong
NOTE: The data for net interest outlays are annual, begin in 1948, and
growth in tax revenue . . .
extend through 2021. Net interest outlays are the cost of servicing the
debt held by the public. Federal debt held by the public equals federal
debt less Treasury securities held in federal employee defined-benefit Federal policymakers have provided a
retirement accounts, evaluated at the end of the quarter. The data for
federal debt are annual from 1901 to 1951 and quarterly thereafter and historic level of fiscal support to state and
extend through 2021:Q3. GDP is gross domestic product.
local governments, with aid totaling nearly
SOURCE: For GDP, Bureau of Economic Analysis via Haver
Analytics; for federal debt, Congressional Budget Office and Federal $1 trillion—more than covering pandemic-
Reserve Board, Statistical Release Z.1, “Financial Accounts of the
United States.” related budget shortfalls in the aggregate.
Moreover, following the pandemic-induced
slump, total state tax collections rose smartly
29. State and local tax receipts in 2021, pushed up by the economic expansion
(figure 29). At the local level, property taxes
Percent change from year earlier
have continued to rise apace, and the typically
30 long lags between changes in the market
Total state taxes value of real estate and changes in taxable
25
assessments suggest that property tax revenues
20
will continue to rise going forward, given the
15
rise in house prices. Meanwhile, conditions
10
Property taxes in municipal bond markets remained
5 accommodative: Yields stayed near historical
+
_0 lows, and issuance continued at a solid pace,
5 on par with pre-pandemic issuance.
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
. . . but hiring and construction outlays
NOTE: State tax data are year-over-year percent changes of 12-month
moving averages, begin in June 2012, extend through December 2021, continued to lag
and are aggregated over all states except Wyoming, for which data are
not available. Revenues from Washington, DC, are also excluded. Data
Despite the return to in-person schooling this
are missing for July through December for Connecticut, October through
December for New Mexico, and December for Nevada and Oregon, as year and the strong fiscal position of state
these states have longer reporting lags than others. Property tax data are
year-over-year percent changes of 4-quarter moving averages, begin in and local governments, employment levels
2012:Q2, extend through 2021:Q3, and are primarily collected by local
have regained only about one-half of their
governments.
SOURCE: Monthly State Government Tax Revenue Data via Urban sizable pandemic losses, with the shortfall
Institute; Census Bureau, Quarterly Summary of State and Local
Government Tax Revenue. concentrated in public education (figure 30).
One reason appears to be that public-sector
wages have not kept pace with the rapid
gains in the private sector, which is likely
inhibiting the ability of these governments
to staff back up to pre-pandemic levels.
MONETARy POLICy REPORT: FEBRUARy 2022 31
Meanwhile, real construction outlays by state 30. State and local government payroll employment
and local governments appear to have declined
Monthly Millions
significantly in 2021, and real infrastructure
spending by these governments is currently
20.5
about 10 percent below pre-pandemic levels.
20.0
Financial Developments
19.5
The path of the federal funds rate 19.0
expected to prevail over the next few
18.5
years steepened notably
18.0
The market-based expected path of the federal
funds rate steepened notably amid news about 2006 2008 2010 2012 2014 2016 2018 2020 2022
the labor market recovery, rising inflation
NOTE: The data are seasonally adjusted.
pressures, and the accompanying prospect SOURCE: Bureau of Labor Statistics via Haver Analytics.
of tighter monetary policy. Market-based
measures suggest that investors anticipate 31. Market-implied federal funds rate path
the federal funds rate will soon begin to rise
Quarterly Percent
and move above 1 percent in the middle of
2.25
this year, about two and a half years earlier
2.00
than expected in July (figure 31).9 Similarly,
1.75
according to the results of the Survey of February 22, 2022
1.50
Primary Dealers and the Survey of Market
1.25
Participants, both conducted by the Federal
1.00
Reserve Bank of New York in January, the .75
median respondent views the target range .50
as most likely to increase later in the current July 9, 2021 .25
quarter, about one and a half years earlier 0
than in the June surveys.10
2021 2022 2023 2024 2025 2026
NOTE: The federal funds rate path is implied by quotes on overnight
Treasury yields increased substantially index swaps—a derivative contract tied to the effective federal funds
rate. The implied path as of July 9, 2021, is compared with that as of
across maturities . . .
February 22, 2022. The path is estimated with a spline approach,
assuming a term premium of 0 basis points. The July 9, 2021, path extends
through 2025:Q3 and the February 22, 2022, path through 2026:Q1.
Yields on nominal Treasury securities across
SOURCE: Bloomberg; Federal Reserve Board staff estimates.
maturities have risen notably since early July,
with much of the increase having occurred in 32. Yields on nominal Treasury securities
the past couple of months as the anticipation
Daily Percent
for an imminent start to the removal of
monetary accommodation has firmed
(figure 32). Uncertainty about longer-term 5-year 4
10-year 3
2
9. These measures are based on a straight read of
market quotes and are not adjusted for term premiums.
2-year 1
10. The results of the Survey of Primary Dealers and
the Survey of Market Participants are available on the
0
Federal Reserve Bank of New York’s website at
https://www.newyorkfed.org/markets/primarydealer_
survey_questions.html and https://www.newyorkfed.org/ 2012 2014 2016 2018 2020 2022
markets/survey_market_participants, respectively. SOURCE: Department of the Treasury via Haver Analytics.
32 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS
33. Corporate bond yields, by securities rating, and interest rates—as measured by the implied
municipal bond yield volatility embedded in the prices of near-term
swap options on 10-year swap interest rates—
Daily Percent
also increased markedly, reportedly reflecting
an increase in uncertainty about inflation and
Investment-grade corporate 12
High-yield corporate the policy outlook.
10
8 . . . while spreads of other long-term
debt to Treasury securities widened
6
moderately
4
Across credit categories, corporate bond yields
2
Municipal have risen substantially, and their spreads
0
over yields on comparable-maturity Treasury
securities have widened moderately since early
2010 2012 2014 2016 2018 2020 2022
July (figure 33). Still, both yields and spreads
NOTE: Investment-grade corporate reflects the effective yield of the
ICE Bank of America Merrill Lynch (BofAML) triple-B U.S. Corporate remain near the bottom of their historical
Index (C0A4). High-yield corporate reflects the effective yield of the ICE
BofAML High Yield Index (H0A0). Municipal reflects the yield to worst distributions, and corporate credit quality is
of the ICE BofAML U.S. Municipal Securities Index (U0A0).
generally healthy and stable. News about the
SOURCE: ICE Data Indices, LLC, used with permission.
spread of new coronavirus variants appeared
34. Yield and spread on agency mortgage-backed to have only limited and temporary effects on
securities corporate bond spreads.
Percent Basis points
Since early July, yields on 30-year agency
mortgage-backed securities—an important
250
5
Yield pricing factor for home mortgage rates—
200 increased, and spreads over comparable-
4
maturity Treasury securities widened
150
3 moderately but stayed near the low end of
100 their historical range (figure 34). Municipal
2
bond yields moved higher, and spreads
50
Spread
over comparable-maturity Treasury
1
0
securities widened to levels close to their
historical medians.
2012 2014 2016 2018 2020 2022
NOTE: The data are daily. Yield shown is for the uniform Broad equity price indexes declined
mortgage-backed securities 30-year current coupon, the coupon rate at
which new mortgage-backed securities would be priced at par, or face, slightly on net
value, for dates after May 31, 2019; for earlier dates, the yield shown is
for the Fannie Mae 30-year current coupon. Spread shown is to the
Broad indexes of equity prices decreased a
average of the 5-year and 10-year nominal Treasury yields.
SOURCE: Department of the Treasury; J.P. Morgan. Courtesy of J.P. little, on net, since early July. Recent declines
Morgan Chase & Co., Copyright 2022.
amid expectations of an earlier beginning to
the removal of policy accommodation have
offset previous gains, which were supported
by strong corporate earnings that had
seemed resilient to pandemic developments
(figure 35). Stocks of small-capitalization firms
underperformed notably, as the likelihood
for a tighter stance of monetary policy has
increased. Bank stock prices rose, on net,
buoyed by an improved economic outlook
MONETARy POLICy REPORT: FEBRUARy 2022 33
and expectations of higher levels of interest 35. Equity prices
rates and net interest margins in the future.
Daily December 31, 2010 = 100
Measures of volatility for the S&P 500 index,
both an option-implied metric (the VIX) and 400
a comparable forward-looking measure based
350
on realized volatility, increased somewhat
300
amid evolving monetary policy expectations
250
and concerns over the Omicron variant and
S&P 500 index 200
stand above their respective historical medians
(figure 36). (For a discussion of financial 150
stability issues, see the box “Developments Dow Jones bank index 100
Related to Financial Stability.”) 50
2012 2014 2016 2018 2020 2022
Markets for Treasury securities, mortgage-
backed securities, and corporate and
SOURCE: S&P Dow Jones Indices LLC via Bloomberg. (For Dow
Jones Indices licensing information, see the note on the Contents page.)
municipal bonds functioned well . . .
36. S&P 500 volatility
Markets for Treasury securities and mortgage-
backed securities functioned smoothly since
Daily Percent
July even as some measures of liquidity
90
conditions for Treasury securities deteriorated
80
moderately, which reflected increased yield
70
volatility due, in part, to uncertainty about the
60
path of monetary policy. Measures of market
50
functioning in corporate and municipal bond VIX
40
markets indicated liquid and stable trading 30
conditions. Bid-ask spreads for corporate 20
bonds across credit ratings currently stand 10
Expected volatility
below pre-pandemic levels and near the 0
bottom of their historical distributions.
2010 2012 2014 2016 2018 2020 2022
NOTE: The VIX is a measure of implied volatility that represents the
. . . while short-term funding market expected annualized change in the S&P 500 index over the following
30 days. The expected volatility series shows a forecast of 1-month
conditions remained stable realized volatility, using a heterogeneous autoregressive model based on
5-minute S&P 500 returns.
Short-term funding markets continued to
SOURCE: Cboe Volatility Index® (VIX®) via Bloomberg; Refinitiv
Datascope and Federal Reserve Board staff estimates.
function smoothly. The effective federal funds
rate and other overnight unsecured rates
declined slightly relative to the interest rate
on reserve balances since early July. Secured
overnight rates remained stable, with the
Secured Overnight Financing Rate steady
at the offering rate on the overnight reverse
repurchase agreement (ON RRP) facility on
most days since early July. Ample liquidity and
a limited supply of Treasury bills kept short-
term interest rates low and led to increased
usage of the ON RRP facility. (See the box
“Developments in the Federal Reserve’s
Balance Sheet and Money Markets” in Part 2.)
34 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS
Developments Related to Financial Stability
This discussion reviews vulnerabilities in the U.S. A. Private nonfinancial-sector credit-to-GDP ratio
fi nancial system. The framework used by the Federal and trend
Reserve Board for assessing the resilience of the U.S.
fi nancial system focuses on fi nancial vulnerabilities Quarterly Ratio
in four broad areas: asset valuations, business and
household debt, leverage in the fi nancial sector, Hodrick-Prescott 1.8
filter trend
and funding risks. Although some asset valuations
are elevated, measures of household and business 1.6
leverage have declined, and the banking system has
1.4
shown considerable resilience since the onset of the
pandemic. Structural vulnerabilities in other parts of 1.2
the fi nancial system are still being addressed, including
Actual ratio
those related to various types of investment funds and 1.0
vulnerabilities in Treasury market functioning.
.8
Prices of risky assets remain elevated, supported
in part by a low interest rate environment and low
1982 1987 1992 1997 2002 2007 2012 2017 2022
term premiums on Treasury securities. One common
measure of equity valuations, the ratio of equity prices NOTE: The dots represent 2022:Q1 nowcasts. The shaded bars indicate
periods of business recession as defined by the National Bureau of
to forecast earnings, remains high compared with
Economic Research. GDP is gross domestic product.
historical values. Spreads on corporate bonds and SOURCE: Federal Reserve Board, Statistical Release Z.1, “Financial
Accounts of the United States”; National Income and Product Accounts,
leveraged loans continue to be low. Price indexes for
Bureau of Economic Analysis; Federal Reserve Board staff calculations.
a range of commercial real estate sectors are at or
near historical highs, and vacancy rates have declined.
Residential home prices have continued to rise, with pandemic, including airlines, hotels, and restaurants,
nearly 80 percent of metropolitan statistical areas leverage remains elevated and interest coverage ratios
seeing double-digit annual growth rates during 2021. are lower.
Nonfi nancial-sector leverage has broadly declined. vulnerabilities from fi nancial-sector leverage
The rapid growth of nominal gross domestic product are well within their historical range. Risk-based
(GDP) has brought the ratio of nominal credit to capital ratios at domestic bank holding companies
nominal GDP, which measures the aggregate debt reached a 20-year high during the fi rst quarter of
owed by the private nonfi nancial sector relative 2021. These capital ratios declined modestly over
to the size of the economy, down to near its pre- the rest of the year as banks increased their share
pandemic levels (fi gure A). Household debt relative repurchases and dividend payouts amid an improved
to nominal GDP remains fi rmly below its long- economic outlook and the Federal Reserve’s lifting of
run trend, and household credit growth has been restrictions on capital distributions. Throughout 2021,
driven almost exclusively by prime-rated borrowers. robust economic growth and strong capital markets
Homeowner equity is high, and mortgage delinquency contributed to high bank profi tability, which fosters
and foreclosure rates are below their pre-pandemic resilience through greater loss absorption capacity and
levels despite the end of pandemic-related relief and an ability to retain earnings to raise capital if needed.
forbearance programs. Because of high corporate cash In contrast, leverage at certain nonbank fi nancial
holdings, aggregate net nonfi nancial business leverage institutions, including life insurers and hedge funds, has
sits at its lowest level since 2014. Fueled by strong remained near historical highs. Data limitations and
earnings and low borrowing costs, most businesses the complexity of hedge fund strategies can obscure
saw a sharp increase in their ability to service their the true nature of leverage in that sector. However, one
debt burdens, with the interest coverage ratio (the ratio common measure of hedge fund leverage, the ratio of
of earnings to interest expenses) for the median fi rm gross notional exposures to equity capital, is near its
solidly above pre-pandemic levels and near historical peak since data became available in 2012.
highs. However, for fi rms in industries hit hardest by the (continued)
MONETARy POLICy REPORT: FEBRUARy 2022 35
Funding markets remain relatively stable. Domestic york, SEC, and Commodity Futures Trading Commission
banks continue to maintain signifi cant levels of high- released a report detailing ongoing vulnerabilities in the
quality liquid assets. Assets under management at U.S. Treasury market and principles to promote a well-
prime and tax-exempt money market funds (MMFs), functioning Treasury market.2 The report also outlined
which experienced signifi cant outfl ows during the multiple ongoing workstreams designed to further
March 2020 turmoil, continued to decline, on net, enhance the group’s understanding of Treasury market
since mid-2021, while those at government MMFs vulnerabilities and to consider policy options that may
remained near historical highs. In December 2021, the further strengthen the market.
Securities and Exchange Commission (SEC) proposed
reforms to MMFs intended to mitigate the fi nancial
LIBOR Transition
stability risks they pose, including the adoption of
swing pricing for certain fund types, increased liquidity The shift away from the widely used U.S. dollar
requirements, and other measures meant to make them (USD) LIBOR reference rates stepped up notably in
more resilient to redemptions. The market for digital recent months, in line with regulatory guidance to
assets, including stablecoins, has grown rapidly. The end most new use of USD LIBOR by December 31,
market value of stablecoins exceeded $150 billion as of 2021, and well ahead of the cessation of those rates
January 2022. As detailed in a November 2021 report on June 30, 2023. The transition away from USD
released by the President’s Working Group on Financial LIBOR has largely been completed in fl oating-rate debt
Markets, the Federal Deposit Insurance Corporation, markets, where nearly 90 percent of new issuance
and the Offi ce of the Comptroller of the Currency, some now references the Secured Overnight Financing Rate
stablecoins are partially backed by assets that may lose (SOFR). In securitization markets, the government-
value or become illiquid, making them susceptible to sponsored enterprises had stopped accepting LIBOR
runs.1 Prefunded resources at central counterparties adjustable-rate mortgages (ARMs) in 2020, are now
(CCPs) are high, particularly relative to current market accepting only SOFR ARMs, and have tied all of their
volatility, reducing the likelihood of margin shortfalls associated MBS issuance to SOFR. Interest rate swap
and liquidity strains if volatility increases. Nevertheless, markets saw increases in volumes for SOFR-based
increased retail trading has exposed new challenges trades in the second half of 2021, and this pace
for the risk-management frameworks of the CCPs that accelerated rapidly in January such that SOFR-based
clear equities and equity options. Financial institutions swaps trading now accounts for the majority of risk
with signifi cant holdings of long-term fi xed-rate debt traded in this market, indicating widespread awareness
instruments (for example, Treasury securities, agency and adoption of risk-free reference rates. Eurodollar
mortgage-backed securities (MBS), corporate bonds, futures have lagged the swap market, although volumes
and mortgage loans), such as banks and mutual funds, for SOFR-based futures contracts are increasing there
may recognize revaluation losses if long-term interest also. The transition in business lending has been slower,
rates increase further, though some of those losses although recent data suggest that the use of USD LIBOR
could be offset by higher interest income. as a reference rate for business loans has fallen sharply
since the start of the year and that the pace of SOFR
adoption is accelerating.
Treasury Market Resilience
In November 2021, the Interagency Working Group
composed of staff from the Department of the Treasury,
2. See U.S. Department of the Treasury, Board of Governors
Federal Reserve Board, Federal Reserve Bank of New
of the Federal Reserve System, Federal Reserve Bank of New
york, U.S. Securities and Exchange Commission, and U.S.
1. See President’s Working Group on Financial Markets, Commodity Futures Trading Commission (2021), Recent
Federal Deposit Insurance Corporation, and Offi ce of the Disruptions and Potential Reforms in the U.S. Treasury
Comptroller of the Currency (2021), Report on Stablecoins Market: A Staff Progress Report (Washington: Department of
(Washington: PWGFM, FDIC, and OCC, November), https:// the Treasury, Board of Governors, FRBNy, SEC, and CFTC,
home.treasury.gov/system/files/136/StableCoinReport_ November), https://home.treasury.gov/system/files/136/IAWG-
Nov1_508.pdf. Treasury-Report.pdf.
36 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS
37. Growth in total loans and leases Bank credit expanded and bank
profitability remained strong
Monthly Percent
Total loans and leases outstanding at
50
commercial banks expanded significantly
40 in the second half of last year, driven by
30 continued solid growth in commercial real
20 estate, residential real estate, and consumer
loans, which outweighed declines in
10
+ commercial and industrial loans (figure 37). In
_0
both October and January, the Senior Loan
10
Officer Opinion Survey on Bank Lending
20
Practices, conducted by the Federal Reserve,
reported easier standards for most loan
2006 2008 2010 2012 2014 2016 2018 2020 2022
categories over the second half of 2021.11 In
NOTE: The data are calculated as monthly annualized growth rates
and are seasonally and break adjusted. the January survey, respondents generally
SOURCE: Federal Reserve Board, Statistical Release H.8, “Assets and
Liabilities of Commercial Banks in the United States.” anticipated a further easing of lending
standards and stronger loan demand over
38. Profitability of bank holding companies the current year. Bank profitability remained
strong, declining slightly over the second half
Percent, annual rate Percent, annual rate
of last year but remaining at pre-pandemic
2.0 30 levels, helped by the continued release of
Return on assets
1.5 loan loss reserves, given solid credit quality
20
1.0 indicators (figure 38). Delinquency rates on
10
.5 bank loans remained low relative to historical
+ +
_0 _0 averages throughout the second half of 2021.
.5 Return on equity
10
1.0 International Developments
20
1.5
2.0 30 The recovery abroad continued in the
second half of the year . . .
2005 2007 2009 2011 2013 2015 2017 2019 2021
NOTE: The data are quarterly and are seasonally adjusted. Economic activity abroad continued to
SOURCE: Federal Reserve Board, Form FR Y-9C, Consolidated
Financial Statements for Bank Holding Companies. recover briskly in the second half of last
year (figure 39), as a noticeable pickup in
39. Foreign real gross domestic product vaccinations and greater adaptability allowed
many foreign economies to further reopen.
Quarterly 2005 average = 100
Unemployment rates in advanced foreign
160 economies (AFEs) have now generally returned
150 to levels near those that prevailed before the
pandemic. That said, the emergence of the
140
Delta variant of the virus last summer slowed
130
the recovery of some economies, especially in
120
Asia, and resulted in factory and port closures,
110
which, in turn, exacerbated supply bottlenecks.
100
90
2005 2007 2009 2011 2013 2015 2017 2019 2021 11. The survey is available on the Federal Reserve
Board’s website at https://www.federalreserve.gov/data/
NOTE: Foreign gross domestic product is computed on a
representative sample of 40 countries and aggregated using U.S. trade sloos/sloos.htm.
weights. The data extend through 2021:Q3.
SOURCE: Federal Reserve Bank of Dallas, Database of Global
Economic Indicators, “Real Gross Domestic Product,” accessed via
https://www.dallasfed.org/institute/dgei/gdp.aspx.
MONETARy POLICy REPORT: FEBRUARy 2022 37
More recently, the Omicron outbreak has been
a headwind and a risk, especially for countries
with lower vaccination rates; and order
backlogs in industries such as automobile
manufacturing remain high. Still, production 40. Consumer price inflation in selected foreign
bottlenecks in Asia have started to unwind. economies
Monthly 12-month percent change
. . . and foreign inflation increased
significantly in most economies
8
Mexico
As in the United States, foreign inflation has
China 6
picked up noticeably since late 2020 (figure 40).
This higher inflation has been mostly driven 4
United Kingdom
by soaring prices for energy and food, which, Canada
2
combined, account for well over half of the
+
level of inflation abroad (figure 41). Higher _0
Euro area
prices for core goods have also contributed to 2
the rise of inflation, but core inflation abroad
has risen less than in the United States, in part 2016 2017 2018 2019 2020 2021 2022
because demand for durable goods in foreign SOURCE: For the United Kingdom, Office for National Statistics; for
the euro area, Statistical Office of the European Communities; for
economies appears to have increased relatively
Canada, Statistics Canada; for Mexico, Instituto Nacional de
less sharply. Estadística, Geografía e Inform ática; for China, China National Bureau
of Statistics; all via Haver Analytics.
Many foreign central banks are tightening
monetary policy or have signaled a future
41. Consumer price inflation in foreign economies
shift in stance
Percentage point contribution
In light of elevated inflation, many
Energy
policymakers are moving to reduce the Food 6
Core
significant monetary stimulus undertaken since
5
the start of the pandemic. Several emerging
market central banks, including those of 4
Brazil, Korea, and Mexico, have already raised
3
their policy rates because of concerns over the
persistence of inflationary pressures. 2
1
In AFEs, a few central banks, including
those of New Zealand, Norway, and the
Advanced foreign economies Emerging market economies
United Kingdom, have started raising their
policy rates, and the Bank of Canada has NOTE: The advanced foreign economy aggregate is the average of
Canada, the euro area, and the United Kingdom, weighted by U.S. goods
signaled its intention to raise its policy rate imports. The emerging market economy aggregate is the average of
Argentina, Brazil, Chile, China, Colombia, Hong Kong, India, Israel,
soon (figure 42). Others have taken steps to Mexico, Russia, Saudi Arabia, Singapore, South Korea, and the 5
normalize their balance sheet policies: The original member countries of the Association of Southeast Asian
Nations, weighted by U.S. goods imports. The inflation measure is the
Bank of Canada, the Bank of England, and Harmonised Index of Consumer Prices for the euro area and the
consumer price index for other economies. The key identifies bars in
the Reserve Bank of Australia have ceased net order from top to bottom. The data are the Q4-over-Q4 percent change
asset purchases, and the European Central for 2021.
SOURCE: Haver Analytics.
Bank plans to reduce its asset purchases
this year. In contrast, the Bank of Japan
has communicated that it is not in a rush
to tighten policy, noting that measures of
38 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS
42. 12-month policy expectations for selected advanced underlying inflation in Japan remain below its
foreign economies 2 percent target.
Weekly Basis points
Foreign financial conditions tightened
300 some but remain accommodative . . .
250
Expectations for faster removal of monetary
200
policy accommodation, amid higher inflation
Canada 150
and easing concerns about the pandemic,
100
led to notable increases in sovereign yields in
50
United Kingdom + several AFEs (figure 43). Despite expectations
_0
Japan for tighter monetary policy, the strength in
50
Euro area corporate earnings and reduced concerns
100
about the pandemic have supported AFE
2016 2017 2018 2019 2020 2021 2022 equities, which are little changed, on net,
NOTE: The data are weekly averages of daily 12-month market-implied since mid-2021.
central bank policy rates. The 12-month policy rates are implied by
quotes on overnight index swaps tied to the policy rates. The data extend
through February 18, 2022. The change in financial conditions in emerging
SOURCE: Bloomberg; Federal Reserve Board staff estimations.
market economies (EMEs) has been relatively
muted despite the shift in advanced-economy
43. Nominal 10-year government bond yields in monetary policy expectations and increased
selected advanced foreign economies geopolitical tensions. Net inflows to EME-
dedicated funds stepped down and hovered
Weekly Percent
around zero, in contrast with notable outflows
6 during the 2013–14 period, and EME
United Kingdom 5 sovereign spreads widened only somewhat
(figure 44). In China, solvency problems in the
4
real estate sector and regulatory uncertainty
Canada 3
Germany
appeared to weigh on stock prices of large
2
Chinese firms listed in Hong Kong, with
Japan 1 the Hang Seng Index decreasing notably.
+
_0 Brazilian equity prices also decreased amid
1 political uncertainty, while some other
EME stock indexes registered moderate
2006 2008 2010 2012 2014 2016 2018 2020 2022
gains. More recently, geopolitical tensions
NOTE: The data are weekly averages of daily benchmark yields and
surrounding Russia and Ukraine have led to
extend through February 18, 2022.
SOURCE: Bloomberg. the underperformance of Eastern European
equity indexes.
MONETARy POLICy REPORT: FEBRUARy 2022 39
. . . and the dollar appreciated
44. Emerging market mutual fund flows and spreads
moderately on net
Basis points Billions of dollars
The broad dollar index—a measure of the Equity fund flows (right scale) 125
900 Bond fund flows (right scale)
100
trade-weighted value of the dollar against EMBI+ (left scale)
600 Jan. 75
foreign currencies—has risen modestly since
50
300
mid-2021 (figure 45). The dollar appreciated 25
+ +
against Latin American currencies amid _0 _0
increased political uncertainty in some 300 25
50
countries, while it was mixed against Asian
600 75
EME currencies. The dollar appreciated
100
900
against many AFE currencies, in part reflecting 125
the more notable increase in the U.S. near-term
2008 2010 2012 2014 2016 2018 2020 2022
yields compared with the AFE counterparts.
NOTE: The bond and equity fund flows data are semiannual sums of
weekly data from December 28, 2006, to December 29, 2021, and a monthly
sum of weekly data from December 30, 2021, to January 26, 2022. Weekly
data span Thursday through Wednesday, and the semiannual and monthly
values are sums over weekly data for weeks ending in that half year or
month. The fund flows data exclude funds located in China. The J.P.
Morgan Emerging Markets Bond Index Plus (EMBI+) data are weekly
averages of daily data, extend through January 28, 2022, and exclude
Venezuela.
SOURCE: For bond and equity fund flows, EPFR Global; for EMBI+,
J.P. Morgan Emerging Markets Bond Index Plus via Bloomberg.
45. U.S. dollar exchange rate indexes
Weekly Week ending December 27, 2019 = 100
Dollar appreciation
115
EME dollar index
110
AFE dollar index 105
100
95
90
85
80
Broad dollar index 75
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
NOTE: The data, which are in foreign currency units per dollar, are
weekly averages of daily values of the broad dollar index, advanced
foreign economies (AFE) dollar index, and emerging market economies
(EME) dollar index. The weekly data extend through February 18, 2022.
As indicated by the leftmost arrow, increases in the data reflect U.S.
dollar appreciation and decreases reflect U.S. dollar depreciation.
SOURCE: Federal Reserve Board, Statistical Release H.10, “Foreign
Exchange Rates.”
41
P 2
art
m P
onetary oLiCy
The Federal Open Market Committee . . . and the Committee has gradually
has maintained the federal funds rate reduced the monthly pace of its net
near zero . . . asset purchases of Treasury securities
and agency mortgage-backed securities,
The Federal Open Market Committee
which will end in early March
(FOMC) has been providing forward guidance
for the target range for the federal funds rate, From June 2020 until November 2021,
indicating that the range would be maintained the Federal Reserve had been expanding
at 0 to ¼ percent until specific employment its holdings of Treasury securities by
and inflation criteria had been met. Consistent $80 billion per month and its holdings of
with that guidance, the FOMC has maintained agency mortgage-backed securities (MBS)
the target range for the federal funds rate at by $40 billion per month. At its November
0 to ¼ percent (figure 46). In December, the meeting, in light of the substantial further
Committee concluded that the inflation criteria progress the economy had made toward
in the forward guidance had been met and maximum employment and price stability, the
the target range would be maintained until Committee decided to reduce the monthly pace
labor market conditions had reached levels of its net asset purchases by $10 billion per
consistent with the Committee’s assessments month for Treasury securities and by $5 billion
of maximum employment. In January, the per month for agency MBS. At its December
Committee stated that, with inflation well meeting, in light of inflation developments and
above 2 percent and a strong labor market, it the further improvement in the labor market,
expected it would soon be appropriate to raise the Committee began to reduce the monthly
the target range for the federal funds rate. pace of net purchases more rapidly, by
46. 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 2020 2021 2022
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.
42 PART 2: MONETARy POLICy
$20 billion per month for Treasury securities the Committee reiterated its view that changes
and by $10 billion per month for agency MBS. in the target range for the federal funds rate are
At its January meeting, the Committee decided its primary means of adjusting the stance of
to continue to reduce the monthly pace of monetary policy and conveyed its expectation
net purchases and conclude net purchases in that reducing the size of the Federal Reserve’s
early March. balance sheet would occur after the process
of increasing the target range for the federal
The FOMC will continue to monitor the funds rate had begun. The Committee also
implications of incoming information for noted that it would determine the timing
the economic outlook and pace of reductions in the size of its
balance sheet so as to promote its maximum-
The Committee will continue to monitor
employment and price-stability goals and
incoming economic data and would be pre-
that reductions would occur over time in a
pared to adjust the stance of monetary
predictable manner, primarily by adjusting
policy as appropriate to manage risks that
the amounts reinvested of principal payments
could impede the attainment of its goals.
received from securities held in the System
The Committee’s assessments will take
Open Market Account (SOMA). Furthermore,
into account a wide range of information,
the FOMC communicated that, over time,
including read ings on public health, labor
it intended to maintain securities holdings
market conditions, inflation pressures and
in amounts needed to implement monetary
inflation expectations, and financial and
policy efficiently and effectively in its ample
international developments. With appropriate
reserves regime. The Committee also noted
policy, inflation is expected to decline over the
that, in the longer run, it intended to hold
course of the year as supply constraints ease
primarily Treasury securities in the SOMA,
and demand moderates due to waning effects
thereby minimizing the effect of Federal
of fiscal support and the removal of monetary
Reserve holdings on the allocation of credit
policy accommodation. The FOMC will use its
across sectors of the economy. Finally, the
policy tools as appropriate to prevent higher
Committee emphasized that it was prepared
inflation from becoming entrenched while
to adjust any details of its approach in light of
promoting a sustainable expansion and strong
economic and financial developments.
labor market.
The Federal Reserve issued a statement The size of the Federal Reserve’s balance
regarding principles for reducing the size sheet continued to grow, although at a
of its balance sheet diminished pace since November
Following the conclusion of its January The Federal Reserve’s balance sheet has grown
meeting, the FOMC issued a set of to $8.9 trillion from $8.1 trillion in July,
principles regarding its planned approach for reflecting continued net asset purchases of
significantly reducing the size of the Federal U.S. Treasury securities and agency mortgage-
Reserve’s balance sheet.12 With these principles, backed securities to support smooth market
functioning and foster accommodative
12. See the January 26, 2022, press release financial conditions, thereby supporting the
regarding the Principles for Reducing the Size of the
flow of credit to households and businesses
Federal Reserve’s Balance Sheet, available at https://
(figure 47). All of the Federal Reserve’s
www.federalreserve.gov/newsevents/pressreleases/
monetary20220126c.htm. emergency credit and liquidity facilities have
MONETARy POLICy REPORT: FEBRUARy 2022 43
been closed for new lending for some time, The Federal Reserve established two
and the residual outstanding balances at those standing repurchase agreement facilities
facilities have continued to decline.13
In July of last year, the Federal Reserve
Reserve balances have changed little, on net, established a domestic standing repurchase
since July and stand near $4 trillion. Usage of agreement (repo) facility and a standing repo
the overnight reverse repurchase agreement facility for foreign and international monetary
facility increased significantly. (See the box authorities. These facilities are intended
“Developments in the Federal Reserve’s to serve as backstops in money markets
Balance Sheet and Money Markets.”) to support the effective implementation
of monetary policy and smooth market
functioning. The rates for these facilities have
13. A list of credit and liquidity facilities established
been maintained at levels somewhat higher
by the Federal Reserve in response to COVID-19 is
than rates in overnight funding markets,
available on the Federal Reserve’s website at https://www.
consistent with their intended roles as
federalreserve.gov/funding-credit-liquidity-and-loan-
facilities.htm. backstops.
47. Federal Reserve assets and liabilities
Weekly Trillions of dollars
10
Other assets
8
Credit and liquidity facilities
Agency debt and mortgage-backed securities holdings 6
Treasury securities held outright 4
2
+
_0
2
4
Federal Reserve notes in circulation
6
Deposits of depository institutions
Capital and other liabilities 8
10
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
NOTE: “Other assets” includes repurchase agreements, FIMA (Foreign and International Monetary Authorities) repurchase agreements, and unamortized
premiums and discounts on securities held outright. “Credit and liquidity facilities” consists of primary, secondary, and seasonal credit; term auction credit;
central bank liquidity swaps; support for Maiden Lane, Bear Stearns Companies, Inc., and AIG; and other credit and liquidity facilities, including the Primary
Dealer Credit Facility, the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Term
Asset-Backed Securities Loan Facility, the Primary and Secondary Market Corporate Credit Facilities, the Paycheck Protection Program Liquidity Facility, the
Municipal Liquidity Facility, and the Main Street Lending Program. “Agency debt and mortgage-backed securities holdings” includes agency residential
mortgage-backed securities and agency commercial mortgage-backed securities. “Capital and other liabilities” includes reverse repurchase agreements, the U.S.
Treasury General Account, and the U.S. Treasury Supplementary Financing Account. The key identifies shaded areas in order from top to bottom. The data
extend through February 16, 2022.
SOURCE: Federal Reserve Board, Statistical Release H.4.1, “Factors Affecting Reserve Balances.”
44 PART 2: MONETARy POLICy
Developments in the Federal Reserve’s Balance Sheet and
Money Markets
The size of the Federal Reserve’s balance sheet notably the overnight reverse repurchase agreements
increased from $4.2 trillion before the pandemic (ON RRP)—increased substantially. Another Federal
to its current level of roughly $8.9 trillion, largely (continued)
refl ecting an increase in System Open Market Account
holdings from asset purchases (fi gure A). As net asset
purchases have continued, albeit at a slower pace in A. Federal Reserve assets
recent months, the Federal Reserve’s liabilities have
also increased (fi gure B).1 This discussion reviews Weekly Trillions of dollars
Other assets
recent developments in the size and composition of Loans 10
the Federal Reserve’s balance sheet and conditions in Central bank liquidity swaps 9
Repurchase agreements
money markets. Agency debt and MBS 8
Treasury securities 7
The Federal Reserve’s net asset purchases continued
held outright 6
at a pace of $120 billion per month from July
5
through October. At its November meeting—in light
4
of the substantial further progress the economy had 3
made toward the Federal Open Market Committee’s 2
goals since December 2020—the Committee 1
decided to begin reducing the monthly pace of its
2019 2020 2021 2022
net asset purchases by $10 billion per month for
NOTE:MBS is mortgage-backed securities. The key identifies shaded areas in order
Treasury securities and $5 billion per month for from top to bottom. The data extend through February 16, 2022.
SOURCE:Federal Reserve Board, Statistical Release H.4.1, “Factors Affecting Reserve
agency mortgage-backed securities. At its December Balances.”
meeting—in light of infl ation developments and further
improvement in the labor market—the Committee B. Federal Reserve liabilities
decided to double the pace of reductions in its net
Weekly Trillions of dollars
asset purchases, implying that increases in securities
Reverse repurchase agreements
11
holdings would cease by mid-March. The Federal Deposits of depository institutions (reserves)
U.S. Treasury General Account 10
Reserve’s net asset purchases since July 2021 have led
Other deposits 9
to an $813 billion increase in its total assets (fi gure C). Capital and other liabilities 8
Federal Reserve notes
Federal Reserve liabilities increased in line with 7
changes in its assets. The level of reserve balances was 6
5
little changed, on net, while other liabilities—most
4
3
1. For general explanations of several liabilities on the 2
Federal Reserve’s bala2nce sheet, see the box “The Role of 1
Liabilities in Determining the Size of the Federal Reserve’s
2019 2020 2021 2022
Balance Sheet” in Board of Governors of the Federal Reserve
System (2019), Monetary Policy Report (Washington: Board of NOTE: “Capital and other liabilities” includes Treasury contributions. The key identifies
shaded areas in order from top to bottom. The data extend through February 16, 2022.
Governors, February), pp. 41–43, https://www.federalreserve. SOURCE:Federal Reserve Board, Statistical Release H.4.1, “Factors Affecting Reserve
gov/monetarypolicy/files/20190222_mprfullreport.pdf. Balances.”
MONETARy POLICy REPORT: FEBRUARy 2022 45
C. Balance sheet comparison the beginning of July 2021 to a low of $42 billion on
Billions of dollars December 16, 2021. Following the debt limit resolution
February 16, July 7, on December 16, 2021, which raised the debt limit of
Change
2022 2021 the U.S. government, both net Treasury bill issuance
Assets and the TGA balance increased to more normal levels.2
Total securities Money markets continued to function smoothly
Treasury securities 5,739 5,202 537 amid these developments, with ample liquidity putting
Agency debt and MBS 2,707 2,322 385 broad downward pressure on short-term interest rates.
Net unamortized premiums 350 351 −1 In addition, the limited supply of Treasury bills during
Repurchase agreements 0 0 0 the debt limit episode pushed bill yields lower. In this
Loans and lending facilities environment of ample liquidity, limited Treasury bill
PPPLF 28 88 −60 supply, and low repurchase agreement rates, the
Other loans and lending ON RRP facility continued to serve its intended
facilities 40 72 −32
purpose of helping to provide a fl oor under short-term
Central bank liquidity swaps 0 1 −1
interest rates and support effective implementation
Other assets 48 61 −13
of monetary policy.3 Usage of the facility has nearly
Total assets 8,911 8,098 813
doubled, on average, since early July, primarily driven
Liabilities and capital
by greater participation from government money
Federal Reserve notes 2,185 2,139 45
market funds.4 The ON RRP take-up reached a record
Reserves held by depository
high of $1.9 trillion on year-end before retracing to
institutions 3,797 3,856 −59
around $1.6 trillion in early January.
Reverse repurchase
agreements
Foreign offi cial and
international accounts 257 264 −7 2. For details, see U.S. Congress, Senate (2021), “A Joint
Others 1,644 786 858 Resolution Relating to Increasing the Debt Limit,” S.J. Res.,
U.S. Treasury General 117 Cong. Congressional Record (daily edition), vol. 167,
Account 709 725 −16 December 14, pp. S 9134–53, https://www.congress.gov/
Other deposits 251 237 14 bill/117th-congress/senate-joint-resolution/33.
3. The ON RRP facility helps keep the effective federal
Other liabilities and capital 67 91 −24
funds rate from falling below the target range set by the
Total liabilities and capital 8,911 8,098 813 Federal Open Market Committee, as institutions with access
Note: MBS is mortgage-backed securities. PPPLF is Paycheck Protection to the ON RRP should be unwilling to lend funds below
Program Liquidity Facility. the ON RRP’s preannounced offering rate. The ON RRP
Source: Federal Reserve Board, Statistical Release H.4.1, “Factors Aff ecting
Reserve Balances.” facility is primarily used by nonbank counterparties such as
money market funds. The rate offered through the ON RRP
facility complements the interest on reserve balances rate in
supporting effective monetary policy implementation.
Reserve liability—balances maintained in the Treasury 4. In light of the potential for expanded use of the facility
General Account (TGA)—varied signifi cantly over and given growth in money market fund assets under
management in recent years, the Federal Open Market
recent months in connection with developments
Committee raised the per-counterparty cap on ON RRP
related to the debt limit. The U.S. Treasury lowered its participation to $160 billion per day from $80 billion at its
outstanding balance in the TGA from $725 billion in September 2021 meeting.
47
P 3
art
s e P
ummary of ConomiC rojeCtions
The following material was released after the conclusion of the December 14–15, 2021, meeting of
the Federal Open Market Committee.
In conjunction with the Federal Open to affect economic outcomes. The longer-
Market Committee (FOMC) meeting held on run projections represent each participant’s
December 14–15, 2021, meeting participants assessment of the value to which each variable
submitted their projections of the most likely would be expected to converge, over time,
outcomes for real gross domestic product under appropriate monetary policy and in the
(GDP) growth, the unemployment rate, and absence of further shocks to the economy.
inflation for each year from 2021 to 2024 “Appropriate monetary policy” is defined as
and over the longer run. Each participant’s the future path of policy that each participant
projections were based on information deems most likely to foster outcomes for
available at the time of the meeting, together economic activity and inflation that best
with her or his assessment of appropriate satisfy his or her individual interpretation of
monetary policy—including a path for the the statutory mandate to promote maximum
federal funds rate and its longer-run value— employment and price stability.
and assumptions about other factors likely
Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their
individual assumptions of projected appropriate monetary policy, December 2021
Percent
Median1 Central tendency2 Range3
Variable
Longer Longer Longer
2021 2022 2023 2024 2021 2022 2023 2024 2021 2022 2023 2024
run run run
Change in real GDP .... 5.5 4.0 2.2 2.0 1.8 5.5 3.6–4.5 2.0–2.5 1.8–2.0 1.8–2.0 5.3–5.8 3.2–4.6 1.8–2.8 1.7–2.3 1.6–2.2
September projection 5.9 3.8 2.5 2.0 1.8 5.8–6.0 3.4–4.5 2.2–2.5 2.0–2.2 1.8–2.0 5.5–6.3 3.1–4.9 1.8–3.0 1.8–2.5 1.6–2.2
Unemployment rate ..... 4.3 3.5 3.5 3.5 4.0 4.2–4.3 3.4–3.7 3.2–3.6 3.2–3.7 3.8–4.2 4.0–4.4 3.0–4.0 2.8–4.0 3.1–4.0 3.5–4.3
September projection 4.8 3.8 3.5 3.5 4.0 4.6–4.8 3.6–4.0 3.3–3.7 3.3–3.6 3.8–4.3 4.5–5.1 3.0–4.0 2.8–4.0 3.0–4.0 3.5–4.5
PCE inflation .......... 5.3 2.6 2.3 2.1 2.0 5.3–5.4 2.2–3.0 2.1–2.5 2.0–2.2 2.0 5.3–5.5 2.0–3.2 2.0–2.5 2.0–2.2 2.0
September projection 4.2 2.2 2.2 2.1 2.0 4.0–4.3 2.0–2.5 2.0–2.3 2.0–2.2 2.0 3.4–4.4 1.7–3.0 1.9–2.4 2.0–2.3 2.0
Core PCE inflation4 ..... 4.4 2.7 2.3 2.1 4.4 2.5–3.0 2.1–2.4 2.0–2.2 4.4–4.5 2.4–3.2 2.0–2.5 2.0–2.3
September projection 3.7 2.3 2.2 2.1 3.6–3.8 2.0–2.5 2.0–2.3 2.0–2.2 3.5–4.2 1.9–2.8 2.0–2.3 2.0–2.4
Memo: Projected
appropriate policy path
Federal funds rate ...... 0.1 0.9 1.6 2.1 2.5 0.1 0.6–0.9 1.4–1.9 1.9–2.9 2.3–2.5 0.1 0.4–1.1 1.1–2.1 1.9–3.1 2.0–3.0
September projection 0.1 0.3 1.0 1.8 2.5 0.1 0.1–0.4 0.4–1.1 0.9–2.1 2.3–2.5 0.1 0.1–0.6 0.1–1.6 0.6–2.6 2.0–3.0
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 consump-
tion 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 econ-
omy. 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 September projections were made in conjunction with the meeting of
the Federal Open Market Committee on September 21–22, 2021. 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 September 21–22, 2021, meeting, and one participant did not submit such projections in conjunction with the December 14–15,
2021, 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.
48 PART 3: SUMMARy OF ECONOMIC PROJECTIONS
Figure 1. Medians, central tendencies, and ranges of economic projections, 2021–24 and over the longer run
Percent
Change in real GDP
7
6
5
Actual 4
3
2
1
Median of projections 0
Central tendency of projections −1
Range of projections −2
−3
2016 2017 2018 2019 2020 2021 2022 2023 2024 Longer
run
Percent
Unemployment rate
8
7
6
5
4
3
2
1
2016 2017 2018 2019 2020 2021 2022 2023 2024 Longer
run
Percent
PCE inflation
6
5
4
3
2
1
2016 2017 2018 2019 2020 2021 2022 2023 2024 Longer
run
Percent
Core PCE inflation
6
5
4
3
2
1
2016 2017 2018 2019 2020 2021 2022 2023 2024 Longer
run
Note: Definitions of variables and other explanations are in the notes to table 1. The data for the actual values of the
variables are annual.
MONETARy POLICy REPORT: FEBRUARy 2022 49
Figure 2. FOMC participants’ assessments of appropriate monetary policy: Midpoint of target range or target
level for the federal funds rate
Percent
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2021 2022 2023 2024 Longer run
Note: Each shaded circle indicates the value (rounded to the nearest 1/8 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 projec-
tions for the federal funds rate.
50 PART 3: SUMMARy OF ECONOMIC PROJECTIONS
Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2021–24 and over the longer run
Number of participants
2021
December projections
18
September projections 16
14
12
10
8
6
4
2
1.4− 1.6− 1.8− 2.0− 2.2− 2.4− 2.6− 2.8− 3.0− 3.2− 3.4− 3.6− 3.8− 4.0− 4.2− 4.4− 4.6− 4.8− 5.0− 5.2− 5.4− 5.6− 5.8− 6.0− 6.2−
1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 4.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9 6.1 6.3
Percent range
Number of participants
2022
18
16
14
12
10
8
6
4
2
1.4− 1.6− 1.8− 2.0− 2.2− 2.4− 2.6− 2.8− 3.0− 3.2− 3.4− 3.6− 3.8− 4.0− 4.2− 4.4− 4.6− 4.8− 5.0− 5.2− 5.4− 5.6− 5.8− 6.0− 6.2−
1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 4.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9 6.1 6.3
Percent range
Number of participants
2023
18
16
14
12
10
8
6
4
2
1.4− 1.6− 1.8− 2.0− 2.2− 2.4− 2.6− 2.8− 3.0− 3.2− 3.4− 3.6− 3.8− 4.0− 4.2− 4.4− 4.6− 4.8− 5.0− 5.2− 5.4− 5.6− 5.8− 6.0− 6.2−
1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 4.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9 6.1 6.3
Percent range
Number of participants
2024
18
16
14
12
10
8
6
4
2
1.4− 1.6− 1.8− 2.0− 2.2− 2.4− 2.6− 2.8− 3.0− 3.2− 3.4− 3.6− 3.8− 4.0− 4.2− 4.4− 4.6− 4.8− 5.0− 5.2− 5.4− 5.6− 5.8− 6.0− 6.2−
1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 4.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9 6.1 6.3
Percent range
Number of participants
Longer run
18
16
14
12
10
8
6
4
2
1.4− 1.6− 1.8− 2.0− 2.2− 2.4− 2.6− 2.8− 3.0− 3.2− 3.4− 3.6− 3.8− 4.0− 4.2− 4.4− 4.6− 4.8− 5.0− 5.2− 5.4− 5.6− 5.8− 6.0− 6.2−
1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 4.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9 6.1 6.3
Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.
MONETARy POLICy REPORT: FEBRUARy 2022 51
Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2021–24 and over the longer run
Number of participants
2021
December projections 18
September projections 16
14
12
10
8
6
4
2
2.4− 2.6− 2.8− 3.0− 3.2− 3.4− 3.6− 3.8− 4.0− 4.2− 4.4− 4.6− 4.8− 5.0−
2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 4.5 4.7 4.9 5.1
Percent range
Number of participants
2022
18
16
14
12
10
8
6
4
2
2.4− 2.6− 2.8− 3.0− 3.2− 3.4− 3.6− 3.8− 4.0− 4.2− 4.4− 4.6− 4.8− 5.0−
2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 4.5 4.7 4.9 5.1
Percent range
Number of participants
2023
18
16
14
12
10
8
6
4
2
2.4− 2.6− 2.8− 3.0− 3.2− 3.4− 3.6− 3.8− 4.0− 4.2− 4.4− 4.6− 4.8− 5.0−
2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 4.5 4.7 4.9 5.1
Percent range
Number of participants
2024
18
16
14
12
10
8
6
4
2
2.4− 2.6− 2.8− 3.0− 3.2− 3.4− 3.6− 3.8− 4.0− 4.2− 4.4− 4.6− 4.8− 5.0−
2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 4.5 4.7 4.9 5.1
Percent range
Number of participants
Longer run
18
16
14
12
10
8
6
4
2
2.4− 2.6− 2.8− 3.0− 3.2− 3.4− 3.6− 3.8− 4.0− 4.2− 4.4− 4.6− 4.8− 5.0−
2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 4.5 4.7 4.9 5.1
Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.
52 PART 3: SUMMARy OF ECONOMIC PROJECTIONS
Figure 3.C. Distribution of participants’ projections for PCE inflation, 2021–24 and over the longer run
Number of participants
2021
December projections
September projections 18
16
14
12
10
8
6
4
2
1.5− 1.7− 1.9− 2.1− 2.3− 2.5− 2.7− 2.9− 3.1− 3.3− 3.5− 3.7− 3.9− 4.1− 4.3− 4.5− 4.7− 4.9− 5.1− 5.3− 5.5−
1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 4.0 4.2 4.4 4.6 4.8 5.0 5.2 5.4 5.6
Percent range
Number of participants
2022
18
16
14
12
10
8
6
4
2
1.5− 1.7− 1.9− 2.1− 2.3− 2.5− 2.7− 2.9− 3.1− 3.3− 3.5− 3.7− 3.9− 4.1− 4.3− 4.5− 4.7− 4.9− 5.1− 5.3− 5.5−
1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 4.0 4.2 4.4 4.6 4.8 5.0 5.2 5.4 5.6
Percent range
Number of participants
2023
18
16
14
12
10
8
6
4
2
1.5− 1.7− 1.9− 2.1− 2.3− 2.5− 2.7− 2.9− 3.1− 3.3− 3.5− 3.7− 3.9− 4.1− 4.3− 4.5− 4.7− 4.9− 5.1− 5.3− 5.5−
1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 4.0 4.2 4.4 4.6 4.8 5.0 5.2 5.4 5.6
Percent range
Number of participants
2024
18
16
14
12
10
8
6
4
2
1.5− 1.7− 1.9− 2.1− 2.3− 2.5− 2.7− 2.9− 3.1− 3.3− 3.5− 3.7− 3.9− 4.1− 4.3− 4.5− 4.7− 4.9− 5.1− 5.3− 5.5−
1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 4.0 4.2 4.4 4.6 4.8 5.0 5.2 5.4 5.6
Percent range
Number of participants
Longer run
18
16
14
12
10
8
6
4
2
1.5− 1.7− 1.9− 2.1− 2.3− 2.5− 2.7− 2.9− 3.1− 3.3− 3.5− 3.7− 3.9− 4.1− 4.3− 4.5− 4.7− 4.9− 5.1− 5.3− 5.5−
1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 4.0 4.2 4.4 4.6 4.8 5.0 5.2 5.4 5.6
Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.
MONETARy POLICy REPORT: FEBRUARy 2022 53
Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2021–24
Number of participants
2021 December projections
September projections
18
16
14
12
10
8
6
4
2
1.7− 1.9− 2.1− 2.3− 2.5− 2.7− 2.9− 3.1− 3.3− 3.5− 3.7− 3.9− 4.1− 4.3− 4.5−
1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 4.0 4.2 4.4 4.6
Percent range
Number of participants
2022
18
16
14
12
10
8
6
4
2
1.7− 1.9− 2.1− 2.3− 2.5− 2.7− 2.9− 3.1− 3.3− 3.5− 3.7− 3.9− 4.1− 4.3− 4.5−
1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 4.0 4.2 4.4 4.6
Percent range
Number of participants
2023
18
16
14
12
10
8
6
4
2
1.7− 1.9− 2.1− 2.3− 2.5− 2.7− 2.9− 3.1− 3.3− 3.5− 3.7− 3.9− 4.1− 4.3− 4.5−
1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 4.0 4.2 4.4 4.6
Percent range
Number of participants
2024
18
16
14
12
10
8
6
4
2
1.7− 1.9− 2.1− 2.3− 2.5− 2.7− 2.9− 3.1− 3.3− 3.5− 3.7− 3.9− 4.1− 4.3− 4.5−
1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 4.0 4.2 4.4 4.6
Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.
54 PART 3: SUMMARy OF ECONOMIC PROJECTIONS
Figure 3.E. Distribution of participants’ judgments of the midpoint of the appropriate target range for the
federal funds rate or the appropriate target level for the federal funds rate, 2021–24 and over the longer run
Number of participants
2021 December projections
September projections 18
16
14
12
10
8
6
4
2
0.13− 0.38− 0.63− 0.88− 1.13− 1.38− 1.63− 1.88− 2.13− 2.38− 2.63− 2.88− 3.13−
0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37
Percent range
Number of participants
2022
18
16
14
12
10
8
6
4
2
0.13− 0.38− 0.63− 0.88− 1.13− 1.38− 1.63− 1.88− 2.13− 2.38− 2.63− 2.88− 3.13−
0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37
Percent range
Number of participants
2023
18
16
14
12
10
8
6
4
2
0.13− 0.38− 0.63− 0.88− 1.13− 1.38− 1.63− 1.88− 2.13− 2.38− 2.63− 2.88− 3.13−
0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37
Percent range
Number of participants
2024
18
16
14
12
10
8
6
4
2
0.13− 0.38− 0.63− 0.88− 1.13− 1.38− 1.63− 1.88− 2.13− 2.38− 2.63− 2.88− 3.13−
0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37
Percent range
Number of participants
Longer run
18
16
14
12
10
8
6
4
2
0.13− 0.38− 0.63− 0.88− 1.13− 1.38− 1.63− 1.88− 2.13− 2.38− 2.63− 2.88− 3.13−
0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37
Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.
MONETARy POLICy REPORT: FEBRUARy 2022 55
Figure 4.A. Uncertainty and risks in projections of GDP growth
Median projection and confidence interval based on historical forecast errors
Percent
Change in real GDP
Median of projections 7
70% confidence interval 6
5
4
3
2
1
Actual 0
−1
−2
−3
2016 2017 2018 2019 2020 2021 2022 2023 2024
FOMC participants’ assessments of uncertainty and risks around their economic projections
Number of participants Number of participants
Uncertainty about GDP growth Risks to GDP growth
December projections December projections
September projections September projections
18 18
16 16
14 14
12 12
10 10
8 8
6 6
4 4
2 2
Lower Broadly Higher Weighted to Broadly Weighted to
similar downside balanced upside
Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the percent
change in real gross domestic product (GDP) from the fourth quarter of the previous year to the fourth quarter of the year
indicated. The confidence interval around the median projected values is assumed to be symmetric and is based on root mean
squared errors of various private and government forecasts made over the previous 20 years; more information about these data
is available in table 2. Because current conditions may differ from those that prevailed, on average, over the previous 20 years,
the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC
participants’ current assessments of the uncertainty and risks around their projections; these current assessments are summa-
rized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as “broadly
similar” to the average levels of the past 20 years would view the width of the confidence interval shown in the historical fan
chart as largely consistent with their assessments of the uncertainty about their projections. Likewise, participants who judge the
risks to their projections as “broadly balanced” would view the confidence interval around their projections as approximately
symmetric. For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.”
56 PART 3: SUMMARy OF ECONOMIC PROJECTIONS
Figure 4.B. Uncertainty and risks in projections of the unemployment rate
Medianprojectionandconfidenceintervalbasedonhistoricalforecasterrors
Percent
Unemployment rate
Median of projections 8
70% confidence interval 7
6
5
4
Actual
3
2
1
2016 2017 2018 2019 2020 2021 2022 2023 2024
FOMC participants’ assessments of uncertainty and risks around their economic projections
Number of participants Number of participants
Uncertainty about the unemployment rate Risks to the unemployment rate
December projections December projections
September projections September projections
18 18
16 16
14 14
12 12
10 10
8 8
6 6
4 4
2 2
Lower Broadly Higher Weighted to Broadly Weighted to
similar downside balanced upside
Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the average
civilian unemployment rate in the fourth quarter of the year indicated. The confidence interval around the median projected
values is assumed to be symmetric and is based on root mean squared errors of various private and government forecasts made
over the previous 20 years; more information about these data is available in table 2. Because current conditions may differ from
those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the
basis of the historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty and risks
around their projections; these current assessments are summarized in the lower panels. Generally speaking, participants who
judge the uncertainty about their projections as “broadly similar” to the average levels of the past 20 years would view the
width of the confidence interval shown in the historical fan chart as largely consistent with their assessments of the uncertainty
about their projections. Likewise, participants who judge the risks to their projections as “broadly balanced” would view the
confidence interval around their projections as approximately symmetric. For definitions of uncertainty and risks in economic
projections, see the box “Forecast Uncertainty.”
MONETARy POLICy REPORT: FEBRUARy 2022 57
Figure 4.C. Uncertainty and risks in projections of PCE inflation
Medianprojectionandconfidenceintervalbasedonhistoricalforecasterrors
Percent
PCE inflation
6
Median of projections
70% confidence interval 5
4
3
Actual 2
1
2016 2017 2018 2019 2020 2021 2022 2023 2024
FOMC participants’ assessments of uncertainty and risks around their economic projections
Number of participants Number of participants
Uncertainty about PCE inflation Risks to PCE inflation
December projections December projections
September projections September projections
18 18
16 16
14 14
12 12
10 10
8 8
6 6
4 4
2 2
Lower Broadly Higher Weighted to Broadly Weighted to
similar downside balanced upside
Number of participants Number of participants
Uncertainty about core PCE inflation Risks to core PCE inflation
December projections December projections
September projections September projections
18 18
16 16
14 14
12 12
10 10
8 8
6 6
4 4
2 2
Lower Broadly Higher Weighted to Broadly Weighted to
similar downside balanced upside
Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the percent
change in the price index for personal consumption expenditures (PCE) from the fourth quarter of the previous year to the
fourth quarter of the year indicated. The confidence interval around the median projected values is assumed to be symmetric
and is based on root mean squared errors of various private and government forecasts made over the previous 20 years; more
information about these data is available in table 2. Because current conditions may differ from those that prevailed, on average,
over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors
may not reflect FOMC participants’ current assessments of the uncertainty and risks around their projections; these current
assessments are summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their
projections as “broadly similar” to the average levels of the past 20 years would view the width of the confidence interval shown
in the historical fan chart as largely consistent with their assessments of the uncertainty about their projections. Likewise,
participants who judge the risks to their projections as “broadly balanced” would view the confidence interval around their
projections as approximately symmetric. For definitions of uncertainty and risks in economic projections, see the box “Forecast
Uncertainty.”
58 PART 3: SUMMARy OF ECONOMIC PROJECTIONS
Figure 4.D. Diffusion indexes of participants’ uncertainty assessments
Diffusion index
Change in real GDP
1.00
0.75
0.50
0.25
0.00
−0.25
−0.50
−0.75
−1.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Diffusion index
Unemployment rate
1.00
0.75
0.50
0.25
0.00
−0.25
−0.50
−0.75
−1.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Diffusion index
PCE inflation
1.00
0.75
0.50
0.25
0.00
−0.25
−0.50
−0.75
−1.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Diffusion index
Core PCE inflation
1.00
0.75
0.50
0.25
0.00
−0.25
−0.50
−0.75
−1.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Note: For each SEP, participants provided responses to the question “Please indicate your judgment of the uncertainty
attached to your projections relative to the levels of uncertainty over the past 20 years.” Each point in the diffusion indexes
represents the number of participants who responded “Higher” minus the number who responded “Lower,” divided by the total
number of participants. Figure excludes March 2020 when no projections were submitted.
MONETARy POLICy REPORT: FEBRUARy 2022 59
Figure 4.E. Diffusion indexes of participants’ risk weightings
Diffusion index
Change in real GDP
1.00
0.75
0.50
0.25
0.00
−0.25
−0.50
−0.75
−1.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Diffusion index
Unemployment rate
1.00
0.75
0.50
0.25
0.00
−0.25
−0.50
−0.75
−1.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Diffusion index
PCE inflation
1.00
0.75
0.50
0.25
0.00
−0.25
−0.50
−0.75
−1.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Diffusion index
Core PCE inflation
1.00
0.75
0.50
0.25
0.00
−0.25
−0.50
−0.75
−1.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Note: For each SEP, participants provided responses to the question “Please indicate your judgment of the risk weighting
around your projections.” Each point in the diffusion indexes represents the number of participants who responded “Weighted
to the Upside” minus the number who responded “Weighted to the Downside,” divided by the total number of participants.
Figure excludes March 2020 when no projections were submitted.
60 PART 3: SUMMARy OF ECONOMIC PROJECTIONS
Figure 5. Uncertainty and risks in projections of the federal funds rate
Percent
Federal funds rate
Midpoint of target range
Median of projections
70% confidence interval* 4
3
2
Actual
1
0
2016 2017 2018 2019 2020 2021 2022 2023 2024
Note: The blue and red lines are based on actual values and median projected values, respectively, of the Committee’s target
for the federal funds rate at the end of the year indicated. The actual values are the midpoint of the target range; the median
projected values are based on either the midpoint of the target range or the target level. The confidence interval around the
median projected values is based on root mean squared errors of various private and government forecasts made over the
previous 20 years. The confidence interval is not strictly consistent with the projections for the federal funds rate, primarily
because these projections are not forecasts of the likeliest outcomes for the federal funds rate, but rather projections of
participants’ individual assessments of appropriate monetary policy. Still, historical forecast errors provide a broad sense of the
uncertainty around the future path of the federal funds rate generated by the uncertainty about the macroeconomic variables as
well as additional adjustments to monetary policy that may be appropriate to offset the effects of shocks to the economy.
The confidence interval is assumed to be symmetric except when it is truncated at zero - the bottom of the lowest target range
for the federal funds rate that has been adopted in the past by the Committee. This truncation would not be intended to indicate
the likelihood of the use of negative interest rates to provide additional monetary policy accommodation if doing so was judged
appropriate. In such situations, the Committee could also employ other tools, including forward guidance and large-scale asset
purchases, to provide additional accommodation. Because current conditions may differ from those that prevailed, on average,
over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors
may not reflect FOMC participants’ current assessments of the uncertainty and risks around their projections.
* The confidence interval is derived from forecasts of the average level of short-term interest rates in the fourth quarter of the
year indicated; more information about these data is available in table 2. The shaded area encompasses less than a 70 percent
confidence interval if the confidence interval has been truncated at zero.
MONETARy POLICy REPORT: FEBRUARy 2022 61
Table 2. Average historical projection error ranges
Percentage points
Variable 2021 2022 2023 2024
Change in real GDP1 ...... ±0.7 ±1.7 ±2.2 ±2.3
Unemployment rate1 ...... ±0.1 ±1.0 ±1.6 ±2.0
Total consumer prices2 .... ±0.2 ±0.9 ±1.0 ±0.9
Short-term interest rates3 .. ±0.1 ±1.5 ±2.1 ±2.5
Note: Error ranges shown are measured as plus or minus the root mean squared
error of projections for 2001 through 2020 that were released in the winter by var-
ious private and government forecasters. As described in the box “Forecast Un-
certainty,” under certain assumptions, there is about a 70 percent probability that
actual outcomes for real GDP, unemployment, consumer prices, and the federal
funds rate will be in ranges implied by the average size of projection errors made
in the past. For more information, see David Reifschneider and Peter Tulip (2017),
“Gauging the Uncertainty of the Economic Outlook Using Historical Forecasting
Errors: The Federal Reserve’s Approach,” Finance and Economics Discussion
Series 2017–020 (Washington: Board of Governors of the Federal Reserve System,
February), https://dx.doi.org/10.17016/FEDS.2017.020.
1. Definitions of variables are in the general note to table 1.
2. Measure is the overall consumer price index, the price measure that has been
most widely used in government and private economic forecasts. Projections are
percent changes on a fourth quarter to fourth quarter basis.
3. For Federal Reserve staff forecasts, measure is the federal funds rate. For
other forecasts, measure is the rate on 3-month Treasury bills. Projection errors
are calculated using average levels, in percent, in the fourth quarter.
62 PART 3: SUMMARy OF ECONOMIC PROJECTIONS
Forecast Uncertainty
The economic projections provided by the members reported in table 2 would imply a probability of about current assessments of the uncertainty surrounding projections of participants’ individual assessments of
of the Board of Governors and the presidents of 70 percent that actual GDP would expand within a their projections are summarized in the bottom-left appropriate monetary policy and are on an end-of-
the Federal Reserve Banks inform discussions of range of 2.3 to 3.7 percent in the current year, 1.3 to panels of those fi gures. Participants also provide year basis. However, the forecast errors should provide
monetary policy among policymakers and can aid 4.7 percent in the second year, 0.8 to 5.2 percent in judgments as to whether the risks to their projections a sense of the uncertainty around the future path of
public understanding of the basis for policy actions. the third year, and 0.7 to 5.3 percent in the fourth year. are weighted to the upside, are weighted to the the federal funds rate generated by the uncertainty
Considerable uncertainty attends these projections, The corresponding 70 percent confi dence intervals downside, or are broadly balanced. That is, while about the macroeconomic variables as well as
however. The economic and statistical models and for overall infl ation would be 1.8 to 2.2 percent in the symmetric historical fan charts shown in the top additional adjustments to monetary policy that would
relationships used to help produce economic forecasts the current year, 1.1 to 2.9 percent in the second panels of fi gures 4.A through 4.C imply that the risks to be appropriate to offset the effects of shocks to the
are necessarily imperfect descriptions of the real world, year, 1.0 to 3.0 percent in the third year, and 1.1 to participants’ projections are balanced, participants may economy.
and the future path of the economy can be affected 2.9 percent in the fourth year. Figures 4.A through 4.C judge that there is a greater risk that a given variable If at some point in the future the confi dence interval
by myriad unforeseen developments and events. Thus, illustrate these confi dence bounds in “fan charts” will be above rather than below their projections. These around the federal funds rate were to extend below
in setting the stance of monetary policy, participants that are symmetric and centered on the medians of judgments are summarized in the lower-right panels of zero, it would be truncated at zero for purposes of
consider not only what appears to be the most likely FOMC participants’ projections for GDP growth, the fi gures 4.A through 4.C. the fan chart shown in fi gure 5; zero is the bottom of
economic outcome as embodied in their projections, unemployment rate, and infl ation. However, in some As with real activity and infl ation, the outlook the lowest target range for the federal funds rate that
but also the range of alternative possibilities, the instances, the risks around the projections may not for the future path of the federal funds rate is subject has been adopted by the Committee in the past. This
likelihood of their occurring, and the potential costs to be symmetric. In particular, the unemployment rate to considerable uncertainty. This uncertainty arises approach to the construction of the federal funds rate
the economy should they occur. cannot be negative; furthermore, the risks around a primarily because each participant’s assessment of fan chart would be merely a convention; it would
Table 2 summarizes the average historical accuracy particular projection might be tilted to either the upside the appropriate stance of monetary policy depends not have any implications for possible future policy
of a range of forecasts, including those reported in or the downside, in which case the corresponding fan importantly on the evolution of real activity and decisions regarding the use of negative interest rates to
past Monetary Policy Reports and those prepared chart would be asymmetrically positioned around the infl ation over time. If economic conditions evolve provide additional monetary policy accommodation
by the Federal Reserve Board’s staff in advance of median projection. in an unexpected manner, then assessments of the if doing so were appropriate. In such situations, the
meetings of the Federal Open Market Committee Because current conditions may differ from those appropriate setting of the federal funds rate would Committee could also employ other tools, including
(FOMC). The projection error ranges shown in the that prevailed, on average, over history, participants change from that point forward. The fi nal line in forward guidance and asset purchases, to provide
table illustrate the considerable uncertainty associated provide judgments as to whether the uncertainty table 2 shows the error ranges for forecasts of short- additional accommodation.
with economic forecasts. For example, suppose a attached to their projections of each economic variable term interest rates. They suggest that the historical While fi gures 4.A through 4.C provide information
participant projects that real gross domestic product is greater than, smaller than, or broadly similar to confi dence intervals associated with projections of on the uncertainty around the economic projections,
(GDP) and total consumer prices will rise steadily at typical levels of forecast uncertainty seen in the past the federal funds rate are quite wide. It should be fi gure 1 provides information on the range of views
annual rates of, respectively, 3 percent and 2 percent. 20 years, as presented in table 2 and refl ected in noted, however, that these confi dence intervals are not across FOMC participants. A comparison of fi gure 1
If the uncertainty attending those projections is similar the widths of the confi dence intervals shown in the strictly consistent with the projections for the federal with fi gures 4.A through 4.C shows that the dispersion
to that experienced in the past and the risks around top panels of fi gures 4.A through 4.C. Participants’ funds rate, as these projections are not forecasts of of the projections across participants is much smaller
the projections are broadly balanced, the numbers (continued) the most likely quarterly outcomes but rather are than the average forecast errors over the past 20 years.
MONETARy POLICy REPORT: FEBRUARy 2022 63
current assessments of the uncertainty surrounding projections of participants’ individual assessments of
their projections are summarized in the bottom-left appropriate monetary policy and are on an end-of-
panels of those fi gures. Participants also provide year basis. However, the forecast errors should provide
judgments as to whether the risks to their projections a sense of the uncertainty around the future path of
are weighted to the upside, are weighted to the the federal funds rate generated by the uncertainty
downside, or are broadly balanced. That is, while about the macroeconomic variables as well as
the symmetric historical fan charts shown in the top additional adjustments to monetary policy that would
panels of fi gures 4.A through 4.C imply that the risks to be appropriate to offset the effects of shocks to the
participants’ projections are balanced, participants may economy.
judge that there is a greater risk that a given variable If at some point in the future the confi dence interval
will be above rather than below their projections. These around the federal funds rate were to extend below
judgments are summarized in the lower-right panels of zero, it would be truncated at zero for purposes of
fi gures 4.A through 4.C. the fan chart shown in fi gure 5; zero is the bottom of
As with real activity and infl ation, the outlook the lowest target range for the federal funds rate that
for the future path of the federal funds rate is subject has been adopted by the Committee in the past. This
to considerable uncertainty. This uncertainty arises approach to the construction of the federal funds rate
primarily because each participant’s assessment of fan chart would be merely a convention; it would
the appropriate stance of monetary policy depends not have any implications for possible future policy
importantly on the evolution of real activity and decisions regarding the use of negative interest rates to
infl ation over time. If economic conditions evolve provide additional monetary policy accommodation
in an unexpected manner, then assessments of the if doing so were appropriate. In such situations, the
appropriate setting of the federal funds rate would Committee could also employ other tools, including
change from that point forward. The fi nal line in forward guidance and asset purchases, to provide
table 2 shows the error ranges for forecasts of short- additional accommodation.
term interest rates. They suggest that the historical While fi gures 4.A through 4.C provide information
confi dence intervals associated with projections of on the uncertainty around the economic projections,
the federal funds rate are quite wide. It should be fi gure 1 provides information on the range of views
noted, however, that these confi dence intervals are not across FOMC participants. A comparison of fi gure 1
strictly consistent with the projections for the federal with fi gures 4.A through 4.C shows that the dispersion
funds rate, as these projections are not forecasts of of the projections across participants is much smaller
the most likely quarterly outcomes but rather are than the average forecast errors over the past 20 years.
65
a
bbreviations
AFE advanced foreign economy
ARM adjustable-rate mortgage
BLS Bureau of Labor Statistics
CCP central counterparty
CIE common inflation expectations
COVID-19 coronavirus disease 2019
CPI consumer price index
CPS Current Population Survey
EME emerging market economy
FOMC Federal Open Market Committee; also, the Committee
GDP gross domestic product
LFPR labor force participation rate
MBS mortgage-backed securities
MMF money market fund
ON RRP overnight reverse repurchase agreement
OPEC Organization of the Petroleum Exporting Countries
PCE personal consumption expenditures
PPP Paycheck Protection Program
repo repurchase agreement
SEC Securities and Exchange Commission
SOFR Secured Overnight Financing Rate
SOMA System Open Market Account
S&P Standard & Poor’s
TGA Treasury General Account
TIPS Treasury Inflation-Protected Securities
USD U.S. dollar
VIX implied volatility for the S&P 500 index
For use at 11:00 a.m. EST
February 25, 2022
M P r
onetary olicy ePort
February 25, 2022
Board of Governors of the Federal Reserve System
Cite this document
APA
Federal Reserve (2022, February 24). Monetary Policy Report. Monetary Policy Reports, Federal Reserve. https://whenthefedspeaks.com/doc/monetary_policy_report_20220225
BibTeX
@misc{wtfs_monetary_policy_report_20220225,
author = {Federal Reserve},
title = {Monetary Policy Report},
year = {2022},
month = {Feb},
howpublished = {Monetary Policy Reports, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/monetary_policy_report_20220225},
note = {Retrieved via When the Fed Speaks corpus}
}