monetary policy reports · March 2, 2023
Monetary Policy Report
For use at 11:00 a.m. EST
March 3, 2023
M P r
onetary olicy ePort
March 3, 2023
Board of Governors of the Federal Reserve System
L t
etter of ransmittaL
Board of Governors of the
Federal Reserve System
Washington, D.C., March 3, 2023
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, Chair
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 31, 2023
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.
cc
oonntteennttss
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Recent Economic and Financial Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Special Topics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Part 1: Recent Economic and Financial Developments . . . . . . . . . . . . . . . . . . . . . 5
Domestic Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Financial Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
International Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Part 2: Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
Part 3: Summary of Economic Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63
List of Boxes
Developments in Employment and Earnings across Demographic Groups . . . . . . . . . . . . . . 10
Why Has the Labor Force Recovery Been So Slow? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Developments Related to Financial Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Developments in the Federal Reserve’s Balance Sheet and Money Markets . . . . . . . . . . . . . . 40
Monetary Policy Rules in the Current Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Forecast Uncertainty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Note: This report reflects information that was publicly available as of 4 p.m. EST on March 1, 2023.
Unless otherwise stated, the time series in the figures extend through, for daily data, February 28, 2023; for monthly
data, January 2023; and, for quarterly data, 2022: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 24, 36, and 45, 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 © 2023 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, omis-
sions, or interruptions of any index or the data included therein.
1
s
ummary
Although inflation has slowed since the well above the FOMC’s 2 percent objective.
middle of last year as supply bottlenecks Core PCE prices—which exclude volatile
eased and energy prices declined, it remains food and energy prices and are generally
well above the Federal Open Market considered a better guide to the direction of
Committee’s (FOMC) objective of 2 percent. future inflation—also slowed but still increased
The labor market remains extremely tight, 4.7 percent over the 12 months ending in
with robust job gains, the unemployment January. As supply chain bottlenecks have
rate at historically low levels, and nominal eased, increases in core goods prices slowed
wage growth slowing but still elevated. Real considerably in the second half of last year.
gross domestic product (GDP) growth picked Within core services prices, housing services
up in the second half of 2022, although the inflation has been high, but slowing increases
underlying momentum in the economy likely in rents for new tenants in the second half of
remains subdued. Bringing inflation back to last year point to lower inflation for housing
2 percent will likely require a period of below- services in the year ahead. For other services,
trend growth and some softening of labor however, price inflation remains elevated, and
market conditions. prospects for slowing inflation may depend
in part on an easing of tight labor market
In response to high inflation, the FOMC conditions. Measures of longer-term inflation
continued to rapidly increase interest rates expectations remain within the range of values
and reduce its securities holdings. The seen in the decade before the pandemic and
Committee has raised the target range for continue to be broadly consistent with the
the federal funds rate a further 3 percentage FOMC’s longer-run objective of 2 percent,
points since June, bringing the range to 4½ to suggesting that high inflation is not becoming
4¾ percent, and indicated that it anticipates entrenched.
that ongoing increases in the target range will
be appropriate. The Federal Reserve has also The labor market. The labor market has
reduced its holdings of Treasury securities and remained extremely tight, with job gains
agency mortgage-backed securities by about averaging 380,000 per month since the middle
$500 billion since June, further tightening of last year and the unemployment rate
financial conditions. remaining at historical lows. Labor demand in
many parts of the economy exceeds the supply
The Federal Reserve is acutely aware that of available workers, with the labor force
high inflation imposes significant hardship, participation rate essentially unchanged from
especially on those least able to meet the one year ago. Nominal wage gains slowed over
higher costs of essentials. The Committee is the second half of 2022, but they remain above
strongly committed to returning inflation to its the pace consistent with 2 percent inflation
2 percent objective. over the longer term, given prevailing trends in
productivity growth.
Recent Economic and Financial Economic activity. Real GDP is reported to
Developments have fallen in the first half of 2022 but to have
then risen at roughly a 3 percent pace in the
Inflation. Consumer price inflation, as second half. Some of the swings in growth
measured by the 12-month change in the price reflect fluctuations in volatile expenditure
index for personal consumption expenditures categories such as net exports and inventory
(PCE), was 5.4 percent in January, down investment. Private domestic final demand,
from its peak of 7 percent last June but still which excludes these volatile components, rose
2 SUMMARy
at a subdued rate in both the first and second year. Real estate prices remain high relative
halves last year. Consumer spending has to fundamentals, such as rents, despite a
continued to rise at a solid pace, supported by marked slowing in price increases. While
the savings accumulated during the pandemic. market functioning remained orderly, market
However, manufacturing output declined in liquidity—the ability to trade assets without
recent months, and the housing sector has a large effect on market prices—remained low
continued to contract in response to elevated in several key asset markets, including in the
mortgage rates. Treasury market, when compared with levels
before the COVID-19 pandemic. Nonfinancial
Financial conditions. Financial conditions business and household debt grew in line
have tightened further since June and are with GDP, leaving vulnerabilities associated
significantly tighter than a year ago. The with borrowing by businesses and households
FOMC has raised the target range for the unchanged at moderate levels. Risk-based
federal funds rate a further 3 percentage points capital ratios at banks declined a touch
since June, and the market-implied expected last year but remain well above regulatory
path of the federal funds rate over the next requirements. Funding risks at domestic
year also shifted up notably. Yields on nominal banks and broker-dealers remain low, and
Treasury securities across maturities have the large banks at the core of the financial
risen considerably further since June, while system continue to have ample liquidity. Prime
investment-grade corporate bond yields and and tax-exempt money market funds, as well
mortgage rates have also increased but by less as many bond and bank-loan mutual funds,
than Treasury rates. Equity prices were volatile continue to be susceptible to runs. (See the box
but increased moderately on net. The rise in “Developments Related to Financial Stability”
interest rates over the past year has weighed in Part 1.)
on financing activity. Issuance of leveraged
loans and speculative-grade corporate bonds International developments. Foreign economic
slowed substantially in the second half of the growth moderated in the second half of last
year, while investment-grade bond issuance year, weighed down by the economic fallout of
declined modestly. Business loans at banks Russia’s war against Ukraine and a slowdown
continued to grow in the second half of 2022 in China related to COVID-19. Despite
but decelerated in the fourth quarter. While some signs of easing in headline inflation
business credit quality remains strong, some abroad, core foreign inflation remains high
indicators of future business defaults are and inflationary pressures are broad, in part
somewhat elevated. For households, mortgage reflecting tight labor markets and the pass-
originations continued to decline materially, through of past energy price increases to
although consumer loans (such as auto loans other prices. In response to persistently high
and credit cards) grew further. Delinquency inflation, many major foreign central banks,
rates for credit cards and auto loans rose along with the Fed, have tightened the stance
last year. of monetary policy significantly since June.
More recently, many foreign central banks
Financial stability. Against the backdrop of slowed the pace of their policy rate increases,
a weaker economic outlook, higher interest signaled that such a slowing is coming, or
rates, and elevated uncertainty since June, paused policy rate hikes to take stock of the
financial vulnerabilities remain moderate effects of policy tightening thus far on their
overall. Valuations in equity markets economies.
remained notable and ticked up, on net, as
equity prices increased moderately even as Financial conditions abroad have tightened
earnings expectations declined late in the modestly, on net, since the middle of last
MONETARy POLICy REPORT: MARCH 2023 3
year. Global sovereign bond yields rose from held in the System Open Market Account have
continued tightening of foreign monetary been reinvested only to the extent that they
policy and spillovers from increases in U.S. exceeded monthly caps.
yields. Equity prices abroad rose toward the
end of the year amid surprising resilience Special Topics
of European economies and the removal of
China’s zero-COVID policy. Meanwhile, the Employment and earnings across groups. At
trade-weighted exchange value of the U.S. the onset of the pandemic, employment fell
dollar is a touch higher since mid-2022. by more for disadvantaged groups than the
overall population, but tight labor market
Monetary Policy conditions over the past two years have
largely reversed those movements. As the
In response to high inflation, the Committee labor market tightened, employment grew
last year rapidly increased the target range faster for African Americans and Hispanics,
for the federal funds rate and began reducing and for less educated workers, than for other
its securities holdings. Adjustments to both workers. Wages have grown more rapidly for
interest rates and the balance sheet are playing these workers also, as extremely strong labor
a role in firming the stance of monetary policy demand has outstripped available labor supply.
in support of the Committee’s maximum- However, while disparities in employment have
employment and price-stability goals. largely returned to pre-pandemic levels, there
remain significant disparities in absolute levels
Interest rate policy. The FOMC continued to of employment across groups. (See the box
swiftly increase the target range for the federal “Developments in Employment and Earnings
funds rate, bringing it to the current range of across Demographic Groups” in Part 1.)
4½ to 4¾ percent. In light of the cumulative
tightening of monetary policy and the lags Weak labor supply. Even with labor demand
with which monetary policy affects economic remarkably strong, the labor force has been
activity and inflation, the Committee slowed slow to recover from the pandemic, leaving
the pace of policy tightening at the December a significant labor supply shortfall relative to
and January meetings but indicated that it the levels expected before the pandemic. More
anticipates that ongoing increases in the target than half of that labor force shortfall reflects a
range will be appropriate in order to attain a lower labor force participation rate because of
stance of monetary policy that is sufficiently a wave of retirements beyond what would have
restrictive to return inflation to 2 percent been expected given demographic trends. The
over time. remaining shortfall is attributable to slower
population growth, which in turn reflects both
Balance sheet policy. The Federal Reserve has the higher mortality primarily due to COVID
continued the process of significantly reducing and lower rates of immigration in the first two
its holdings of Treasury and agency securities years of the pandemic. (See the box “Why Has
in a predictable manner.1 Beginning in June of the Labor Force Recovery Been So Slow?” in
last year, principal payments from securities Part 1.)
Monetary policy rules. Simple monetary policy
rules, which prescribe a setting for the policy
1. See the May 4, 2022, press release regarding the
interest rate based on a small number of
Plans for Reducing the Size of the Federal Reserve’s
other economic variables, can provide useful
Balance Sheet, available on the Board’s website at https://
guidance to policymakers. Since 2021, inflation
www.federalreserve.gov/newsevents/pressreleases/
monetary20220504b.htm. has run well above the Committee’s 2 percent
4 SUMMARy
longer-run objective, and labor market repurchase agreement (ON RRP) facility
conditions have been very tight over the past remained elevated, as low rates on repurchase
year. As a result, simple monetary policy rules agreements persisted amid still abundant
have prescribed levels for the federal funds rate liquidity and limited Treasury bill supply.
that are well above those observed over the The ON RRP facility continued to serve its
past decade. (See the box “Monetary Policy intended purpose of helping to provide a floor
Rules in the Current Environment” in Part 2.) under short-term interest rates and supporting
effective implementation of monetary policy.
Federal Reserve’s balance sheet and money Because of the significant increases in
markets. The size of the Federal Reserve’s administered rates to address high inflation,
balance sheet decreased as the Federal the Federal Reserve’s interest expenses rose
Reserve reduced its securities holdings. considerably, and, as a result, net income
Reserve balances—the largest liability on the turned negative. (See the box “Developments
Federal Reserve’s balance sheet—continued in the Federal Reserve’s Balance Sheet and
to fall. Take-up in the overnight reverse Money Markets” in Part 2.)
5
P 1
art
r e f d
ecent conomic and inanciaL eveLoPments
Domestic Developments
Inflation has declined in recent months 1. Personal consumption expenditures price indexes
but remains elevated . . .
Monthly Percent change from year earlier
Inflation, as measured by the 12-month change
in the price index for personal consumption Total 7.0
6.0
expenditures (PCE), stepped down from its
peak of 7.0 percent in June of last year to 5.0
5.4 percent in January, still notably above the 4.0
Federal Open Market Committee’s (FOMC) 3.0
longer-run objective of 2 percent (figure 1).
Trimmed 2.0
Core PCE prices—which exclude volatile food mean
1.0
Excluding food
and energy prices and are generally considered
and energy
0
a better guide to the direction of future
inflation—rose 4.7 percent over the 12 months 2015 2016 2017 2018 2019 2020 2021 2022 2023
to January, down from the above 5 percent SOURCE: For trimmed mean, Federal Reserve Bank of Dallas; for all
pace that prevailed last spring.2 else, Bureau of Economic Analysis; all via Haver Analytics.
. . . in part because energy prices
declined in the second half of last year,
while food price inflation slowed but
remains high
After rising sharply in the first half of last 2. Spot and futures prices for crude oil
year, oil prices peaked and have since declined.
Weekly Dollars per barrel
This decline comes mainly on global growth
concerns and despite a European Union 160
embargo on Russian crude oil and petroleum
140
products (figure 2). As a result of these Brent spot price
120
movements, gasoline prices declined over the
100
second half of last year following their earlier
80
large increases. On net, the PCE energy price
index in January stood 10 percent above its 24-month-ahead 60
futures contracts
level 12 months earlier (figure 3). 40
20
Food price increases slowed in recent months,
2008 2011 2014 2017 2020 2023
but, given earlier sizable increases, grocery
store prices are up 11 percent over the NOTE: The data are weekly averages of daily data and extend through
February 24, 2023.
12 months ending in January. After having SOURCE: ICE Brent Futures via Bloomberg.
2. The latest 12-month changes in PCE prices are
likely overstated at present (and will remain so until the
annual revisions of the national income and product
accounts in September) because they only incompletely
incorporate new seasonally adjusted consumer price
index data. The current overstatement in headline and
core PCE inflation appears to be roughly 0.2 percentage
point and 0.1 percentage point, respectively.
6 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS
3. Subcomponents of personal consumption expenditures price indexes
Food and energy Components of core prices
Percent change from year earlier Percent change from year earlier Monthly Percent change from year earlier
70 14
8
60 12
Food and
50 10
beverages 6
40 8
Housing
30 6 services 4
20 4
10 2 Services 2
+ + ex. energy +
_0 _0 and housing
0
10 Energy 2 _
Goods ex. food,
20 4 beverages, and 2
energy
30 6
2015 2016 2017 2018 2019 2020 2021 2022 2023 2015 2016 2017 2018 2019 2020 2021 2022 2023
NOTE: The data are monthly.
SOURCE: Bureau of Economic Analysis via Haver Analytics.
4. Spot prices for commodities spiked at the start of the war in Ukraine,
prices of most food commodities (agricultural
Weekly Week ending January 3, 2014 = 100
products and livestock) have stabilized in
recent months, likely contributing to the recent
180
slowing of food price increases (figure 4).
160
140 Prices of both energy and food are of
Industrial metals particular importance for lower-income
120
households, for which such necessities are a
100
large share of expenditures.
80
Agriculture
and livestock 60 Softer core goods prices reflect easing
supply bottlenecks and declines in
2015 2017 2019 2021 2023 import prices . . .
NOTE: The data are weekly averages of daily data and extend through
February 24, 2023. Recent inflation performance has varied
SOURCE: For industrial metals, S&P GSCI Industrial Metals Spot
Index; for agriculture and livestock, S&P GSCI Agriculture & Livestock markedly across spending categories. Price
Spot Index; both via Haver Analytics.
increases for goods (outside of food and
energy) slowed considerably in the latter part
of 2022. Demand for these goods appears to
have stabilized, and supply chain issues and
other capacity constraints have waned. For
example, transportation costs have fallen,
and supplier delivery times have improved
notably (figure 5). In addition, nonfuel import
prices have declined, on net, since last spring,
bringing the 12-month change down to around
1 percent from a peak of almost 8 percent
early last year (figure 6). This moderation
occurred following both the appreciation of
the dollar that occurred earlier in the year and
declines in commodity prices such as those for
industrial metals.
MONETARy POLICy REPORT: MARCH 2023 7
The easing of inflation pressures in goods has 5. Suppliers’ delivery times
been especially pronounced for durable goods,
Monthly Diffusion index
where prices have declined, on net, since
June of last year. In particular, used motor
80
vehicle prices, which skyrocketed in 2021
amid reduced production of new cars and Manufacturing
70
trucks, have fallen more than 9 percent over
that period. 60
. . . while core services price inflation 50
Nonmanufacturing
remains elevated
40
In contrast, core services price inflation
remains elevated (figure 3). Housing services
2015 2016 2017 2018 2019 2020 2021 2022 2023
prices have risen especially rapidly, up
NOTE: Data for manufacturing extend through February 2023. Values
8 percent over the 12 months ending in greater than 50 indicate that more respondents reported longer delivery
times relative to a month earlier than reported shorter delivery times.
January. However, market rents on new SOURCE: Institute for Supply Management, Report on Business.
housing leases to new tenants, which had
risen strongly over the past two years, have
decelerated sharply and flattened out since 6. Nonfuel import price index
autumn (figure 7). Because prices for housing
Monthly 12-month percent change
services measure the rents paid by all tenants
(and the equivalent rent implicitly paid by all 8
homeowners)—including those whose leases 6
have not yet come up for renewal—they tend 4
to adjust slowly to changes in rental market
2
conditions and should therefore be expected +
_0
to decelerate over the year ahead. In contrast,
2
prices for other core services—a broad group
that includes services such as travel and 4
dining, financial services, and car repair—rose
2015 2017 2019 2021 2023
4.7 percent over the 12 months ending in
SOURCE: Bureau of Labor Statistics via Haver Analytics.
January and have not yet shown clear signs
of slowing. Some softening of labor market
conditions will likely be required for core 7. Housing rents
services price inflation to abate.
Monthly Percent change from month earlier
Measures of longer-term inflation 2.5
CoreLogic Zillow
expectations have remained contained, single-family 2.0
while shorter-term expectations have detached 1.5
partially reversed their earlier increases
1.0
.5
Inflation expectations likely influence actual +
inflation by affecting wage- and price-setting
_0
PCE housing .5
decisions. Over the past year, survey-based services
1.0
measures of expected inflation over a longer
RealPage
1.5
horizon remained within the range of values
seen in the years before the pandemic and 2019 2020 2021 2022 2023
appear broadly consistent with the FOMC’s
NOTE: CoreLogic and Zillow data extend through December 2022.
longer-run 2 percent inflation objective. That Zillow, CoreLogic, and RealPage measure market-rate rents–that is,
rents for a new lease by a new tenant.
is evident for the median value for expected SOURCE: Bureau of Economic Analysis, personal consumption
expenditures (PCE), via Haver Analytics; CoreLogic, Inc.; Zillow, Inc.;
inflation over the next 5 to 10 years from
RealPage, Inc.; Federal Reserve Board staff calculations.
8 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS
8. Measures of inflation expectations the University of Michigan Surveys of
Consumers (figure 8). And while expected
Percent
inflation over the next 10 years in the Survey
5.5 of Professional Forecasters, conducted by the
Michigan survey,
next 12 months 5.0 Federal Reserve Bank of Philadelphia, has
4.5
moved up somewhat, that increase is driven
4.0
by expectations for the next few years: The
3.5
median forecaster in the survey expects PCE
3.0
price inflation to average 2 percent over the five
2.5
years beginning five years from now.
2.0
SPF, 6 to 10 years ahead SPF, 10 years ahead 1.5
Michigan survey, Furthermore, inflation expectations over
next 5 to 10 years 1.0
a shorter horizon—which tend to follow
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023
observed inflation and rose when inflation
NOTE: The Survey of Professional Forecasters (SPF) data are
turned up—moved lower in the second half
quarterly, begin in 2007:Q1, and extend through 2023:Q1. The data for
the Michigan survey are monthly and extend through February 2023. of 2022 and into 2023, accompanying the
SOURCE: University of Michigan Surveys of Consumers; Federal
Reserve Bank of Philadelphia, SPF. softer inflation readings over this period. In
the Michigan survey, the median value for
9. Inflation compensation implied by Treasury
inflation expectations over the next year was
Inflation-Protected Securities
4.1 percent in February, a step-down from
Daily Percent the values in the middle of 2022. Expected
inflation for the next year from the Survey of
4.0
Consumer Expectations, conducted by the
3.5
Federal Reserve Bank of New York, has also
5-to-10-year 3.0
moved lower in recent months.
2.5
2.0
Market-based measures of longer-term
1.5
5-year inflation compensation, which are based on
1.0
financial instruments linked to inflation, are
.5
also broadly in line with readings seen in the
0
years before the pandemic. A measure of
2011 2013 2015 2017 2019 2021 2023 inflation compensation over the next 5 years
implied by Treasury Inflation-Protected
NOTE: The data are at a business-day frequency and are estimated
from smoothed nominal and inflation-indexed Treasury yield curves. Securities moved notably lower last year, and
SOURCE: Federal Reserve Bank of New York; Federal Reserve Board
staff calculations. inflation compensation 5 to 10 years ahead still
appears consistent with inflation returning to
10. Nonfarm payroll employment
2 percent (figure 9).
Monthly Thousands
The labor market has continued to
strengthen
1,200
1,000 Payroll employment gains averaged 380,000
per month since the middle of 2022, down
800
from the 445,000 per month pace in the
600 first half but still quite robust (figure 10).
Employment in the leisure and hospitality
400
sector continued its steady recovery from
200 the pandemic, and payrolls also increased
robustly in health services and in state and
2020 2021 2022 2023
NOTE: The data shown are a 3-month moving average of the change in
nonfarm payroll employment.
SOURCE: Bureau of Labor Statistics via Haver Analytics.
MONETARy POLICy REPORT: MARCH 2023 9
local governments.3 Alternative indicators of
employment—the Bureau of Labor Statistics’
household survey, the Federal Reserve Board
staff’s measure of private employment using
data from the payroll processing firm ADP,
and the Quarterly Census of Employment and
Wages—suggest a slower pace of job gains last 11. Civilian unemployment rate
year, particularly in the first half. However,
Monthly Percent
these other indicators suggest continued job
gains in recent months, roughly in line with 16
published payroll data.
14
12
The unemployment rate has remained
10
at historically low levels (figure 11). At
8
3.4 percent in January, the jobless rate was
a touch below its level right before the 6
pandemic. Unemployment rates among 4
various age, educational attainment, gender, 2
and ethnic and racial groups are also near their
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023
respective historical lows (figure 12). (The box
“Developments in Employment and Earnings SOURCE: Bureau of Labor Statistics via Haver Analytics.
across Demographic Groups” provides
further details.)
3. Two sectors where employment growth slowed
notably in the second half were transportation and
warehousing—where employment had expanded robustly
since the onset of the pandemic—and retail trade.
12. 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
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023
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.
10 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS
Developments in Employment and Earnings across
Demographic Groups
As the labor market has recovered from the mid-2021 through 2022, as labor market conditions
depths of the pandemic, conditions have become became extremely tight, employment rose faster for the
extremely tight. Tight labor markets, characterized by groups that saw larger initial declines. However, while
low unemployment and plentiful job openings, have disparities in employment have largely returned to
historically proven especially benefi cial to minorities pre-pandemic levels, these disparities are signifi cant in
and less educated workers.1 These disproportionate absolute levels of employment across groups.
benefi ts can help make up for disproportionate losses Differences in employment dynamics between
experienced by the same groups during recessions. groups during the pandemic stem from a mixture of
Tight labor market conditions have largely erased the demand and supply factors. On the labor demand
pandemic-induced widening of the gaps in employment side, for example, the leisure and hospitality sector
across different groups. As shown in the left panel of experienced severe losses in 2020 but has seen a
fi gure A, both men and women aged 25 to 54 with a strong rebound in employment growth in the past two
high school degree or less saw much larger employment years. Since workers with a high school degree or less
declines in early 2020 than workers with at least some are historically more than twice as likely as workers
college education, but by the end of 2022, this gap had with a college degree to be employed in leisure
almost entirely closed.2 The same story is true among and hospitality, part of this group’s unusually large
both Black or African American and Hispanic or Latino employment decline and rebound is likely attributable
workers aged 25 to 54, as shown in the right panel. From to the fl uctuations in labor demand from this sector.3
On the labor supply side, many parents left work during
the pandemic period when schools and childcare
1. See Arthur M. Okun (1973), “Upward Mobility in a High- facilities were closed. This phenomenon appears to
Pressure Economy,” Brookings Papers on Economic Activity,
have been particularly acute for women, especially
no. 1, pp. 207–61, https://www.brookings.edu/wp-content/
uploads/1973/01/1973a_bpea_okun_fellner_greenspan. (continued)
pdf; and Stephanie R. Aaronson, Mary C. Daly, William L.
Wascher, and David W. Wilcox (2019), “Okun Revisited: Who
Benefi ts Most from a Strong Economy?” Brookings Papers on
Economic Activity, Spring, pp. 333–75, https://www.brookings.
edu/wp-content/uploads/2019/03/aaronson_web.pdf. 3. Similarly, Black or African American, Hispanic or
2. Women saw slightly greater employment losses relative Latino, and Asian workers are also overrepresented in the
to men with a similar educational background at the beginning leisure and hospitality industry relative to white workers,
of the pandemic but also experienced a slightly more rapid although these differences are smaller than differences by
recovery. The disproportionate effect of the pandemic on education. See Guido Matias Cortes and Eliza Forsythe (2022),
women contrasts with previous recessions, when employment “Heterogeneous Labor Market Impacts of the COvID-19
has historically fallen more among men than women. Pandemic,” ILR Review, vol. 76 (January), pp. 30–55.
A. Prime-age employment-to-population ratios compared with the 2019 average ratio, by group
Sex and educational attainment Race and ethnicity
Monthly Percentage points Monthly Percentage points
Men, some college or more 4 4
Asian
Women, some college or more + White +
_0 _0
4 4
Men, high school or less
8 8
Black or African American
12 12
Women, high school or less Hispanic or Latino
16 16
2019 2020 2021 2022 2023 2019 2020 2021 2022 2023
NOTE: Prime age is 25 to 54. All series are seasonally adjusted by the Federal Reserve Board staff.
SOURCE: Bureau of Labor Statistics; U.S. Census Bureau, Current Population Survey; Federal Reserve Board staff calculations.
MONETARy POLICy REPORT: MARCH 2023 11
Black and Hispanic mothers, as well as those with less 2022, but growth was higher for non-college-educated
education.4 (For more discussion of recent labor supply workers than for college-educated workers and higher
developments, see the box “Why Has the Labor Force for nonwhite workers than for white workers. This
Recovery Been So Slow?”) largely refl ects that wage growth has been consistently
As labor market conditions have tightened, wage stronger at the lower end of the income distribution
growth has risen sharply, especially for the least (see the lower-right panel).5 Importantly, these higher
advantaged groups. As shown in the upper panels of rates of wage growth for less advantaged groups
fi gure B, growth of nominal hourly wages jumped in coincided with the faster increase in employment,
indicating that labor supply could not keep up with the
growth in labor demand.
4. See Joshua Montes, Christopher Smith, and Isabel Leigh
(2021), “Caregiving for Children and Parental Labor Force
Participation during the Pandemic,” FEDS Notes (Washington:
Board of Governors of the Federal Reserve System, 5. Wage growth for the bottom quartile was a bit stronger
November 5), https://www.federalreserve.gov/econres/notes/ than for other groups even before the pandemic, as labor
feds-notes/caregiving-for-children-and-parental-labor-force- market conditions tightened at the end of the previous
participation-during-the-pandemic-20211105.htm. expansion.
B. Nominal weekly earnings growth, by group
Educational attainment Race
Monthly Percent Monthly Percent
7 7
6 6
High school Nonwhite
5 5
Bachelor’s degree
4 4
White
3 3
Associate’s degree
2019 2020 2021 2022 2023 2019 2020 2021 2022 2023
Sex Wage quartiles
Monthly Percent Monthly Percent
8
7
7
1st quartile
6
6
Women 2nd quartile
5 5
Men 3rd quartile 4
4
3
4th quartile
3
2
2019 2020 2021 2022 2023 2019 2020 2021 2022 2023
NOTE: Series show 12-month moving averages of the median percent change in the nominal hourly wage of individuals observed 12 months apart. In the bottom
right panel, workers are assigned to wage quartiles based on the average of their wage reports in both Current Population Survey outgoing rotation group
interviews; workers in the lowest 25 percent of the average wage distribution are assigned to the 1st quartile, and those in the top 25 percent are assigned to the 4th
quartile.
SOURCE: Federal Reserve Bank of Atlanta, Wage Growth Tracker; Bureau of Labor Statistics; U.S. Census Bureau, Current Population Survey.
12 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS
Labor demand has remained very strong,
showing only tentative signs of easing . . .
Why Has the Labor Force Recovery Been So Slow?
Demand for labor continued to be very strong
in the second half of 2022. The Job Openings
By many measures, the labor market has recovered B. Decomposition of the current labor force shortfall
and Labor Turnover Survey indicated that
strongly. Unemployment is low, job growth has been Millions of people
there were 11 million job openings at the end
robust, and job opportunities are abundant. However,
Total shortfall 3.5
of December—down about 850,000 from the the labor market has underperformed in one key
LFPR 2.1
all-time high recorded last March but still dimension: The labor force, or the number of people Population 1.4
more than 50 percent above pre-pandemic working or looking for work, is well below levels Excess deaths since COVID .5
projected by most observers before the pandemic. This
levels. An alternative measure of job vacancies Net migration slowdown since COVID .9
shortfall has contributed to a widening gap between
constructed by Federal Reserve Board staff Note: The labor force shortfall is calculated over the period from 2019:Q4
labor demand and labor supply and to widespread to 2022:Q4.
using job postings data from the large online labor shortages. Source: Current Population Survey; CDC mortality statistics; staff
calculations.
job board Indeed also shows that vacancies One estimate of the shortfall compares the labor
moved gradually lower throughout 2022 force that the nation has now to the labor force that
might have been expected given past economic
but remain well above pre-pandemic levels.
and demographic trends. One way to make such a likely an upper bound on the true shortfall, in light of
Many employers report having scaled back
comparison is to look at what professional forecasters new data not yet incorporated into the Census Bureau’s
their hiring plans somewhat, though levels of at some point in the past expected the labor force to publicly available population estimates and so not
anticipated hiring remain high by historical be now. For example, comparing the current level of in these calculations.2 Even so, the shortfall appears
standards.4 Also consistent with strong labor the labor force with the Congressional Budget Offi ce’s large and economically signifi cant, and it refl ects
demand, initial claims for unemployment January 2020 projection of its current level suggests a both a lower labor force participation rate and slower
shortfall of about 3½ million (fi gure A).1 That fi gure is population growth than was expected without the
insurance have remained at historically
pandemic (fi gure B).
low levels.
A. Labor force relative to an ex-pandemic counterfactual Lower labor force participation
13. Labor force participation rate . . . while labor supply has increased only
modestly . . . Quarterly Millions The labor force participation rate dropped sharply
Monthly Percent at the onset of the pandemic and has remained
170
Meanwhile, the supply of labor increased persistently below pre-pandemic levels ever since then
67 only modestly last year. The labor force CBO, Jan. 2020 168 (fi gure 13, main text). Earlier in the pandemic, the
66 participation rate, which measures the share 166 low level of participation refl ected several pandemic-
related infl uences (fi gure C). Many people left the labor
65 of people either working or actively seeking 164
force to care for sick relatives or for children learning
64 work, was essentially flat last year and remains 162
Observed labor force (continued on next page)
63 roughly 1¼ percentage points below its 160
February 2020 level (figure 13).5 (See the box
62 158 2022 onto the level of the labor force just before the start of
61 “Why Has the Labor Force Recovery Been 156 the pandemic that is adjusted for population controls. The
So Slow?”) CBO projected the labor force participation rate (LFPR) to
60 decline about ¼ percentage point per year from 2020 onward,
2020 2021 2022
consistent with the downward pressure on the LFPR from the
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023
NOTE: The “CBO, Jan. 2020” line appends the Congressional Budget aging of the baby boomers into retirement ages. The CBO also
4. For example, the (net) share of employers planning Office’s (CBO) January 2020 projected labor force growth onto the level projected the population to increase at an average annual rate
NOTE: The labor force participation rate is a percentage of the to increase payrolls in coming months, as reported by of the labor force at the start of the pandemic through the end of 2022. of 2.1 million from 2020 onward. See Congressional Budget
population aged 16 and over. Data are adjusted for the January 2022 both the staffing firm ManpowerGroup and the National cal S c O u U la R t C io E n : s. C ongressional Budget Office; Federal Reserve Board staff Offi ce (2020), The Budget and Economic Outlook: 2020 to
updated population controls. See Bureau of Labor Statistics (2022),
2030 (Washington: CBO, January), https://www.cbo.gov/
“Adjustments to Household Survey Population Estimates in January Federation of Independent Business, has come down in
2022,” Current Population Survey Technical Documentation, February, recent months but remains elevated. publication/56073.
https://www.bls.gov/cps/population-co ntrol-adjustments-2022.pdf. 2. This analysis does not adjust for the updated
SOURCE: Bureau of Labor Statistics via Haver Analytics. 5. This labor force participation rate (LFPR) estimate 1. All analysis in this discussion is through the end of January 2023 population controls. The January 2023 updated
and figure 13 adjust the historical data to account for 2022 and based on data from the Current Population Survey population controls revised up the level of the labor force in
the updated population estimates produced by the that are adjusted for the January 2022 updated population December 2022 by 871,000 people, which suggests that the
controls as described in the main text. To account for the effect labor force shortfall may be materially smaller. However, as
Census Bureau and incorporated by the Bureau of Labor
of those population controls on the level of the labor force, the detailed population estimates are not yet available, it is
Statistics in their January 2022 Employment Situation the shortfall is calculated by appending the Congressional not possible to precisely estimate the level of the labor force
report. Without making an adjustment for these updated Budget Offi ce’s (CBO) January 2020 projected labor force before the pandemic that refl ects the January 2023 updated
population estimates, the LFPR would erroneously growth from the start of the pandemic through the end of population controls.
appear to have improved more since the onset of the
pandemic and to be only about 1 percentage point below
its pre-pandemic level.
MONETARy POLICy REPORT: MARCH 2023 13
Why Has the Labor Force Recovery Been So Slow?
By many measures, the labor market has recovered B. Decomposition of the current labor force shortfall
strongly. Unemployment is low, job growth has been Millions of people
robust, and job opportunities are abundant. However,
Total shortfall 3.5
the labor market has underperformed in one key
LFPR 2.1
dimension: The labor force, or the number of people
Population 1.4
working or looking for work, is well below levels
Excess deaths since COVID .5
projected by most observers before the pandemic. This
Net migration slowdown since COVID .9
shortfall has contributed to a widening gap between
Note: The labor force shortfall is calculated over the period from 2019:Q4
labor demand and labor supply and to widespread to 2022:Q4.
labor shortages. Source: Current Population Survey; CDC mortality statistics; staff
calculations.
One estimate of the shortfall compares the labor
force that the nation has now to the labor force that
might have been expected given past economic
and demographic trends. One way to make such a likely an upper bound on the true shortfall, in light of
comparison is to look at what professional forecasters new data not yet incorporated into the Census Bureau’s
at some point in the past expected the labor force to publicly available population estimates and so not
be now. For example, comparing the current level of in these calculations.2 Even so, the shortfall appears
the labor force with the Congressional Budget Offi ce’s large and economically signifi cant, and it refl ects
January 2020 projection of its current level suggests a both a lower labor force participation rate and slower
shortfall of about 3½ million (fi gure A).1 That fi gure is population growth than was expected without the
pandemic (fi gure B).
A. Labor force relative to an ex-pandemic counterfactual Lower labor force participation
Quarterly Millions The labor force participation rate dropped sharply
at the onset of the pandemic and has remained
170
persistently below pre-pandemic levels ever since then
CBO, Jan. 2020
168 (fi gure 13, main text). Earlier in the pandemic, the
166 low level of participation refl ected several pandemic-
related infl uences (fi gure C). Many people left the labor
164
force to care for sick relatives or for children learning
162
Observed labor force (continued on next page)
160
158 2022 onto the level of the labor force just before the start of
156 the pandemic that is adjusted for population controls. The
CBO projected the labor force participation rate (LFPR) to
decline about ¼ percentage point per year from 2020 onward,
2020 2021 2022
consistent with the downward pressure on the LFPR from the
NOTE: The “CBO, Jan. 2020” line appends the Congressional Budget aging of the baby boomers into retirement ages. The CBO also
Office’s (CBO) January 2020 projected labor force growth onto the level projected the population to increase at an average annual rate
of the labor force at the start of the pandemic through the end of 2022.
of 2.1 million from 2020 onward. See Congressional Budget
SOURCE: Congressional Budget Office; Federal Reserve Board staff
calculations. Offi ce (2020), The Budget and Economic Outlook: 2020 to
2030 (Washington: CBO, January), https://www.cbo.gov/
publication/56073.
2. This analysis does not adjust for the updated
1. All analysis in this discussion is through the end of January 2023 population controls. The January 2023 updated
2022 and based on data from the Current Population Survey population controls revised up the level of the labor force in
that are adjusted for the January 2022 updated population December 2022 by 871,000 people, which suggests that the
controls as described in the main text. To account for the effect labor force shortfall may be materially smaller. However, as
of those population controls on the level of the labor force, the detailed population estimates are not yet available, it is
the shortfall is calculated by appending the Congressional not possible to precisely estimate the level of the labor force
Budget Offi ce’s (CBO) January 2020 projected labor force before the pandemic that refl ects the January 2023 updated
growth from the start of the pandemic through the end of population controls.
14 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS
Why Has the Labor Force Recovery Been So Slow? (continued)
C. Nonparticipation in the labor force as a percent of the D. Retired share of the population (aged 16 and older),
population and by reason, relative to February 2020 actual relative to expected
Monthly Change since Feb. 2020 as percent of population Monthly Percent
3.5
Not in labor force 20
3.0 Observed retired
share
2.5 19
Retirements
2.0
18
Expected retired
1.5 share
1.0 17
Caregiving
.5
+ 16
_0
15
Other .5
2020 2021 2022 2008 2010 2012 2014 2016 2018 2020 2022
NOTE: The curves show estimates of the percent of the population
NOTE: Data are adjusted for the January 2022 updated population
indicating they are not in the labor force for various reasons, relative to
controls. The shaded bars indicate periods of business recession as
February 2020 values. The “Other” category includes disability, illness,
defined by the National Bureau of Economic Research. The data extend
school, and all other reasons. The data extend through December 2022.
through December 2022.
Su
S
rv
O
e
U
y
R
,
C
B
E
u
:
re
S
a
ta
u
ff
o f
e s
L
ti
a
m
b
a
o
t
r
e
S
s
t
u
a
s
t
i
i
n
st
g
ic
m
s.
icrodata from the Current Population SOURCE: Joshua Montes, Christopher Smith, and Juliana Dajon
(2022), “ ‘The Great Retirement Boom’: The Pandemic-Era Surge in
Retirements and Implications for Future Labor Force Participation,”
Finance and Economics Discussion Series 2022-081 (Washington: Board
of Governors, November), https://doi.org/10.17016/FEDS.2022.081.
remotely. Others withdrew because they were sick with
COvID-19 or feared getting COvID-19 at work. Many
others retired early. As COvID concerns have waned,
the infl uence of caregiving and fears of contracting
Several factors have led to people retiring before
COvID at work have diminished, whereas the
they otherwise would have. Health concerns likely
contribution of retirements has increased. As a result,
contributed to a portion of the excess retirements, as
essentially all of the current participation rate shortfall
COvID poses a particularly large risk to the health
can be accounted for by the higher percentage of the
of older people. In addition, many older workers lost
population that is retired.
their jobs early in the pandemic when layoffs were
The retired share of the population jumped sharply
historically high, and fi nding new employment may
at the onset of the pandemic (fi gure D, blue line). Some
have been particularly diffi cult for those workers given
of this increase was to be expected. In the decade
pandemic-related disruptions to the work environment
leading up to the pandemic, retirements increased
and health concerns. Indeed, workers aged 65 and
steadily as the baby-boom cohort aged. If the pandemic
over who lost their job during the pandemic had much
had not occurred, this trend of rising retirements
lower reemployment rates and much higher rates
would have likely continued (fi gure D, black line).
of labor force exit than did similarly aged displaced
Currently, however, the total number of people retired
is well above that expected level. Excess retirements (continued)
(the difference between total and expected) number
roughly 2.2 million and are concentrated among older
Americans, particularly among people aged 65
Retirement Boom’: The Pandemic-Era Surge in Retirements and
and over.3
Implications for Future Labor Force Participation,” Finance and
Economics Discussion Series 2022-081 (Washington: Board of
3. For more on pandemic retirements, see Joshua Montes, Governors of the Federal Reserve System, November), https://
Christopher Smith, and Juliana Dajon (2022), “ ‘The Great doi.org/10.17016/FEDS.2022.081.
MONETARy POLICy REPORT: MARCH 2023 15
workers in the years just before the pandemic.4 Further, E. Labor force participation rate for prime-age people
increases in wealth, fueled by gains in the stock market
and rising house prices in the fi rst two years of the Monthly Percent
pandemic, may have allowed some people to retire
early, and research suggests that excess retirements 84
have been largest among college-educated and white
workers—the groups that likely benefi ted most from 83
the stock market and house price gains earlier in the
82
pandemic. There is little sign yet of a reduction in
excess retirements. Instead, older workers are still 81
retiring at higher rates than before the pandemic, and
retirees are not returning to the labor force in suffi cient 80
numbers to reduce the total number of retirees.
79
In contrast, participation for those aged 25 to 54
(prime age) has mostly returned to pre-COvID levels
(fi gure E). This recovery likely refl ects the abundance of 2016 2017 2018 2019 2020 2021 2022
job opportunities and strong wage growth as well as the NOTE: The shaded bar indicates a period of business recession as
defined by the National Bureau of Economic Research. The data extend
waning infl uence of COvID-related factors. However,
through December 2022.
the prime-age participation rate did move somewhat SOURCE: Bureau of Labor Statistics via Haver Analytics.
lower the last few months of 2022. Although the drag
on participation from caregiving has diminished since
the fi rst year of the pandemic, it remains elevated
Lower population growth
relative to its pre-pandemic level and, in fact, moved
higher over the second half of 2022—perhaps because The second contributor to the labor force shortfall
many caretakers have been unable to participate in the is slower population growth. Over the decade before
labor force because of fl u, COvID, or other respiratory the pandemic, the population increased about
illness among their children and other family 1 percent per year. Since the start of 2020, annual
members.5 Further, many workers are still out of work population growth has slowed to about ½ percent
because they are sick with COvID or continue to suffer per year, on average, resulting in slower labor force
lingering symptoms from previous COvID infections growth for a given participation rate. That slowdown
(“long COvID”), and their illness is likely depressing refl ects two factors. First, primarily because of COvID,
participation to some extent.6 mortality over the past few years has far exceeded
what was expected before the pandemic; even
though the mortality was concentrated among older
4. See Bureau of Labor Statistics (2022), “Displaced
Workers Summary,” Economic News Release, August 26, Americans who are less likely to be working, it still has
https://www.bls.gov/news.release/disp.nr0.htm. contributed about 500,000 to the labor force shortfall.
5. For more on how caregiving burdens affected labor Second, pandemic-related restrictions on entry into
force participation in the fi rst year and a half of the pandemic,
see, for example, Joshua Montes, Christopher Smith, and (continued on next page)
Isabel Leigh (2021), “Caregiving for Children and Parental
Labor Force Participation during the Pandemic,” FEDS Notes
(Washington: Board of Governors of the Federal Reserve
System, November 5), https://doi.org/10.17016/2380- Participation? Not Much (So Far),” Hutchins Center Working
7172.3013. Paper Series 80 (Washington: Brookings Institution, October),
6. See, for example, Gopi Shah Goda and Evan J. Soltas https://www.brookings.edu/wp-content/uploads/2022/10/
(2022), “The Impacts of COvID-19 Illnesses on Workers,” WP80-Sheiner-Salwati_10.27.pdf; and Brendan M. Price
NBER Working Paper Series 30435 (Cambridge, Mass.: (2022), “Long COvID, Cognitive Impairment, and the Stalled
National Bureau of Economic Research, September), https:// Decline in Disability Rates,” FEDS Notes (Washington: Board
doi.org/10.3386/w30435; Louise Sheiner and Nasiha Salwati of Governors of the Federal Reserve System, August 5), https://
(2022), “How Much Is Long COvID Reducing Labor Force doi.org/10.17016/2380-7172.3189.
16 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS
Why Has the Labor Force Recovery Been So Slow? (continued)
the U.S. substantially slowed total immigration in retirements suggests this reentry is not yet happening. In
the fi rst two years of the pandemic. Although net contrast, some further gains in labor force participation
migration rebounded considerably in 2022, lower among younger people may be possible. Over the fi ve
net international migration since the start of the years before the pandemic, the participation rate for
pandemic has lowered the labor force by as much as 25-to-54-year-olds increased signifi cantly, partially
900,000 people relative to pre-pandemic trends.7 reversing a multidecade decline in their labor force
participation, and the participation rate for this group
seemed poised for further gains had the pandemic
Looking ahead
not occurred. However, even if further increases in
Due to the aging of the population, a meaningful participation among younger people occur, those
reversal of the run-up in the retired share of the increases would likely only gradually reduce the overall
population seems unlikely, and the labor force labor force shortfall.
participation rate is likely to remain well below its level Regarding population growth, as pandemic-
from before the pandemic. It is possible that some of related restrictions on immigration have eased,
those who retired during the pandemic will reenter the immigration has started to rebound. If net migration
labor force, but the persistently high level of excess continues to move higher, it may help alleviate labor
shortages, as immigrant workers have tended to work
in industries and jobs where labor shortages appear
particularly acute, such as childcare, health care, and
7. There is considerable uncertainty about the contribution accommodation and food services.8
of changes in immigration since the start of the pandemic to
the labor force shortfall, especially in light of the revisions to
the historical level of the labor force due to the January 2023
updated population controls and because of the pickup in
immigration over 2022, which lowered its contribution to the 8. Immigration had slowed markedly in the few years
labor force shortfall. The 900,000-person contribution of lower before the pandemic. If immigration rises only to the relatively
immigration to the labor force shortfall is likely an upper- low levels prevailing before the pandemic, the population will
bound estimate. grow at a historically low rate.
MONETARy POLICy REPORT: MARCH 2023 17
. . . resulting in an extremely tight
14. Available jobs versus available workers
labor market
Monthly Millions
As a result, the labor market remains
175
extremely tight despite some tentative signs of
170
modest easing. The number of total available
165
jobs (measured by total employment plus
160
posted job openings) continues to far exceed Available workers
155
the number of available workers (measured by
the size of the labor force). This jobs–workers 150
gap was 5.3 million at the end of the year, Available jobs 145
down about 600,000 from the peak recorded 140
last March but still very elevated by historical 135
standards (figure 14).6 The share of workers
2002 2005 2008 2011 2014 2017 2020 2023
quitting jobs each month, an indicator of the
NOTE: Available jobs are employment plus job openings as of the
availability of attractive job prospects, was end of the previous month. Available workers are the labor force. Data
are adjusted for the January 2022 updated population controls. See
2.7 percent at the end of the year, somewhat Bureau of Labor Statistics (2022), “Adjustments to Household Survey
below the all-time high of 3 percent reported Population Estimates in January 2022,” Current Population Survey
Technical Documentation, February, https://www.bls.gov/cps/populat
a year earlier but still elevated. Similarly, tion-control-adjustments-2022.pdf.
SOURCE: Bureau of Labor Statistics; Job Openings and Labor
households’ and small businesses’ perceptions Turnover Survey; all via Haver Analytics; Federal Reserve Board staff
of labor market tightness have come down calculations.
from their recent peaks but remain high.
And many employers across Federal Reserve
Districts reported some easing of hiring and
retention difficulties but continued to view
labor market conditions as tight.7
15. Measures of change in hourly compensation
Wage growth has slowed but
Percent change from year earlier
remains elevated
Wage growth slowed in the second half of 10
Average hourly earnings,
2022 but was still elevated (figure 15). Total private sector
8
hourly compensation as measured by the
employment cost index increased at an annual 6
Atlanta Fed’s
rate of 4.1 percent in the second half of last Wage Growth Tracker
4
year, a strong gain but a step-down from the
2
6.0 percent increase observed during the first
Employment cost index,
half. Increases in average hourly earnings (a private sector 0
less comprehensive measure of compensation)
have slowed as well, rising 4.4 percent over the 2013 2015 2017 2019 2021 2023
12 months to January, down from 5.7 percent NOTE: For the private-sector employment cost index, change is over
the 12 months ending in the last month of each quarter; for private-sector
over the preceding 12 months. Wage growth as
average hourly earnings, the data are 12-month percent changes; for the
computed by the Federal Reserve Bank of Atlanta Fed’s Wage Growth Tracker, the data are shown as a 3-month
moving average of the 12-month percent change.
SOURCE: Bureau of Labor Statistics; Federal Reserve Bank of Atlanta,
Wage Growth Tracker; all via Haver Analytics.
6. The ratio of job openings to unemployment shows
that there were 1.9 job openings per unemployed person
in December 2022. For comparison, this ratio averaged
1.2 in 2019 and 0.6 over the 10-year period from 2010
to 2019.
7. See the January 2023 Beige Book, available on
the Board’s website at https://www.federalreserve.gov/
monetarypolicy/publications/beige-book-default.htm.
18 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS
Atlanta, which tracks the median 12-month
wage growth of individuals responding to the
Current Population Survey, was 6.1 percent in
January, down from its peak last summer but
well above the 3 to 4 percent pace reported
over the previous few years.
Following a period of strong growth,
labor productivity weakened last year
16. U.S. labor productivity The extent to which wage gains raise
firms’ costs and act as a source of inflation
Quarterly 2012 = 100
pressure depends importantly on the pace of
118 productivity growth. Productivity rose at a
116 rapid average pace of 3¼ percent over 2020
114 and 2021, but it declined last year as output
112 growth slowed and employment growth held
110
up (figure 16). In retrospect, much of the
108
strong productivity growth in 2020 and 2021
106
seems to have been the result of temporary
104
pandemic-related factors such that the
102
100 decline in 2022 may reflect a normalization
98 as productivity moves back toward its trend.
In 2021, as the economy reopened, firms
2010 2012 2014 2016 2018 2020 2022
struggled to hire workers, and many firms
NOTE: The data are output per hour in the nonfarm business
sector. temporarily operated with overstretched
SOURCE: Bureau of Labor Statistics via Haver Analytics. workforces.8 Subsequently, the slowdown in
aggregate demand last year allowed many
firms to catch up in their hiring.9
The pace of productivity growth going
forward remains very uncertain. Productivity
growth averaged only about 1 percent per
year during the expansion that preceded the
pandemic recession, and it is possible that
the economy will return to a similar low-
productivity growth regime. However, it
also seems possible that the high rate of new
business formation, widespread adoption of
remote-work technology, and the wave of
8. In 2020, there were also significant composition
effects boosting labor productivity, as pandemic-induced
employment losses were largest in lower-productivity
services sectors. Employment composition looks to have
largely normalized by 2021.
9. Consistent with this view, the November 2022
Beige Book reported that many employers cited
concerns that their workforce was being overworked
as an important reason for hiring; see that publication,
which can be found on the Board’s website at https://
www.federalreserve.gov/monetarypolicy/files/
BeigeBook_20221130.pdf.
MONETARy POLICy REPORT: MARCH 2023 19
labor-saving investments that the pandemic
brought about could boost productivity
growth above that pace in coming years.
Momentum in gross domestic product
has slowed
After the strong rebound in 2021 from the
pandemic-induced recession, economic activity
lost momentum last year. Although real gross
domestic product (GDP) is reported to have
risen at a solid 3.0 percent pace in the second 17. Real gross domestic product
half of 2022, growth in real private domestic
Quarterly Trillions of chained 2012 dollars
final purchases—consumer spending plus
residential and business fixed investment, a 20.5
measure of output that often better reflects the
20.0
underlying momentum of economic activity—
19.5
slowed to just a 0.6 percent pace (figure 17).
19.0
Consumer spending growth held up last year,
18.5
but the fundamentals that underpin household
spending have deteriorated. Business 18.0
investment rose moderately in the second half 17.5
of 2022, although new orders indexes, business 17.0
sentiment, and profit expectations suggest
2015 2016 2017 2018 2019 2020 2021 2022
that spending growth may slow. And activity
in the housing sector contracted sharply last SOURCE: Bureau of Economic Analysis via Haver Analytics.
year in response to elevated mortgage rates.
Finally, manufacturing output moved lower,
on net, over the past few months, with surveys
of manufacturing pointing to continued
weakness in coming months. Diffusion indexes
of new orders from various manufacturing
surveys are well into contractionary territory,
and backlogs of existing orders have
declined sharply.
Consumer spending grew moderately
18. Real personal consumption expenditures
last year . . .
Trillions of chained 2012 dollars Trillions of chained 2012 dollars
Consumer spending adjusted for inflation grew
at a 1.8 percent rate in the second half of 2022, 6.0 9.5
about the same pace as in the first half of the 5.5
9.0
year. And, averaging through some recent 5.0
8.5
volatility, consumer spending has continued to
4.5
look solid in the most recent data. Spending 8.0
Goods
4.0
increases over the past year have been 7.5
3.5
concentrated in services, whereas spending on
3.0 Services 7.0
goods has remained roughly flat since mid-
2021 following its surge during 2020 and early 2.5 6.5
2021, suggesting that consumers’ spending
2007 2009 2011 2013 2015 2017 2019 2021 2023
habits have been returning toward their pre-
NOTE: The data are monthly.
pandemic patterns (figure 18). SOURCE: Bureau of Economic Analysis via Haver Analytics.
20 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS
19. Indexes of consumer sentiment . . . even as real disposable income fell
and consumer confidence was low
Monthly 2018 average = 100
The fundamentals for household spending,
110
Michigan survey 100 however, appear to be somewhat less
90 supportive of spending growth. Despite the
80 sizable increases in jobs and wages last year,
70
after factoring in the rise in prices, higher
60
Conference Board tax payments, and reduced transfers, real
50
disposable income fell 1.4 percent in 2022. And
40
30 the University of Michigan index of consumer
20 sentiment remains very low by historical
10 standards despite a move higher in the second
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 half of 2022 (figure 19).
NOTE: The data extend through February 2023.
SOURCE: University of Michigan Surveys of Consumers; Conference As real incomes fell, households likely relied
Board.
on the savings that had been accumulated
during the pandemic as well as higher
wealth—reflecting, in part, house price gains
20. Personal saving rate
over the past few years that outweighed the
Monthly Percent drag from recent equity price declines—to
fund continued consumption. As a result, the
36
personal saving rate fell to its lowest levels
32
since the Great Recession (figure 20).
28
24
Consumer financing conditions have
20
tightened somewhat
16
12
Interest rates on credit cards and auto loans
8
continued to increase last year and are now
4
higher than the levels observed in 2018 at
0
the peak of the previous monetary policy
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 tightening cycle. In addition, banks reported
SOURCE: Bureau of Economic Analysis via Haver Analytics. tighter lending standards across consumer
credit products in the second half of 2022,
in part reflecting increases in delinquency
21. Consumer credit flows
rates and concerns about further future
deterioration in credit performance. After
Billions of dollars, monthly rate
reaching record lows in 2021, delinquency
Student loans
40 rates for credit cards and auto loans rose
Auto loans
Credit cards last year. That said, the share of delinquent
30
balances for credit cards remained low, while
20
that for auto loans is just a little above its pre-
10 pandemic level. Despite these tighter financial
+
0 conditions, financing has been generally
_
available to support consumer spending, and
10
consumer credit continued to expand in the
20
past several months (figure 21). Total credit
card balances have increased across the credit
2010 2012 2014 2016 2018 2020 2022
score distribution, and auto loans continued to
SOURCE: Federal Reserve Board, Statistical Release G.19, “Consumer
Credit.” rise at a robust pace.
MONETARy POLICy REPORT: MARCH 2023 21
Housing market activity has 22. Mortgage interest rates
declined sharply
Weekly Percent
After rising further over the summer, mortgage
rates have fallen back some but remain roughly 8
3 percentage points higher than their levels 7
a year ago (figure 22). Although mortgage
6
credit broadly remains available, the move
5
up in mortgage rates (along with the earlier
large home price increases) has greatly 4
reduced affordability and further depressed 3
homebuying sentiment, leading to a sharp
2
decline in demand to purchase homes. Home
sales fell precipitously last year and are now 2013 2015 2017 2019 2021 2023
at levels seen during the financial crisis, while NOTE: The data are contract rates on 30-year, fixed-rate conventional
house prices have ceased their sharp increases home mortgage commitments and extend through February 23, 2023.
SOURCE: Freddie Mac Primary Mortgage Market Survey.
(figures 23 and 24).
The drop in housing demand, combined with a 23. New and existing home sales
larger-than-normal backlog of homes already
Millions, annual rate Millions, annual rate
in the construction pipeline, has led builders to
sharply cut back the number of new housing 1.6 7.0
starts. Single-family starts collapsed from their 6.6
1.4
2021 highs, though multifamily starts have 6.2
1.2 Existing home sales
5.8
held up, likely supported by a shift in demand
1.0 5.4
toward rentals given the decline in purchase
.8 5.0
affordability (figure 25).
4.6
.6
4.2
Capital spending grew at a solid pace .4
3.8
in the second half last year but has
.2 New home sales 3.4
been slowing
2007 2009 2011 2013 2015 2017 2019 2021 2023
Business investment in equipment and
NOTE: The data are monthly. New home sales include only
intangible capital grew at a solid 5 percent single-family sales. Existing home sales include single-family, condo, and
co-op sales.
pace in the second half of 2022 (figure 26). SOURCE: For new home sales, U.S. Census Bureau; for existing home
sales, National Association of Realtors; all via Haver Analytics.
The increase in part reflects a jump in spending
on transportation equipment, as supply
bottlenecks in the motor vehicles sector eased
and aircraft shipments stepped up. Excluding
the volatile transportation category, investment
in equipment and intangibles declined in the
fourth quarter, likely reflecting tighter financial
conditions for businesses as well as tepid
growth in demand. In contrast, investment
in nonresidential structures—which tends to
respond with a lag to economic conditions—
has shown signs of turning up of late,
after falling further last year amid ongoing
pandemic-related weakness in demand for
categories such as office buildings.
22 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS
24. Real prices of existing single-family houses While business sentiment has declined
significantly and financial conditions have
Monthly January 2005 = 100
tightened, survey indicators of capital
150 spending plans have continued to hold up and
S&P/Case-Shiller 140 remain above levels that would normally be
national index
130 associated with a sharp downturn in capital
120
Zillow index spending.
110
100 Business financing conditions tightened,
90 but credit generally remained available
80
CoreLogic 70 Credit remained available to most nonfinancial
price index 60 corporations but at generally higher interest
rates and under tighter financial conditions
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023
more broadly. Issuance of leveraged loans
NOTE: Series are deflated by the personal consumption expenditures
price index. CoreLogic is not seasonally adjusted. The data for S&P and speculative-grade corporate bonds
Case-Shiller and CoreLogic extend through December 2022. slowed substantially in the second half of the
SOURCE: Bureau of Economic Analysis via Haver Analytics;
CoreLogic Home Price Index; Zillow, Inc., Real Estate Data; year, while investment-grade bond issuance
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. declined modestly. Banks tightened lending
(For Dow Jones Indices licensing information, see the note on the
standards on commercial and industrial
Contents page.)
loans and commercial real estate loans over
25. Private housing starts and permits
the third and fourth quarters of 2022. Credit
remained tight for lower-rated borrowers
Monthly Millions of units, annual rate
and tightened further for bank-dependent
1.4 borrowers. Business loans at banks continued
Single-family starts 1.2 to grow in the second half of 2022 but
1.0 started to decelerate in the fourth quarter,
.8 thus moderating the robust pace of growth
Single-family .6 observed earlier in the year. Despite the
permits
increase in borrowing costs, credit quality has
.4
remained strong for most nonfinancial firms.
.2
Multifamily starts However, some predictors of future business
0
defaults suggest that defaults are more likely.
2007 2009 2011 2013 2015 2017 2019 2021 2023
Meanwhile, financing conditions for small
SOURCE: U.S. Census Bureau via Haver Analytics.
businesses have remained stable over the past
26. Real business fixed investment year. While credit supply appears to have
tightened slightly and interest rates on small
Billions of chained 2012 dollars Billions of chained 2012 dollars
business loans have risen notably in recent
650 Equipment and 2,600 months, credit availability is broadly in line
intangible capital
2,400 with pre-pandemic levels. Loan performance
600
2,200 remains strong but shows signs of weakening,
550 2,000 as default and delinquency rates remain
500 1,800 below their pre-pandemic levels but have risen
1,600 moderately since last spring.
450
1,400
400 Trade softened amid slowing
Structures 1,200
goods demand
350
1,000
After growing at a notable pace during the
2007 2010 2013 2016 2019 2022
first half of the year, real imports declined in
NOTE: Business fixed investment is known as “private nonresidential
fixed investment” in the national income and product accounts. The data the second half, reflecting softening domestic
are quarterly.
demand for goods (figure 27). Real exports
SOURCE: Bureau of Economic Analysis via Haver Analytics.
MONETARy POLICy REPORT: MARCH 2023 23
increased modestly, restrained by the past 27. Real imports and exports of goods and services
appreciation of the dollar and weak foreign
Quarterly Billions of chained 2012 dollars
demand. Real exports of services, especially
travel services, continue to slowly recover but 4,000
3,750
remain subdued. The current account deficit as
3,500
a share of GDP narrowed over the second half Imports
3,250
of last year but remains wider than before the
3,000
pandemic. 2,750
Exports 2,500
The support to economic activity
2,250
from federal fiscal actions has largely 2,000
phased out 1,750
1,500
The federal government enacted a historic set
2008 2010 2012 2014 2016 2018 2020 2022
of fiscal policies to alleviate hardship caused
SOURCE: Bureau of Economic Analysis via Haver Analytics.
by the pandemic and to support the economic
recovery. Policies such as stimulus checks,
supplemental unemployment insurance, and
child tax credit payments aided households;
grants-in-aid supported state and local
governments; and business support programs
such as the Paycheck Protection Program
helped support firms. The support to the level
of GDP from these temporary policies has
been diminishing, and their unwinding likely
imposed a drag on GDP growth in 2022 as the
effects on spending waned.
The budget deficit fell sharply from
pandemic highs, causing growth in
28. Federal receipts and expenditures
federal debt to moderate
Annual Percent of nominal GDP
Fiscal policies enacted since the start of
the pandemic, combined with the effects of 32
30
automatic stabilizers—the reduction in tax
28
receipts and the increase in transfers that
26
occur because of subdued economic activity— Expenditures
24
caused the federal deficit to surge to 15 percent
22
of GDP in fiscal 2020 and to more than Receipts
20
12 percent in fiscal 2021 (figure 28).10 However,
18
16
10. For more information, see Congressional Budget 14
Office (2020), “The Budgetary Effects of Laws Enacted in
Response to the 2020 Coronavirus Pandemic, March and 1997 2002 2007 2012 2017 2022
April 2020,” June, https://www.cbo.gov/system/files/2020- NOTE: The receipts and expenditures data are on a unified-budget
06/56403-CBO-covid-legislation.pdf; Congressional basis and are for fiscal years (October through September); gross
domestic product (GDP) data are on a 4-quarter basis ending in Q3.
Budget Office (2021), “The Budgetary Effects of Major SOURCE: Department of the Treasury, Financial Management Service;
Laws Enacted in Response to the 2020–21 Coronavirus Office of Management and Budget and Bureau of Economic Analysis via
Haver Analytics.
Pandemic, December 2020 and March 2021,” September,
https://www.cbo.gov/system/files/2021-09/57343-
Pandemic.pdf; and Congressional Budget Office
(2021), “Senate Amendment 2137 to H.R. 3684, the
Infrastructure Investment and Jobs Act, as Proposed on
August 1, 2021,” August 9, https://www.cbo.gov/system/
files/2021-08/hr3684_infrastructure.pdf.
24 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS
29. Federal government debt and net interest outlays with pandemic-related fiscal support fading
and receipts on the rise, the deficit fell to
Percent of nominal GDP Percent of nominal GDP
5.5 percent of GDP in 2022.
Net interest outlays
3.5 on federal debt 120
As a result of the unprecedented fiscal
3.0 100
support enacted early in the pandemic, federal
2.5 80 debt held by the public jumped roughly
20 percentage points to 100 percent of GDP
2.0 60
in fiscal 2020—the highest debt-to-GDP ratio
1.5 40
since 1947 (figure 29). With deficits falling and
1.0 Debt held by 20 economic growth rebounding since fiscal 2020,
the public
.5 0 the debt-to-GDP ratio has since leveled off
but is expected to remain elevated compared
1902 1922 1942 1962 1982 2002 2022 with the years before the pandemic. With
NOTE: The data for net interest outlays are annual, begin in 1948, and interest rates on the rise, net interest outlays
extend through 2022. Net interest outlays are the cost of servicing the
debt held by the public. Federal debt held by the public equals federal have recently picked up and are expected to
debt less Treasury securities held in federal employee defined-benefit
continue to grow over the next few years.
retirement accounts, evaluated at the end of the quarter. The data for
federal debt are annual from 1901 to 1951 and a four-quarter moving
average thereafter and extend through 2022:Q3. GDP is gross domestic
State and local government budget
product.
SOURCE: For GDP, Bureau of Economic Analysis via Haver positions remain strong . . .
Analytics; for federal debt, Congressional Budget Office and Federal
Reserve Board, Statistical Release Z.1, “Financial Accounts of the
United States.” Federal policymakers provided a historical
level of fiscal support to state and local
30. State and local tax receipts governments during the pandemic, leaving
the sector in a strong budget position overall.
Percent change from year earlier
In addition, total state tax collections rose
appreciably in 2021 and 2022, pushed up by
30
Total state taxes the economic recovery (figure 30). In response
25
to their strong budget positions, lawmakers
20
cut state taxes by roughly $16 billion in state
15
fiscal year 2023 according to the National
Property taxes
10 Association of State Budget Officers.
5
+
_0 At the local level, property taxes have
continued to rise, and the typically long lags
5
between changes in the market value of real
2012 2014 2016 2018 2020 2022 estate and changes in taxable assessments
NOTE: State tax data are year-over-year percent changes of 12-month suggest that property tax revenues will
moving averages, begin in June 2012, extend through December 2022,
and are aggregated over all states except Wyoming, for which data are continue to grow despite the recent sharp
not available. Revenues from Washington, D.C., are also excluded. The
deceleration in house prices.
data extend only through September 2022 for New Mexico and
November 2022 for Nevada and South Dakota, as these states have
longer reporting lags than others. Property tax data are year-over-year
. . . yet employment and construction
percent changes of 4-quarter moving averages, begin in 2012:Q2, extend
through 2022:Q3, and are primarily collected by local governments. outlays are still below their pre-
SOURCE: Monthly State Government Tax Revenue Data via Urban
Institute; U.S. Census Bureau, Quarterly Summary of State and Local pandemic levels
Government Tax Revenue.
Despite the strong fiscal position of state and
local governments, the sector’s payrolls have
regained approximately three-fourths of their
sizable pandemic losses, and real infrastructure
spending by these governments is 10 percent
below pre-pandemic levels. Nevertheless, both
infrastructure outlays and employment showed
MONETARy POLICy REPORT: MARCH 2023 25
signs of a recovery in the second half of 2022 31. State and local government payroll employment
(figure 31).
Monthly Millions of jobs
Financial Developments
20.5
The expected level of the federal funds 20.0
rate over the next year shifted up notably
19.5
The FOMC raised the target range for the
19.0
federal funds rate a further 3 percentage points
since June. Market-based measures of the path 18.5
of the federal funds rate expected to prevail
18.0
through the first half of 2024 also shifted up
notably over the same period (figure 32).11 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023
According to these market-based measures, SOURCE: Bureau of Labor Statistics via Haver Analytics.
investors anticipate that the federal funds rate
will peak at more than 5 percent in mid-2023,
32. Market-implied federal funds rate path
which is about 2 percentage points higher
than the peak rate that had been expected in Quarterly Percent
June. The market path implies that market 5.5
participants believe that the federal funds February 28, 2023 5.0
4.5
rate will fall gradually starting around the
4.0
fourth quarter of 2023 and will reach about
3.5
3.3 percent by the end of 2025. The results of 3.0
the Survey of Primary Dealers and the Survey 2.5
2.0
of Market Participants, both conducted by the
June 22, 2022 1.5
Federal Reserve Bank of New York in January,
1.0
similarly indicate that respondents’ projections .5
of the most likely path of the federal funds 0
rate over 2023 and 2024 shifted up significantly 2022 2023 2024 2025 2026 2027
since June.12 NOTE: The federal funds rate path is implied by quotes on overnight
index swaps—a derivative contract tied to the effective federal funds rate.
The implied path as of June 22, 2022, is compared with that as of
Yields on U.S. nominal Treasury securities February 28, 2023. The path is estimated with a spline approach,
assuming a term premium of 0 basis points. The June 22, 2022, path
also rose considerably
extends through 2026:Q2 and the February 28, 2023, path through
2027:Q1.
Short-term yields have increased substantially SOURCE: Bloomberg; Federal Reserve Board staff estimates.
further since June, reflecting expectations
for a higher path for the federal funds rate, 33. Yields on nominal Treasury securities
while long-term yields have risen notably
Daily Percent
further, following a considerable rise in yields
across maturities over the first half of 2022
5
(figure 33). The increases in nominal yields
5-year 4
10-year 3
11. These measures are based on market prices for
effective federal funds overnight interest rate swaps and 2
are not adjusted for term premiums.
12. The results of the Survey of Primary Dealers 2-year 1
and the Survey of Market Participants are available
0
on the Federal Reserve Bank of New York’s website at
https://www.newyorkfed.org/markets/primarydealer_
survey_questions.html and https://www.newyorkfed.org/ 2011 2013 2015 2017 2019 2021 2023
markets/survey_market_participants, respectively. SOURCE: Department of the Treasury via Haver Analytics.
26 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS
since June were primarily accounted for by
higher real yields, consistent with expectations
for more restrictive monetary policy.
Yields on other long-term debt increased
modestly
34. Corporate bond yields, by securities rating, and After increasing substantially over the first half
municipal bond yield
of 2022, corporate bond yields for investment-
Daily Percent grade borrowers and yields for municipal
borrowers have increased moderately further
Investment-grade corporate 12 since June, while yields for speculative-grade
High-yield corporate
10 corporate borrowers are about unchanged
(figure 34). Corporate and municipal bond
8
spreads over comparable-maturity Treasury
6
securities have declined somewhat since June,
4 particularly so for speculative-grade corporate
2 bonds, and are now near levels prevailing
Municipal shortly before the pandemic. Corporate and
0
municipal credit quality remains strong, and
2011 2013 2015 2017 2019 2021 2023 defaults have been low in 2022 and thus far in
2023. However, an indicator of future business
NOTE: Investment-grade corporate reflects the effective yield of the
ICE Bank of America Merrill Lynch (BofAML) triple-B U.S. Corporate defaults is elevated.
Index (C0A4). High-yield corporate reflects the effective yield of the ICE
BofAML H igh Y ield I ndex (H 0A0). M unicipal reflects the yield to worst
of the ICE BofAML U.S. Municipal Securities Index (U0A0).
Yields on agency mortgage-backed securities
SOURCE: ICE Data Indices, LLC, used with permission.
(MBS)—an important pricing factor for home
mortgage rates—generally moved in line with
longer-dated Treasury yields since June and
have increased notably on net (figure 35). The
35. Yield and spread on agency mortgage-backed
MBS spread remains elevated relative to pre-
securities
pandemic levels, at least partly resulting from
Percent Basis points the large amount of interest rate volatility,
which reduces the value of holding MBS.
7 250
6 Broad equity price indexes increased
200
moderately, on net, amid substantial
5
Yield 150 volatility
4
100
After declining sharply over the first half of
3
Spread 50 2022, broad equity price indexes have been
2
volatile and have increased moderately since
1 0 June, on net, as inflation pressures showed
some signs of easing and earnings remained
2011 2013 2015 2017 2019 2021 2023
resilient (figure 36). One-month option-implied
NOTE: The data are daily. Yield shown is for the uniform
mortgage-backed securities 30-year current coupon, the coupon rate at volatility on the S&P 500 index—the VIX—
which new mortgage-backed securities would be priced at par, or face, has declined notably but remains moderately
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 above the median of its historical distribution
average of the 5-year and 10-year nominal Treasury yields.
SOURCE: Department of the Treasury; J.P. Morgan. Courtesy of J.P. (figure 37). (For a discussion of financial
Morgan Chase & Co., Copyright 2023.
MONETARy POLICy REPORT: MARCH 2023 27
stability issues, see the box “Developments 36. Equity prices
Related to Financial Stability.”)
Daily December 31, 2010 = 100
Major asset markets functioned in an
400
orderly way, but some measures suggest
350
persistence of low liquidity
300
Consistent with ongoing higher interest rate
250
volatility, liquidity conditions in the Treasury
S&P 500 index 200
cash market continue to remain low relative
150
to pre-pandemic levels. Market depth—a
measure of the availability of contracts to Dow Jones bank index 100
trade at best quoted prices—for Treasury 50
securities remains near historically low levels,
2011 2013 2015 2017 2019 2021 2023
particularly for short-term Treasury securities,
SOURCE: S&P Dow Jones Indices LLC via Bloomberg. (For Dow
and bid-ask spreads remain elevated relative to Jones Indices licensing information, see the note on the Contents page.)
pre-pandemic levels. However, trading volumes
in Treasury securities markets have remained
about in line with historical levels, and market 37. S&P 500 volatility
functioning has not been materially impaired.
Daily Percent
Equity market liquidity has improved
somewhat since the summer but is still strained 90
compared with pre-COVID levels. Corporate 80
and municipal secondary bond markets 70
60
continue to function well; transaction costs in
50
these markets remained fairly low by historical VIX
40
standards.
30
20
Short-term funding market conditions
10
remained stable
Expected volatility
0
Conditions in short-term funding markets
2011 2013 2015 2017 2019 2021 2023
have remained stable. Increases in the FOMC’s
NOTE: The VIX is an option-implied volatility measure that represents
target range for the federal funds rate were the expected annualized variability of the S&P 500 index over the
following 30 days. The expected volatility series shows a forecast of
transmitted effectively to other overnight rates. 1-m onth r ealize d volatili ty, using a hetero geneou s autoregre ssive model
The effective federal funds rate and other based on 5-minute S&P 5 00 returns.
SOURCE: Cboe Volatility Index® (VIX®) via Bloomberg; Refinitiv
unsecured overnight rates have been a few DataScope; Federal Reserve Board staff estimates.
basis points below the interest rate on reserve
balances since June. Secured overnight rates
have been somewhat lower than unsecured
rates but have shown some signs of firming
more recently.
Prime money market funds (MMFs) have seen
a notable increase in assets under management
(AUM) since June, but government MMF
AUM have remained relatively flat. Both prime
and government MMFs have shortened their
portfolios’ weighted average maturities to
28 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS
Developments Related to Financial Stability
This discussion reviews vulnerabilities in the U.S. remain elevated despite the rise in mortgage rates and
fi nancial system. The framework used by the Federal sharply decelerating real estate prices, as the increase
Reserve Board for assessing the resilience of the U.S. in house prices over the past two years has substantially
fi nancial system focuses on fi nancial vulnerabilities exceeded the increase in rents. Similarly, commercial
in four broad areas: asset valuations, business and real estate prices relative to the income associated with
household debt, leverage in the fi nancial sector, such properties remain high by historical standards.
and funding risks. Against the backdrop of a weaker Indicators for market liquidity such as market depth,
economic outlook, higher interest rates, and elevated a measure of the availability of contracts to trade
uncertainty over the second half of the year, fi nancial at best quoted prices, and price impact, a measure
vulnerabilities remain moderate overall. valuation of how much prices move in response to large
pressures in equity markets increased modestly, directional orders, remain low in several important
and real estate prices continued to be high relative markets—including the Treasury market—relative to
to fundamentals, such as rents, despite a marked pre-pandemic levels. However, market functioning
slowing in price increases. Nonfi nancial business remained orderly.
and household debt grew in line with gross domestic The total combined debt of households and
product (GDP), leaving vulnerabilities associated with nonfi nancial businesses grew roughly in line with GDP,
borrowing by businesses and households unchanged leaving the credit-to-GDP ratio roughly fl at and close
at moderate levels, and vulnerabilities from fi nancial- to its pre-pandemic level (fi gure A). Household balance
sector leverage remained well within their historical sheets remained strong, with continued buffers of
range. Funding risks at domestic banks are low, but excess savings built up over 2020 and 2021 and sizable
structural vulnerabilities persist at some money market home equity cushions. Most of the increases in real
funds, bond funds, and stablecoins. household debt were accounted for by borrowers with
Broad equity prices increased moderately since the prime credit scores, for whom delinquency rates remain
middle of last year even as earning expectations fell as low and stable. In contrast, some signs of increased
the economic outlook weakened. As a result, overall stress have become apparent for households at the
valuation pressures, as measured by the ratio of prices lower end of the income distribution as delinquency
to expected earnings, ticked up. Spreads on corporate rates for near-prime and subprime borrowers have
bonds declined moderately over the past six months risen. Business leverage continues to be elevated by
and remain roughly in line with their historical median. historical standards, but indicators of credit quality
The prices of several crypto-assets fell substantially after have remained solid and, thus far, the increase in
a widely publicized bankruptcy fi ling in November, but interest rates has not weighted materially on the ability
spillovers from crypto markets to the broader fi nancial of businesses to service their debt.
system were limited. Residential real estate valuations (continued)
MONETARy POLICy REPORT: MARCH 2023 29
Developments Related to Financial Stability
This discussion reviews vulnerabilities in the U.S. remain elevated despite the rise in mortgage rates and A. Private nonfinancial-sector credit-to-GDP ratio limitations and the complexity of hedge fund strategies
fi nancial system. The framework used by the Federal sharply decelerating real estate prices, as the increase can obscure the true nature of leverage in that sector,
Reserve Board for assessing the resilience of the U.S. in house prices over the past two years has substantially Quarterly Ratio one common measure of hedge fund leverage, the ratio
fi nancial system focuses on fi nancial vulnerabilities exceeded the increase in rents. Similarly, commercial of gross notional exposure to equity capital, remained
in four broad areas: asset valuations, business and real estate prices relative to the income associated with 1.8 elevated in the third quarter of 2022—the most recent
household debt, leverage in the fi nancial sector, such properties remain high by historical standards. data available.
and funding risks. Against the backdrop of a weaker Indicators for market liquidity such as market depth, 1.6 Funding risks at domestic banks and broker-dealers
economic outlook, higher interest rates, and elevated a measure of the availability of contracts to trade remain low. Liquidity coverage ratios indicate that
1.4
uncertainty over the second half of the year, fi nancial at best quoted prices, and price impact, a measure large banks continue to have ample liquidity to meet
vulnerabilities remain moderate overall. valuation of how much prices move in response to large 1.2 severe deposit outfl ows. However, prime and tax-
pressures in equity markets increased modestly, directional orders, remain low in several important exempt money market funds, as well as certain other
and real estate prices continued to be high relative markets—including the Treasury market—relative to 1.0 cash-investment vehicles, remain susceptible to runs.
to fundamentals, such as rents, despite a marked pre-pandemic levels. However, market functioning Many bond and bank-loan mutual funds continue to
.8
slowing in price increases. Nonfi nancial business remained orderly. be vulnerable to large redemptions, because they hold
and household debt grew in line with gross domestic The total combined debt of households and assets that can become illiquid amid stress.
product (GDP), leaving vulnerabilities associated with nonfi nancial businesses grew roughly in line with GDP, 1982 1987 1992 1997 2002 2007 2012 2017 2022 Near-term risks to fi nancial stability are little
borrowing by businesses and households unchanged leaving the credit-to-GDP ratio roughly fl at and close NOTE: Data extend through 2022:Q3. The shaded bars indicate changed. A recession would likely limit the ability
at moderate levels, and vulnerabilities from fi nancial- to its pre-pandemic level (fi gure A). Household balance periods of business recession as defined by the National Bureau of of some households and fi rms to service their debt,
Economic Research. GDP is gross domestic product.
sector leverage remained well within their historical sheets remained strong, with continued buffers of SOURCE: Federal Reserve Board, Statistical Release Z.1, “Financial potentially increasing delinquency rates. If a recession
range. Funding risks at domestic banks are low, but excess savings built up over 2020 and 2021 and sizable Accounts of the United States”; Bureau of Economic Analysis, national were to coincide with higher-than-expected infl ation
income and product accounts; Federal Reserve Board staff calculations.
structural vulnerabilities persist at some money market home equity cushions. Most of the increases in real and interest rates, the strains on households, businesses,
funds, bond funds, and stablecoins. household debt were accounted for by borrowers with and the fi nancial sector would be exacerbated.
Broad equity prices increased moderately since the prime credit scores, for whom delinquency rates remain vulnerabilities from fi nancial-sector leverage Moreover, low liquidity in some fi nancial markets may
middle of last year even as earning expectations fell as low and stable. In contrast, some signs of increased are roughly in line with historically average levels. amplify the volatility of asset prices, impair market
the economic outlook weakened. As a result, overall stress have become apparent for households at the Risk-based capital ratios at domestic bank holding functioning, and cause funding pressures at fi nancial
valuation pressures, as measured by the ratio of prices lower end of the income distribution as delinquency companies declined last year, in part due to strong loan intermediaries. International developments such as
to expected earnings, ticked up. Spreads on corporate rates for near-prime and subprime borrowers have growth, but remain well above regulatory requirements. Russia’s continuing war against Ukraine or stresses in
bonds declined moderately over the past six months risen. Business leverage continues to be elevated by Moreover, even as rising interest rates have led to China could cause some strains in parts of the U.S.
and remain roughly in line with their historical median. historical standards, but indicators of credit quality declines in the value of available-for-sale securities held fi nancial system. Finally, cyber risk in the fi nancial
The prices of several crypto-assets fell substantially after have remained solid and, thus far, the increase in on bank balance sheets, earnings and credit quality system, defi ned as the risk of loss or operational
a widely publicized bankruptcy fi ling in November, but interest rates has not weighted materially on the ability remain strong for banks. Leverage at certain nonbank disruptions relating to dependence on computer
spillovers from crypto markets to the broader fi nancial of businesses to service their debt. fi nancial institutions, including life insurers and hedge systems and digital technology, has increased over time
system were limited. Residential real estate valuations (continued) funds, has remained near historical highs. While data and could impair the U.S. fi nancial system.
30 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS
near historical lows, likely in response to the
continued increase in short-term rates and
fund managers’ uncertainty about the future
path of interest rates. Both elevated AUM and
short weighted average maturities at MMFs,
as well as a limited supply of Treasury bills,
have contributed to continuing elevated take-
up at the Federal Reserve’s overnight reverse
repurchase agreement facility.
Bank credit continued to expand, but
38. Ratio of total commercial bank credit to nominal growth decelerated in the fourth quarter
gross domestic product
Total loans and leases outstanding at
Quarterly Percent commercial banks have continued to expand
since June, although the pace of growth
80 has moderated in recent months (figure 38).
Banks reported tighter standards and weaker
75
demand for most loan categories over the third
70
and fourth quarters of 2022 in the October
65 and January Senior Loan Officer Opinion
Surveys on Bank Lending Practices. Interest
60
rates on bank loans increased through the
55 second half of 2022, in line with the current
tightening cycle. Bank profitability in the
2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 second half of 2022 remained robust overall,
SOURCE: Federal Reserve Board, Statistical Release H.8, “Assets and driven by strong net interest income, but
Liabilities of Commercial Banks in the United States”; Bureau of
Economic Analysis via Haver Analytics. revenues and earnings in the fourth quarter
were generally weaker, particularly among
banks with a greater share of income derived
39. Profitability of bank holding companies
from investment banking activities (figure 39).
Percent, annual rate Percent, annual rate Bank equity prices increased moderately, on
net, in line with broader equity price indexes
2.0
30
Return on assets (figure 36). Delinquency rates on bank loans
1.5
20 remained low in the fourth quarter of 2022
1.0
10 relative to historical averages. However,
.5
+ + loan loss provisions have increased in recent
_0 _0
.5 Return on equity quarters, consistent with banks’ expectations
10
for credit losses to increase in the future,
1.0
20 and delinquency rates rose slightly last year
1.5
30 for some loan types such as credit cards and
2.0
auto loans.
2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
NOTE: The data are quarterly.
SOURCE: Federal Reserve Board, Form FR Y-9C, Consolidated
Financial Statements for Holding Companies.
MONETARy POLICy REPORT: MARCH 2023 31
International Developments
Economic activity abroad has
softened . . .
Following solid growth early last year, foreign
economic growth slowed, especially at the end
of the year, weighed down by a COVID-related
slowdown in China, the economic fallout of
Russia’s war against Ukraine, and tighter
financial conditions. A stringent clampdown
on COVID cases in the fall brought a marked
deceleration in Chinese economic activity. In
Europe, GDP growth stepped down notably
in the second half of the year as high energy
40. European Union natural gas prices
prices compressed real incomes and depressed
confidence of households and businesses. Weekly Dollars per million Btu
In addition to tighter financial conditions, 100
weaker global demand also damped activity in 90
emerging market economies (EMEs), where 80
70
exports have fallen notably.
60
50
More recently, however, economic indicators
40
suggest that a recovery has started to take hold 30
in China following the rapid abandonment of 20
its zero-COVID policy. In Europe, economic 10
activity, although still subdued, is proving 0
more resilient than expected and is being 2019 2020 2021 2022 2023
supported by a sharp fall in natural gas prices NOTE: The data are weekly averages of daily data and extend through
February 24, 2023.
to below their levels preceding the Russian
SOURCE: ICE Dutch TTF Futures via Haver Analytics.
invasion of Ukraine in 2022 (figure 40).
41. Unemployment rate in selected advanced foreign
Despite softer activity in the second half of economies
last year, labor markets remained strong in
Monthly Percent
most advanced foreign economies (AFEs),
with unemployment rates at or near decades 16
lows (figure 41). As in the U.S., low jobless 14
Euro area
rates in part reflect continued high labor
12
demand. Job vacancy rates in AFEs eased
10
slightly in recent months but remain near
Canada 8
historically high levels, pointing to continued
6
difficulties in hiring. In addition, labor supply
challenges in some foreign economies have 4
contributed to tight labor market conditions. United Kingdom Japan 2
For example, the labor force participation
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023
rate in the U.K. has not risen back to its
NOTE: The data for the United Kingdom extend through November
pre-pandemic level, reflecting the slow 2022 and are centered 3-month averages of monthly data. The data for
ongoing recovery from a broad range of the euro area and Japan extend through December 2022.
SOURCE: For the United Kingdom, Office for National Statistics; for
pandemic-related factors, including long-term Japan, Ministry of Health, Labour and Welfare; for the euro area,
Statistical Office of the European Communities; for Canada, Statistics
Canada; all via Haver Analytics.
32 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS
sickness and early retirements. In Canada,
reduced immigration flows at the onset of
the pandemic and an aging population have
contributed to slower labor force growth in
recent years.
Global supply chains continued to normalize
over the latter half of 2022, helped by the
slowdown in foreign economic growth.
Transportation and production bottlenecks
continued to abate amid weakening demand
for goods. Recent data suggest that congestion
at U.S. ports has broadly decreased. Container
spot prices have declined sharply, especially for
shipping from China to the West Coast. Both
air cargo and ocean cargo transit times from
Asia to North America have declined from
their early 2022 peaks.
42. Consumer price inflation in foreign economies . . . and foreign inflationary pressures
have broadened . . .
Monthly 12-month percent change
Foreign headline inflation abroad has started
10 falling as effects of earlier commodity price
8 increases have waned, though the decline so
far has been less pronounced than in the U.S.
6
EMEs ex. China (figure 42). Energy inflation has moderated in
4
foreign economies, but food inflation remained
2 strong through year-end (figure 43).
AFEs ex. Japan +
_0
While headline inflation has begun easing,
2
core inflation has been running firmly above
2016 2017 2018 2019 2020 2021 2022 2023 its pre-COVID average in the second half
of 2022. Pass-through from past energy
NOTE: The advanced foreign economy (AFE) aggregate is the average
of Canada, the euro area, and the United Kingdom, weighted by shares price increases into other prices, robust wage
of U.S. non-oil goods imports. The emerging market economy (EME)
aggregate is the average of Argentina, Brazil, Chile, Colombia, Hong growth stemming from tight labor markets,
Kong, India, Indonesia, Israel, Malaysia, Mexico, Philippines, Russia,
and past exchange rate depreciation in some
Saudi Arabia, Singapore, South Korea, Taiwan, Thailand, and Vietnam,
weighted by shares of U.S. non-oil goods imports. The inflation measure economies have all contributed to elevated
is the Harmonised Index of Consumer Prices for the euro area and the
consumer price index for other economies. core inflation abroad. Core goods inflation
SOURCE: Haver Analytics.
has begun moderating, helped by fewer supply
bottlenecks and a rebalancing of consumption
away from goods. Services inflation, however,
remains persistent.
. . . leading many foreign central banks to
continue tightening monetary policy
In response to persistent inflationary pressures,
foreign central banks—especially those in
AFEs—raised policy rates expeditiously.
Some also started reducing, or laid out plans
to reduce, the size of their balance sheets. In
MONETARy POLICy REPORT: MARCH 2023 33
43. Foreign consumer price inflation components
Advanced foreign economies Emerging market economies
Percent Percent
Energy Energy
9 9
Food Food
Core 8 Core 8
7 7
6 6
5 5
4 4
3 3
2 2
1 1
2017–19 avg. 2022:H1 2022:Q3 2022:Q4 2017–19 avg. 2022:H1 2022:Q3 2022:Q4
NOTE: The advanced foreign economy (AFE) aggregate is the average of Canada, the euro area, and the United Kingdom, weighted by shares of U.S. non-oil
goods imports. The emerging market economy (EME) aggregate is the average of Argentina, Brazil, Chile, Colombia, Hong Kong, India, Indonesia, Israel,
Malaysia, Mexico, Philippines, Russia, Saudi Arabia, Singapore, South Korea, Taiwan, Thailand, and Vietnam, weighted by shares of U.S. non-oil goods imports.
The inflation measure is the Harmonised Index of Consumer Prices for the euro area and the consumer price index for other economies. The key identifies bars in
order from top to bottom. The data show percent changes from year-ago levels.
SOURCE: Haver Analytics.
light of the cumulative increase in policy rates
and signs that inflation is easing, many foreign
central banks have in recent months slowed
the pace of their policy rate increases, signaled
that such a slowing is coming, or paused
policy rate hikes to take stock of the effects of
policy tightening thus far on their economies.
Even so, most foreign central banks have
communicated that they would maintain
sufficiently restrictive policy stances to lower
inflation to target.
The European Central Bank has
communicated its intention to continue
raising its policy rate, citing strong underlying
price pressures, while the Bank of England
has signaled additional tightening will be
warranted if inflationary pressures, especially
from the labor market, prove more persistent
than anticipated. Both these central banks
have indicated that future policy decisions
depend on realized progress toward their
inflation goals. In January, the Bank of
Canada conveyed that it was pausing policy
rate hikes to assess the effect of the cumulative
rise in interest rates on inflation and the
economy. That said, the Bank of Canada
also warned that it stood ready to raise its
policy rate further if needed to lower inflation
to its 2 percent target. In contrast to other
34 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS
foreign central banks, and notwithstanding
a widening of the trading band on 10-year
Japanese government bond yields, the Bank
of Japan reaffirmed that it intends to maintain
accommodative monetary conditions “as
long as it is necessary” to achieve its 2 percent
inflation target, including by conducting
further asset purchases.
Within EMEs, the Central Bank of Brazil
has left its policy rate unchanged since the
middle of 2022 but recently indicated that it
will resume tightening the stance of policy
if reductions in inflation do not progress as
expected. Other EME central banks, including
the Bank of Mexico and Reserve Bank of
India, have conveyed the possibility of further
rate increases given still-elevated core inflation.
The synchronous nature of the recent increases
in global interest rates has raised concerns
about possible adverse international spillovers
of tighter monetary policy. Simulations from
global macroeconomic models suggest that
U.S. monetary policy actions can produce
notable spillovers abroad, especially given
the dollar’s dominant role in international
trade and finance. Spillovers from foreign
economies’ policy actions to the U.S. can be
sizable as well, particularly when many central
banks tighten policy simultaneously.13
44. Nominal 10-year government bond yields in Financial conditions abroad have
selected advanced foreign economies tightened
Weekly Percent Since the middle of last year, market-based
measures of monetary policy expectations and
6
sovereign bond yields have moved significantly
United Kingdom 5
higher in many AFEs (figure 44). The rise in
4
sovereign bond yields reflects rapid tightening
Canada 3 in monetary policy and spillovers from higher
Germany
2 U.S. yields. Fiscal announcements in the U.K.
1 in late September drove significant global bond
+
market volatility and yield increases, although
_0
1
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 13. For a discussion of these spillovers, their channels
NOTE: The data are weekly averages of daily benchmark yields and of transmission, and their likely effects on growth, see
extend through February 24, 2023. Dario Caldara, Francesco Ferrante, and Albert Queralto
SOURCE: Bloomberg.
(2022), “International Spillovers of Tighter Monetary
Policy,” FEDS Notes (Washington: Board of Governors
of the Federal Reserve System, December 22), https://
doi.org/10.17016/2380-7172.3238.
MONETARy POLICy REPORT: MARCH 2023 35
these moves largely retraced following changes
in government policy plans. The Bank of
Japan widened the trading band of its yield
curve control policy framework, allowing
Japanese 10-year interest rates to rise and
leading Japanese yields across the curve to rise.
Euro-area yields rose amid communications
from the European Central Bank that were
perceived as more restrictive than expected.
After declining over the first half of last year, 45. Equity indexes for selected foreign economies
prices of foreign risky assets turned higher
Weekly Week ending January 8, 2016 = 100
toward the end of the year. Foreign equity
indexes increased across major economies, 150
buoyed by moderation in U.S. and European 140
inflation readings and by recent economic Euro area 130
developments that suggest improved growth 120
prospects in China and Europe (figure 45). 110
In addition, equities abroad were supported 100
by China’s shift away from its zero-COVID 90
China
policy, which led to improved sentiment
Japan 80
regarding China’s medium-term growth
70
prospects. Financial conditions in EMEs have
2016 2017 2018 2019 2020 2021 2022 2023
improved since year-end. Outflows from EME-
focused investment funds, which had been NOTE: The data are weekly averages of daily data and extend through
February 24, 2023.
slowing toward the end of last year, turned to SOURCE: For the euro area, Dow Jones Euro Stoxx Index; for Japan,
Tokyo Stock Price Index; for China, Shanghai Composite Index; all via
inflows this year, while EME sovereign spreads Bloomberg. (For Dow Jones Indices licensing information, see the note
on the Contents page.)
are little changed.
The broad dollar index—a measure of the 46. U.S. dollar exchange rate index
trade-weighted value of the dollar against
Weekly Week ending December 27, 2019 = 100
foreign currencies—continued to rise over the
Dollar appreciation
summer and through the beginning of the 115
fourth quarter but, more recently, has largely 110
reversed those increases (figure 46). Widening 105
yield differentials between the U.S. and the 100
rest of the world and concerns around foreign 95
growth pushed the dollar higher through 90
October of last year, prompting several 85
central banks, especially in Asia, to intervene
80
in foreign exchange markets to support their Broad dollar index
75
currencies. Since peaking in October, the dollar
has largely retraced those gains, reflecting 2013 2015 2017 2019 2021 2023
softer inflation data in the U.S., tighter NOTE: The data, which are in foreign currency units per dollar, are
weekly averages of daily values of the broad dollar index. The data
monetary policy abroad, and better prospects extend through February 24, 2023. As indicated by the leftmost arrow,
increases in the data reflect U.S. dollar appreciation and decreases reflect
for foreign economic growth. Still, the broad U.S. dollar depreciation.
dollar index remains stronger than it was in
SOURCE: Federal Reserve Board, Statistical Release H.10, “Foreign
Exchange Rates.”
early 2021. After reaching multidecade lows
against the dollar in October, the Japanese yen
rebounded following the adjustment of the
Bank of Japan’s yield curve control policy.
37
P 2
art
m P
onetary oLicy
The Federal Open Market Committee . . . and has continued the process of
continued to increase the federal significantly reducing its holdings of
funds rate . . . Treasury and agency securities
With inflation still well above the Federal The Committee has continued to implement its
Open Market Committee’s (FOMC) 2 percent plan for significantly reducing the size of the
objective and with labor market conditions Federal Reserve’s balance sheet in a predictable
remaining tight, the Committee continued to manner.14 Beginning in June, principal
swiftly raise the target range for the federal payments from securities held in the System
funds rate. Since June, the Committee raised Open Market Account (SOMA) have been
the target range by 3 percentage points, reinvested only to the extent that they exceeded
from 1½ to 1¾ percent to 4½ to 4¾ percent monthly caps. For Treasury securities, the cap
(figure 47). In light of the cumulative was initially set at $30 billion per month and,
tightening of monetary policy and the lags in September, was increased to $60 billion per
with which monetary policy affects economic month. For agency debt and agency mortgage-
activity and inflation, after having increased backed securities, the cap was initially set at
the federal funds rate by 75 basis points at $17.5 billion per month and, in September, was
its meetings in June, July, September, and increased to $35 billion per month. As a result
November, the Committee slowed the pace of of these actions, holdings of Treasury and
policy firming at its December and January agency securities in the SOMA have declined
meetings to 50 basis points and 25 basis
points, respectively. The Committee indicated
that it anticipates that ongoing increases in
the target range will be appropriate in order 14. See the May 4, 2022, press release regarding the
to attain a stance of monetary policy that is Plans for Reducing the Size of the Federal Reserve’s
Balance Sheet, available on the Board’s website at https://
sufficiently restrictive to return inflation to
www.federalreserve.gov/newsevents/pressreleases/
2 percent over time.
monetary20220504b.htm.
47. 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 2023
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.
38 PART 2: MONETARy POLICy
by about $500 billion to around $8 trillion, The FOMC will continue to monitor the
or 31 percent of U.S. nominal gross domestic implications of incoming information for
product, since the process to reduce securities the economic outlook
holdings began (figure 48). Reserve balances
The FOMC is strongly committed to returning
have fallen by about $200 billion to around
inflation to its 2 percent objective. In assessing
$3 trillion over that period. (See the box
the appropriate stance of monetary policy,
“Developments in the Federal Reserve’s
the Committee will continue to monitor the
Balance Sheet and Money Markets.”)
implications of incoming information for
the economic outlook. The Committee’s
The Committee has stated that it intends to assessments will take into account a wide
maintain securities holdings in amounts needed range of information, including readings on
to implement monetary policy efficiently and labor market conditions, inflation pressures
effectively in its ample-reserves regime. To and inflation expectations, and financial and
ensure a smooth transition, the Committee international developments. The Committee
intends to slow and then stop reductions in has noted that it is also prepared to adjust any
its securities holdings when reserve balances of the details of its approach to reducing the
are somewhat above the level the Committee size of the balance sheet in light of economic
judges to be consistent with ample reserves. and financial developments.
Once balance sheet runoff has ceased, reserve
balances will likely continue to decline at a In addition to considering a wide range of
slower pace—reflecting growth in other Federal economic and financial data, the Committee
Reserve liabilities—until the Committee gathers information from business contacts
judges that reserve balances are at the level and other informed parties around the
required for implementing policy efficiently and country, as summarized in the Beige Book.
effectively in its ample-reserves regime. To hear from a broad range of stakeholders in
48. Federal Reserve assets and liabilities
Weekly Trillions of dollars
Other assets 9
Credit and liquidity facilities
Agency debt and mortgage-backed securities holdings 6
Treasury securities held outright
3
+
_0
3
Federal Reserve notes in circulation
6
Deposits of depository institutions
Capital and other liabilities
9
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
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 22, 2023.
SOURCE: Federal Reserve Board, Statistical Release H.4.1, “Factors Affecting Reserve Balances.”
MONETARy POLICy REPORT: MARCH 2023 39
the U.S. economy about how monetary policy Although simple rules cannot capture all
affects people’s daily lives and livelihoods, of the complexities of monetary policy,
the Federal Reserve has continued to gather and many practical considerations make it
insights through the Fed Listens initiative undesirable for the FOMC to adhere strictly
and the Federal Reserve System’s community to the prescriptions of any specific rule, some
development outreach. Policymakers also principles of good monetary policy can
routinely consult prescriptions for the policy be illustrated by these policy rules (see the
interest rate provided by various monetary box “Monetary Policy Rules in the Current
policy rules. These rule prescriptions can Environment”).
provide useful benchmarks for the FOMC.
40 PART 2: MONETARy POLICy
Developments in the Federal Reserve’s Balance Sheet and
Money Markets
The Federal Open Market Committee (FOMC) began $200 billion since June 2022 (fi gure C).1 The ongoing
to signifi cantly reduce the size of the Federal Reserve’s reduction in the Federal Reserve’s securities holdings
balance sheet in June 2022. Since that time, total assets would reduce the level of reserve balances one-for-one,
have decreased by $550 billion, leaving the total size if all other balance sheet items stayed constant.
of the balance sheet at about $8.4 trillion (fi gures A After fl uctuating around $2.2 trillion over the second
and B). This discussion reviews recent developments in half of 2022, usage at the overnight reverse repurchase
the Federal Reserve’s balance sheet and money market agreement (ON RRP) facility increased toward year-
conditions. end and reached a record high of $2.55 trillion on
Reserve balances—the largest liability on the Federal December 30. Since early January, ON RRP take-up has
Reserve’s balance sheet—have declined by about declined to about $2.1 trillion at the time of this report.
Low rates on private money market instruments—
refl ecting still abundant liquidity in the banking system
A. Balance sheet comparison
and limited Treasury bill supply—have contributed
Billions of dollars to the overall high level of take-up. In addition,
February 22, June 15, uncertainty about the economic outlook—and, as a
Change
2023 2022 result, about the magnitude and pace of policy rate
Assets increases—continued to contribute to a preference
Total securities for short-duration assets, like those provided by the
ON RRP facility.
Treasury securities 5,364 5,763 -399
(continued)
Agency debt and MBS 2,623 2,730 -107
Net unamortized premiums 308 336 -28
1. Reserve balances consist of deposits held at Federal
Repurchase agreements 0 0 0 Reserve Banks by depository institutions, such as commercial
banks, savings banks, credit unions, thrift institutions, and U.S.
Loans and lending facilities
branches and agencies of foreign banks. Reserve balances
PPPLF 11 19 -8 allow depository institutions to facilitate daily payment
fl ows, both in ordinary times and in stress scenarios, without
Other loans and lending facilities 34 38 -4
borrowing funds or selling assets.
Central bank liquidity swaps 0 0 0
Other assets 41 47 -6
Total assets 8,382 8,932 -550 B. Federal Reserve assets
Liabilities
Weekly Trillions of dollars
Federal Reserve notes 2,252 2,227 25
Other assets 12
Reserves held by depository
institutions 2,984 3,190 -206 Loans 11
Central bank liquidity swaps
10
Reverse repurchase agreements Repurchase agreements
Agency debt and MBS 9
Foreign offi cial and Treasury securities 8
international accounts 358 259 99 held outright 7
Others 2,114 2,163 -49 6
5
U.S. Treasury General Account 451 770 -319
4
Other deposits 193 258 -65 3
Other liabilities and capital 32 66 -34 2
1
Total liabilities and capital 8,382 8,932 -550
2019 2020 2021 2022 2023
Note: MBS is mortgage-backed securities. PPPLF is Paycheck Protection
Program Liquidity Facility.
NOTE: MBS is mortgage-backed securities. The key identifies shaded areas
SourCe: Federal Reserve Board, Statistical Release H.4.1, “Factors Aff ecting in order from top to bottom. The data extend through February 22, 2023.
Reserve Balances.” SOURCE: Federal Reserve Board, Statistical Release H.4.1, “Factors
Affecting Reserve Balances.”
MONETARy POLICy REPORT: MARCH 2023 41
C. Federal Reserve liabilities no longer has positive net income to remit to the
Treasury Department, as of February 2023, the Federal
Weekly Trillions of dollars Reserve’s balance sheet now reports a deferred asset
Reverse repurchase agreements 12 of about $36 billion. The deferred asset is equal to
Deposits of depository institutions (reserves) 11 the cumulative shortfall of net income and represents
U.S. Treasury General Account
Other deposits 10 the amount of future net income that will need to be
Capital and other liabilities 9 realized before remittances to the Treasury resume.3
Federal Reserve notes 8
Although remittances are suspended at the time of this
7
6 report, over the past decade and a half, the Federal
5 Reserve has remitted over $1 trillion to the Treasury.
4 Net income is expected to again turn positive as
3 interest expenses fall, and remittances will resume once
2
the temporary deferred asset falls to zero.4 Negative net
1
income and the associated deferred asset do not affect
2019 2020 2021 2022 2023 the Federal Reserve’s conduct of monetary policy or its
ability to meet its fi nancial obligations.
NOTE: “Capital and other liabilities” includes Treasury contributions. The
key identifies shaded areas in order from top to bottom. The data extend
through February 22, 2023.
SOURCE: Federal Reserve Board, Statistical Release H.4.1, “Factors
Affecting Reserve Balances.”
The ON RRP facility is intended to help keep the
converges to its face value as it approaches maturity, and,
effective federal funds rate from falling below the target so long as the security is held until that time, any gains or
range set by the FOMC, as institutions with access to losses due to interest rate fl uctuations remain unrealized.
the ON RRP should be unwilling to lend funds below Further information on the topics of the Federal Reserve’s
income and the SOMA portfolio’s unrealized position is
the ON RRP’s offering rate. The facility continued to
available in two FEDS Notes articles. For a discussion of
serve this intended purpose, and the Federal Reserve’s concepts related to net income and the SOMA portfolio’s
administered rates—interest on reserve balances and unrealized position, see Alyssa Anderson, Dave Na, Bernd
the ON RRP offering rate—were highly effective at Schlusche, and Zeynep Senyuz (2022), “An Analysis of the
Interest Rate Risk of the Federal Reserve’s Balance Sheet,
maintaining the effective federal funds rate within the
Part 1: Background and Historical Perspective,” FEDS Notes
target range as the FOMC has tightened the stance of
(Washington: Board of Governors of the Federal Reserve
monetary policy since last March. System, July 15), https://doi.org/10.17016/2380-7172.3173;
The Federal Reserve System had an estimated and for illustrative projections of the Federal Reserve’s balance
consolidated net income of about $58 billion over sheet and income under a wide range of potential interest
rate paths, see Alyssa Anderson, Philippa Marks, Dave Na,
2022. Given the signifi cant increases in policy
Bernd Schlusche, and Zeynep Senyuz (2022), “An Analysis of
rates in response to sustained infl ation pressures, the Interest Rate Risk of the Federal Reserve’s Balance Sheet,
the Federal Reserve’s interest expenses have risen Part 2: Projections under Alternative Interest Rate Paths,” FEDS
considerably, and, as a result, net income turned Notes (Washington: Board of Governors of the Federal Reserve
System, July 15), https://doi.org/10.17016/2380-7172.3174.
negative in September.2 Because the Federal Reserve
3. Because of variation in the timing and magnitude of
payments for expenditures, interest income, and interest
2. The ongoing monetary tightening also reduces the expense, individual Reserve Banks may have positive
market value of the Federal Reserve’s securities holdings by earnings while Systemwide net income is negative. As net
putting upward pressure on longer-term market interest rates. income is remitted on a weekly basis at the Reserve Bank
The System Open Market Account (SOMA) portfolio was in level, individual Reserve Banks may occasionally remit
an estimated unrealized loss position of about $1.1 trillion small amounts of positive earnings to the Treasury while the
as of September 2022. Under the current May 2022 Plans Systemwide deferred asset grows.
for Reducing the Size of the Federal Reserve’s Balance 4. As a result of the ongoing reduction in the size of the
Sheet, unrealized gains or losses will not fl ow through to Federal Reserve’s balance sheet, it is expected that interest
the Federal Reserve’s net income, as SOMA securities will expenses will fall over time as they are tied to a smaller total
be held until maturity. An individual security’s market value amount of liabilities.
42 PART 2: MONETARy POLICy
Monetary Policy Rules in the Current Environment
Simple interest rate rules relate a policy interest rules, along with a “balanced-approach (shortfalls)”
rate, such as the federal funds rate, to a small number rule, which represents one simple way to illustrate
of other economic variables—typically including the the Committee’s focus on shortfalls from maximum
current deviation of infl ation from its target value employment.2 All of these simple rules shown embody
and a measure of resource slack in the economy. key design principles of good monetary policy,
Policymakers consult policy rate prescriptions derived including that the policy rate should be adjusted
from a variety of policy rules as part of their monetary forcefully enough over time to ensure a return of
policy deliberations without mechanically following the infl ation to the central bank’s longer-run objective and
prescriptions of any particular rule. to anchor longer-term infl ation expectations at levels
Since 2021, infl ation has run well above the consistent with that objective.
Committee’s 2 percent longer-run objective, and All fi ve rules feature the difference between infl ation
labor market conditions have been very tight over the and the FOMC’s longer-run objective of 2 percent. The
past year. Refl ecting these developments, the simple fi ve rules use the unemployment rate gap, measured
monetary policy rules considered in this discussion as the difference between an estimate of the rate of
have called for levels of the federal funds rate well unemployment in the longer run (uLR) and the current
t
above those observed over the past decade. Also unemployment rate; the fi rst-difference rule includes
because of the persistently high levels of infl ation, the change in the unemployment rate gap rather than
the Federal Open Market Committee (FOMC) has its level.3 All but the fi rst-difference rule include an
expeditiously raised the target range for the federal (continued)
funds rate and has reduced its holdings of Treasury
securities and agency debt and agency mortgage-
backed securities at a historically rapid pace.
(July), pp. 983–1022. A review of policy rules is in John B.
Taylor and John C. Williams (2011), “Simple and Robust Rules
Selected Policy Rules: Descriptions for Monetary Policy,” in Benjamin M. Friedman and Michael
Woodford, eds., Handbook of Monetary Economics, vol. 3B
(Amsterdam: North-Holland), pp. 829–59. The same volume
In many economic models, desirable economic
of the Handbook of Monetary Economics also discusses
outcomes can be achieved if monetary policy
approaches other than policy rules for deriving policy rate
responds in a predictable way to changes in economic prescriptions.
conditions. In recognition of this idea, economists 2. Since August 2020, the FOMC’s Statement on Longer-
have analyzed many monetary policy rules, including Run Goals and Monetary Policy Strategy has referred to
“shortfalls of employment” from the Committee’s assessment
the well-known Taylor (1993) rule, the “balanced
of its maximum level rather than the “deviations of
approach” rule, the “adjusted Taylor (1993)” rule, employment” used in the previous statement. The balanced-
and the “fi rst difference” rule.1 Figure A shows these approach (shortfalls) rule refl ects this change by responding
asymmetrically to unemployment rates above or below their
estimated longer-run value: When unemployment is above
1. The Taylor (1993) rule was introduced in John B. that value, the policy rates are identical to those prescribed by
Taylor (1993), “Discretion versus Policy Rules in Practice,” the balanced-approach rule, whereas when unemployment
Carnegie-Rochester Conference Series on Public Policy, vol. is below that value, policy rates do not rise because of
39 (December), pp. 195–214. The balanced-approach rule further declines in the unemployment rate. As a result, the
was analyzed in John B. Taylor (1999), “A Historical Analysis prescription of the balanced-approach (shortfalls) rule in
of Monetary Policy Rules,” in John B. Taylor, ed., Monetary 2022:Q4 is more accommodative than that of the balanced-
Policy Rules (Chicago: University of Chicago Press), pp. approach rule.
319–41. The adjusted Taylor (1993) rule was studied in David 3. Implementations of simple rules often use the output
Reifschneider and John C. Williams (2000), “Three Lessons gap as a measure of resource slack in the economy. The rules
for Monetary Policy in a Low-Infl ation Era,” Journal of Money, described in fi gure A instead use the unemployment rate gap
Credit and Banking, vol. 32 (November), pp. 936–66. The because that gap better captures the FOMC’s statutory goal
fi rst-difference rule is based on a rule suggested by Athanasios to promote maximum employment. Movements in these
Orphanides (2003), “Historical Monetary Policy Analysis alternative measures of resource utilization tend to be highly
and the Taylor Rule,” Journal of Monetary Economics, vol. 50 correlated. For more information, see the note below fi gure A.
MONETARy POLICy REPORT: MARCH 2023 43
A. Monetary policy rules
Taylor (1993) rule Rt T93 = rt LR + πt + 0.5(πt − πLR) + (ut LR − ut)
Balanced-approach rule Rt BA = rt LR + πt + 0.5(πt − πLR) + 2(ut LR − ut)
Balanced-approach (shortfalls) rule Rt BAS = rt LR + πt + 0.5(πt − πLR) + 2min{(ut LR − ut), 0}
Adjusted Taylor (1993) rule Rt T93adj = max{Rt T93 − Zt, ELB}
First-difference rule Rt FD = Rt−1 + 0.5(πt − πLR) + (ut LR − ut) − (ut L − R 4 − ut−4)
Note: RtT93, RtBA, RtBAS, RtT93adj, and RtFD represent the values of the nominal federal funds rate prescribed by the Taylor (1993),
balanced-approach, balanced-approach (shortfalls), adjusted Taylor (1993), and first-difference rules, respectively.
Rt−1 denotes the midpoint of the target range for the federal funds rate for quarter t−1, ut is the unemployment rate in quarter t, and rtLR is the
level of the neutral real federal funds rate in the longer run that is expected to be consistent with sustaining maximum employment and inflation
at the FOMC’s 2 percent longer-run objective, represented by πLR. πt denotes the realized four-quarter price inflation for quarter t. In addition, utLR
is the rate of unemployment expected in the longer run. Zt is the cumulative sum of past deviations of the federal funds rate from the prescriptions
of the Taylor (1993) rule when that rule prescribes setting the federal funds rate below an effective lower bound of 12.5 basis points.
The Taylor (1993) rule and other policy rules generally respond to the deviation of real output from its full capacity level. In these equations,
the output gap has been replaced with the gap between the rate of unemployment in the longer run and its actual level (using a relationship known
as Okun’s law) to represent the rules in terms of the unemployment rate. The rules are implemented as responding to core PCE inflation rather
than to headline PCE inflation because current and near-term core inflation rates tend to outperform headline inflation rates as predictors of the
medium-term behavior of headline inflation.
estimate of the neutral real interest rate in the longer standard Taylor (1993) rule until after the economy
run (rLR).4 begins to recover.
t
Unlike the other simple rules featured here, the
adjusted Taylor (1993) rule recognizes that the federal
Policy Rules: Limitations
funds rate cannot be reduced materially below the
effective lower bound. To make up for the cumulative Simple policy rules are also subject to important
shortfall in policy accommodation following a limitations. One important limitation is that simple
recession during which the federal funds rate is policy rules were designed and tested under very
constrained by its effective lower bound, the adjusted different economic conditions than those faced at
Taylor (1993) rule prescribes delaying the return of the present. In addition, the simple policy rules respond
policy rate to the (positive) levels prescribed by the to only a small set of economic variables and thus
necessarily abstract from many of the factors that the
4. The neutral real interest rate in the longer run (r tLR) is FOMC considers when it assesses the appropriate
the level of the real federal funds rate that is expected to be setting of the policy rate. Another important limitation
consistent, in the longer run, with maximum employment is that most simple policy rules do not take into
and stable infl ation. Like u tLR, r tLR is determined largely by
account the effective lower bound on interest rates,
nonmonetary factors. The fi rst-difference rule shown in
fi gure A does not require an estimate of r tLR, a feature that is which limits the extent to which the policy rate can
touted by proponents of such rules as providing an element of be lowered to support the economy. This constraint
robustness. However, this rule has its own shortcomings. For was particularly evident during the pandemic-driven
example, research suggests that this sort of rule often results in
recession, when the lower bound on the policy
greater volatility in employment and infl ation relative to what
rate motivated the FOMC’s other policy actions to
would be obtained under the Taylor (1993) and balanced-
approach rules. (continued on next page)
44 PART 2: MONETARy POLICy
Monetary Policy Rules in the Current Environment (continued)
support the economy. Relatedly, another limitation is estimates of uLR and rLR at the time. All of the rules
t t
that simple policy rules do not take into account the considered called for a highly accommodative stance
other tools of monetary policy, such as balance sheet for monetary policy in response to the pandemic-
policies. Finally, simple policy rules generally abstract driven recession, followed by values above the
from the risk-management considerations associated effective lower bound as infl ation picked up and labor
with uncertainty about economic relationships and the market conditions strengthened. For most of 2022, the
evolution of the economy. prescriptions for the federal funds rate were between
4 and 8 percent; these values are well above the levels
observed before the pandemic and refl ect, in large part,
Selected Policy Rules: Prescriptions
elevated infl ation readings. Throughout 2021 and 2022,
Figure B shows historical prescriptions for the target range for the federal funds rate was below
the federal funds rate under the fi ve simple rules the prescriptions of most of the simple rules, though
considered. For each quarterly period, the fi gure reports that gap has narrowed considerably as the FOMC has
the policy rates prescribed by the rules, taking as given expeditiously tightened the stance of monetary policy
the prevailing economic conditions and survey-based and infl ation has begun to moderate.
B. Historical federal funds rate prescriptions from simple policy rules
Percent
First-difference rule 9
Balanced-approach rule Taylor (1993) rule 6
3
+
_0
B (s a h l o a r n t c fa ed lls -a ) p ru p l r e oach Adjusted Taylor (1993) rule Federal funds rate 3
6
9
12
15
18
2018 2019 2020 2021 2022 2023
NOTE: The rules use historical values of core personal consumption expenditures inflation, the unemployment rate, and, where applicable, historical
values of the midpoint of the target range for the federal funds rate. Quarterly projections of longer-run values for the federal funds rate and the
unemployment rate used in the computation of the rules’ prescriptions are derived through interpolations of biannual projections from Blue Chip
Economic Indicators. The longer-run value for inflation is set to 2 percent. The rules prescriptions are quarterly, and the federal funds rate data are the
monthly average of the daily midpoint of the target range for the federal funds rate and extend through February 2023.
SOURCE: Federal Reserve Bank of Philadelphia; Wolters Kluwer, Blue Chip Economic Indicators; Federal Reserve Board staff estimates.
45
P 3
art
s e P
ummary of conomic rojections
The following material was released after the conclusion of the December 13–14, 2022, 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 13–14, 2022, 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 2022 to 2025 “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 2022
Percent
Median1 Central tendency2 Range3
Variable
Longer Longer Longer
2022 2023 2024 2025 2022 2023 2024 2025 2022 2023 2024 2025
run run run
Change in real GDP ..... 0.5 0.5 1.6 1.8 1.8 0.4–0.5 0.4–1.0 1.3–2.0 1.6–2.0 1.7–2.0 0.2–0.5 -0.5–1.0 0.5–2.4 1.4–2.3 1.6–2.5
September projection 0.2 1.2 1.7 1.8 1.8 0.1–0.3 0.5–1.5 1.4–2.0 1.6–2.0 1.7–2.0 0.0–0.5 -0.3–1.9 1.0–2.6 1.4–2.4 1.6–2.2
Unemployment rate ..... 3.7 4.6 4.6 4.5 4.0 3.7 4.4–4.7 4.3–4.8 4.0–4.7 3.8–4.3 3.7–3.9 4.0–5.3 4.0–5.0 3.8–4.8 3.5–4.8
September projection 3.8 4.4 4.4 4.3 4.0 3.8–3.9 4.1–4.5 4.0–4.6 4.0–4.5 3.8–4.3 3.7–4.0 3.7–5.0 3.7–4.7 3.7–4.6 3.5–4.5
PCE inflation .......... 5.6 3.1 2.5 2.1 2.0 5.6–5.8 2.9–3.5 2.3–2.7 2.0–2.2 2.0 5.5–5.9 2.6–4.1 2.2–3.5 2.0–3.0 2.0
September projection 5.4 2.8 2.3 2.0 2.0 5.3–5.7 2.6–3.5 2.1–2.6 2.0–2.2 2.0 5.0–6.2 2.4–4.1 2.0–3.0 2.0–2.5 2.0
Core PCE inflation4 ..... 4.8 3.5 2.5 2.1 4.7–4.8 3.2–3.7 2.3–2.7 2.0–2.2 4.6–5.0 3.0–3.8 2.2–3.0 2.0–3.0
September projection 4.5 3.1 2.3 2.1 4.4–4.6 3.0–3.4 2.2–2.5 2.0–2.2 4.3–4.8 2.8–3.5 2.0–2.8 2.0–2.5
Memo: Projected
appropriate policy path
Federal funds rate ....... 4.4 5.1 4.1 3.1 2.5 4.4 5.1–5.4 3.9–4.9 2.6–3.9 2.3–2.5 4.4 4.9–5.6 3.1–5.6 2.4–5.6 2.3–3.3
September projection 4.4 4.6 3.9 2.9 2.5 4.1–4.4 4.4–4.9 3.4–4.4 2.4–3.4 2.3–2.5 3.9–4.6 3.9–4.9 2.6–4.6 2.4–4.6 2.3–3.0
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 consumption expenditures
(PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year
indicated. Each participant’s projections are based on his or her assessment of appropriate monetary policy. Longer-run projections represent each participant’s assessment of the rate
to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy. The projections for the federal funds rate
are the value of the midpoint of the projected appropriate target range for the federal funds rate or the projected appropriate target level for the federal funds rate at the end of the speci-
fied 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 20-21, 2022. 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 20-21, 2022, meeting,
and one participant did not submit such projections in conjunction with the December 13–14, 2022, 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.
46 PART 3: SUMMARy OF ECONOMIC PROJECTIONS
Figure 1. Medians, central tendencies, and ranges of economic projections, 2022–25 and over the longer run
Percent
Change in real GDP
6
5
Actual 4
3
2
1
0
Median of projections −1
Central tendency of projections −2
Range of projections
−3
2017 2018 2019 2020 2021 2022 2023 2024 2025 Longer
run
Percent
Unemployment rate
7
6
5
4
3
2
1
2017 2018 2019 2020 2021 2022 2023 2024 2025 Longer
run
Percent
PCE inflation
7
6
5
4
3
2
1
2017 2018 2019 2020 2021 2022 2023 2024 2025 Longer
run
Percent
Core PCE inflation
7
6
5
4
3
2
1
2017 2018 2019 2020 2021 2022 2023 2024 2025 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: MARCH 2023 47
Figure 2. FOMC participants’ assessments of appropriate monetary policy: Midpoint of target range or target
level for the federal funds rate
Percent
6.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2022 2023 2024 2025 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 projections for the federal funds rate.
48 PART 3: SUMMARy OF ECONOMIC PROJECTIONS
Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2022–25 and over the longer run
Number of participants
2022
20
December projections 18
September projections 16
14
12
10
8
6
4
2
−0.8− −0.6− −0.4− −0.2− 0.0− 0.2− 0.4− 0.6− 0.8− 1.0− 1.2− 1.4− 1.6− 1.8− 2.0− 2.2− 2.4− 2.6−
−0.7 −0.5 −0.3 −0.1 0.1 0.3 0.5 0.7 0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7
Percent range
Number of participants
2023
20
18
16
14
12
10
8
6
4
2
−0.8− −0.6− −0.4− −0.2− 0.0− 0.2− 0.4− 0.6− 0.8− 1.0− 1.2− 1.4− 1.6− 1.8− 2.0− 2.2− 2.4− 2.6−
−0.7 −0.5 −0.3 −0.1 0.1 0.3 0.5 0.7 0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7
Percent range
Number of participants
2024
20
18
16
14
12
10
8
6
4
2
−0.8− −0.6− −0.4− −0.2− 0.0− 0.2− 0.4− 0.6− 0.8− 1.0− 1.2− 1.4− 1.6− 1.8− 2.0− 2.2− 2.4− 2.6−
−0.7 −0.5 −0.3 −0.1 0.1 0.3 0.5 0.7 0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7
Percent range
Number of participants
2025
20
18
16
14
12
10
8
6
4
2
−0.8− −0.6− −0.4− −0.2− 0.0− 0.2− 0.4− 0.6− 0.8− 1.0− 1.2− 1.4− 1.6− 1.8− 2.0− 2.2− 2.4− 2.6−
−0.7 −0.5 −0.3 −0.1 0.1 0.3 0.5 0.7 0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7
Percent range
Number of participants
Longer run
20
18
16
14
12
10
8
6
4
2
−0.8− −0.6− −0.4− −0.2− 0.0− 0.2− 0.4− 0.6− 0.8− 1.0− 1.2− 1.4− 1.6− 1.8− 2.0− 2.2− 2.4− 2.6−
−0.7 −0.5 −0.3 −0.1 0.1 0.3 0.5 0.7 0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7
Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.
MONETARy POLICy REPORT: MARCH 2023 49
Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2022–25 and over the longer run
Number of participants
2022
20
December projections 18
September projections 16
14
12
10
8
6
4
2
3.2− 3.4− 3.6− 3.8− 4.0− 4.2− 4.4− 4.6− 4.8− 5.0− 5.2−
3.3 3.5 3.7 3.9 4.1 4.3 4.5 4.7 4.9 5.1 5.3
Percent range
Number of participants
2023
20
18
16
14
12
10
8
6
4
2
3.2− 3.4− 3.6− 3.8− 4.0− 4.2− 4.4− 4.6− 4.8− 5.0− 5.2−
3.3 3.5 3.7 3.9 4.1 4.3 4.5 4.7 4.9 5.1 5.3
Percent range
Number of participants
2024
20
18
16
14
12
10
8
6
4
2
3.2− 3.4− 3.6− 3.8− 4.0− 4.2− 4.4− 4.6− 4.8− 5.0− 5.2−
3.3 3.5 3.7 3.9 4.1 4.3 4.5 4.7 4.9 5.1 5.3
Percent range
Number of participants
2025
20
18
16
14
12
10
8
6
4
2
3.2− 3.4− 3.6− 3.8− 4.0− 4.2− 4.4− 4.6− 4.8− 5.0− 5.2−
3.3 3.5 3.7 3.9 4.1 4.3 4.5 4.7 4.9 5.1 5.3
Percent range
Number of participants
Longer run
20
18
16
14
12
10
8
6
4
2
3.2− 3.4− 3.6− 3.8− 4.0− 4.2− 4.4− 4.6− 4.8− 5.0− 5.2−
3.3 3.5 3.7 3.9 4.1 4.3 4.5 4.7 4.9 5.1 5.3
Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.
50 PART 3: SUMMARy OF ECONOMIC PROJECTIONS
Figure 3.C. Distribution of participants’ projections for PCE inflation, 2022–25 and over the longer run
Number of participants
2022
December projections 20
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− 4.7− 4.9− 5.1− 5.3− 5.5− 5.7− 5.9− 6.1−
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
Percent range
Number of participants
2023
20
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− 4.7− 4.9− 5.1− 5.3− 5.5− 5.7− 5.9− 6.1−
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
Percent range
Number of participants
2024
20
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− 4.7− 4.9− 5.1− 5.3− 5.5− 5.7− 5.9− 6.1−
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
Percent range
Number of participants
2025
20
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− 4.7− 4.9− 5.1− 5.3− 5.5− 5.7− 5.9− 6.1−
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
Percent range
Number of participants
Longer run
20
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− 4.7− 4.9− 5.1− 5.3− 5.5− 5.7− 5.9− 6.1−
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
Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.
MONETARy POLICy REPORT: MARCH 2023 51
Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2022–25
Number of participants
2022
December projections 20
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− 4.7− 4.9−
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
Percent range
Number of participants
2023
20
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− 4.7− 4.9−
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
Percent range
Number of participants
2024
20
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− 4.7− 4.9−
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
Percent range
Number of participants
2025
20
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− 4.7− 4.9−
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
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.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, 2022–25 and over the longer run
Number of participants
2022
December projections 20
September projections 18
16
14
12
10
8
6
4
2
1.88− 2.13− 2.38− 2.63− 2.88− 3.13− 3.38− 3.63− 3.88− 4.13− 4.38− 4.63− 4.88− 5.13− 5.38− 5.63−
2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62 4.87 5.12 5.37 5.62 5.87
Percent range
Number of participants
2023
20
18
16
14
12
10
8
6
4
2
1.88− 2.13− 2.38− 2.63− 2.88− 3.13− 3.38− 3.63− 3.88− 4.13− 4.38− 4.63− 4.88− 5.13− 5.38− 5.63−
2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62 4.87 5.12 5.37 5.62 5.87
Percent range
Number of participants
2024
20
18
16
14
12
10
8
6
4
2
1.88− 2.13− 2.38− 2.63− 2.88− 3.13− 3.38− 3.63− 3.88− 4.13− 4.38− 4.63− 4.88− 5.13− 5.38− 5.63−
2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62 4.87 5.12 5.37 5.62 5.87
Percent range
Number of participants
2025
20
18
16
14
12
10
8
6
4
2
1.88− 2.13− 2.38− 2.63− 2.88− 3.13− 3.38− 3.63− 3.88− 4.13− 4.38− 4.63− 4.88− 5.13− 5.38− 5.63−
2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62 4.87 5.12 5.37 5.62 5.87
Percent range
Number of participants
Longer run
20
18
16
14
12
10
8
6
4
2
1.88− 2.13− 2.38− 2.63− 2.88− 3.13− 3.38− 3.63− 3.88− 4.13− 4.38− 4.63− 4.88− 5.13− 5.38− 5.63−
2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62 4.87 5.12 5.37 5.62 5.87
Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.
MONETARy POLICy REPORT: MARCH 2023 53
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
6
Median of projections
70% confidence interval 5
4
3
2
Actual
1
0
−1
−2
−3
2017 2018 2019 2020 2021 2022 2023 2024 2025
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
20 20
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 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.”
54 PART 3: SUMMARy OF ECONOMIC PROJECTIONS
Figure 4.B. Uncertainty and risks in projections of the unemployment rate
Median projection and confidence interval based on historical forecast errors
Percent
Unemployment rate
Median of projections
7
70% confidence interval
6
Actual 5
4
3
2
1
2017 2018 2019 2020 2021 2022 2023 2024 2025
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
20 20
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 approxi-
mately symmetric. For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.”
MONETARy POLICy REPORT: MARCH 2023 55
Figure 4.C. Uncertainty and risks in projections of PCE inflation
Median projection andconfidence interval based on historical forecast errors
Percent
PCE inflation
Median of projections
7
70% confidence interval
6
5
4
3
Actual
2
1
2017 2018 2019 2020 2021 2022 2023 2024 2025
FOMC participants’ assessments of uncertainty and risksaround theireconomic projections
Number of participants Number of participants
Uncertainty about PCE inflation Risks to PCE inflation
December projections December projections
20 20
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
20 20
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.”
56 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 2022
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 2022
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 2022
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 2022
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: MARCH 2023 57
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 2022
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 2022
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 2022
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 2022
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.
58 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 7
Median of projections
70% confidence interval*
6
5
4
3
Actual
2
1
0
2017 2018 2019 2020 2021 2022 2023 2024 2025
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: MARCH 2023 59
Table 2. Average historical projection error ranges
Percentage points
Variable 2022 2023 2024 2025
Change in real GDP1 ......... ± 0.7 ± 1.6 ± 2.1 ± 2.3
Unemployment rate1 ......... ± 0.1 ± 1.1 ± 1.6 ± 2.0
Total consumer prices2 ....... ± 0.3 ± 1.3 ± 1.4 ± 1.4
Short-term interest rates3 .... ± 0.1 ± 1.2 ± 2.0 ± 2.6
Note: Error ranges shown are measured as plus or minus the root mean squared
error of projections for 2002 through 2021 that were released in the winter by various
private and government forecasters. As described in the box “Forecast Uncertain-
ty,” 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 calculat-
ed using average levels, in percent, in the fourth quarter.
60 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
of the Board of Governors and the presidents of 70 percent that actual GDP would expand within a
the Federal Reserve Banks inform discussions of range of 2.3 to 3.7 percent in the current year, 1.4 to
monetary policy among policymakers and can aid 4.6 percent in the second year, 0.9 to 5.1 percent in
public understanding of the basis for policy actions. the third year, and 0.7 to 5.3 percent in the fourth year.
Considerable uncertainty attends these projections, The corresponding 70 percent confi dence intervals
however. The economic and statistical models and for overall infl ation would be 1.7 to 2.3 percent in the
relationships used to help produce economic forecasts current year, 0.7 to 3.3 percent in the second year, and
are necessarily imperfect descriptions of the real world, 0.6 to 3.4 percent in the third and fourth years.
and the future path of the economy can be affected Figures 4.A through 4.C illustrate these confi dence
by myriad unforeseen developments and events. Thus, bounds in “fan charts” that are symmetric and centered
in setting the stance of monetary policy, participants on the medians of FOMC participants’ projections for
consider not only what appears to be the most likely GDP growth, the unemployment rate, and infl ation.
economic outcome as embodied in their projections, However, in some instances, the risks around the
but also the range of alternative possibilities, the projections may not be symmetric. In particular, the
likelihood of their occurring, and the potential costs to unemployment rate cannot be negative; furthermore,
the economy should they occur. the risks around a particular projection might be tilted
Table 2 summarizes the average historical accuracy to either the upside or the downside, in which case
of a range of forecasts, including those reported in the corresponding fan chart would be asymmetrically
past Monetary Policy Reports and those prepared positioned around the median projection.
by the Federal Reserve Board’s staff in advance of Because current conditions may differ from those
meetings of the Federal Open Market Committee that prevailed, on average, over history, participants
(FOMC). The projection error ranges shown in the provide judgments as to whether the uncertainty
table illustrate the considerable uncertainty associated attached to their projections of each economic
with economic forecasts. For example, suppose a variable is greater than, smaller than, or broadly similar
participant projects that real gross domestic product to typical levels of forecast uncertainty seen in the past
(GDP) and total consumer prices will rise steadily at 20 years, as presented in table 2 and refl ected in the
annual rates of, respectively, 3 percent and 2 percent. widths of the confi dence intervals shown in the top
If the uncertainty attending those projections is similar panels of fi gures 4.A through 4.C. Participants’ current
to that experienced in the past and the risks around
the projections are broadly balanced, the numbers (continued)
MONETARy POLICy REPORT: MARCH 2023 61
assessments of the uncertainty surrounding their projections of participants’ individual assessments of
projections are summarized in the bottom-left panels appropriate monetary policy and are on an end-of-year
of those fi gures. Participants also provide judgments as basis. However, the forecast errors should provide
to whether the risks to their projections are weighted a sense of the uncertainty around the future path of
to the upside, are weighted to the downside, or the federal funds rate generated by the uncertainty
are broadly balanced. That is, while the symmetric about the macroeconomic variables as well as
historical fan charts shown in the top panels of additional adjustments to monetary policy that would
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 economy.
may judge that there is a greater risk that a given If at some point in the future the confi dence interval
variable will be above rather than below their around the federal funds rate were to extend below
projections. These judgments are summarized in the zero, it would be truncated at zero for purposes of
lower-right panels 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 for the lowest target range for the federal funds rate that
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
primarily because each participant’s assessment of rate 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.
63
a
bbreviations
AFE advanced foreign economy
AUM assets under management
COVID-19 coronavirus disease 2019
EME emerging market economy
FOMC Federal Open Market Committee; also, the Committee
GDP gross domestic product
MBS mortgage-backed securities
MMF money market fund
ON RRP overnight reverse repurchase agreement
PCE personal consumption expenditures
SOMA System Open Market Account
S&P Standard & Poor’s
VIX implied volatility for the S&P 500 index
For use at 11:00 a.m. EST
March 3, 2023
M P r
onetary olicy ePort
March 3, 2023
Board of Governors of the Federal Reserve System
Cite this document
APA
Federal Reserve (2023, March 2). Monetary Policy Report. Monetary Policy Reports, Federal Reserve. https://whenthefedspeaks.com/doc/monetary_policy_report_20230303
BibTeX
@misc{wtfs_monetary_policy_report_20230303,
author = {Federal Reserve},
title = {Monetary Policy Report},
year = {2023},
month = {Mar},
howpublished = {Monetary Policy Reports, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/monetary_policy_report_20230303},
note = {Retrieved via When the Fed Speaks corpus}
}