Monetary Policy Report

For use at 11:00 a.m. EST March 1, 2024 M P r onetary olicy ePort March 1, 2024 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 1, 2024 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 30, 2024 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Special Topics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Part 1: Recent Economic and Financial Developments . . . . . . . . . . . . . . . . . . . . . 5 Domestic Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Financial Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 International Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Part 2: Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35 Part 3: Summary of Economic Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45 Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63 List of Boxes Employment and Earnings across Demographic Groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Recent Housing Market Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Developments Related to Financial Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Developments in the Federal Reserve’s Balance Sheet and Money Markets . . . . . . . . . . . . . . 38 Monetary Policy Rules in the Current Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Forecast Uncertainty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Note: This report reflects information that was publicly available as of noon EST on February 29, 2024. Unless otherwise stated, the time series in the figures extend through, for daily data, February 27, 2024; for monthly data, January 2024; and, for quarterly data, 2023: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 33 and 40 as well as figure C in the box “Recent Housing Market Developments,” 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 © 2024 S&P Dow Jones Indices LLC, a division of S&P Global, and/or its affiliates. All rights reserved. Redistribution, reproduction, and/or photocopying in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices, please visit www.spdji.com. S&P® is a registered trademark of Standard & Poor’s Financial Services LLC, and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates, nor their third-party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent, and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates, nor their third- party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein. 1 s ummary While inflation remains above the Federal The price index for personal consumption Open Market Committee’s (FOMC) objective expenditures (PCE) rose 2.4 percent over the of 2 percent, it has eased substantially over 12 months ending in January, down from a the past year, and the slowing in inflation peak of 7.1 percent in 2022. The core PCE has occurred without a significant increase price index—which excludes volatile food in unemployment. The labor market remains and energy prices and is generally considered relatively tight, with the unemployment rate a better guide to the direction of future near historically low levels and job vacancies inflation—rose 2.8 percent in the 12 months still elevated. Real gross domestic product ending in January, and the slowing in inflation (GDP) growth has also been strong, supported was widespread across both goods and by solid increases in consumer spending. services prices. More recently, core PCE prices increased at an annual rate of 2.5 percent over The FOMC has maintained the target range the six months ending in January, though for the federal funds rate at 5¼ to 5½ percent measuring inflation over relatively short since its July 2023 meeting. The Committee periods risks exaggerating the influence of views the policy rate as likely at its peak for idiosyncratic or temporary factors. Measures this tightening cycle, which began in early of longer-term inflation expectations are 2022. The Federal Reserve has also continued within the range of values seen in the decade to reduce its holdings of Treasury and agency before the pandemic and continue to be mortgage-backed securities. broadly consistent with the FOMC’s longer- run objective of 2 percent. As labor market tightness has eased and progress on inflation has continued, the risks The labor market. The labor market has to achieving the Committee’s employment and remained relatively tight, with job gains inflation goals have been moving into better averaging 239,000 per month since June balance. Even so, the Committee remains and the unemployment rate near historical highly attentive to inflation risks and is acutely lows. Labor demand has eased—as job aware that high inflation imposes significant openings have declined in many sectors of the hardship, especially on those least able to meet economy—but continues to exceed the supply the higher costs of essentials. of available workers. Labor supply has trended higher over the past year, reflecting a continued The FOMC is strongly committed to strong pace of immigration and increases in returning inflation to its 2 percent objective. the labor force participation rate, particularly In considering any adjustments to the target among prime-age workers. Reflecting the range for the federal funds rate, the Committee improved balance between labor demand and will carefully assess incoming data, the supply, nominal wage gains slowed in 2023, evolving outlook, and the balance of risks. but they remain above a pace consistent with The Committee does not expect it will be 2 percent inflation over the longer term, given appropriate to reduce the target range until it prevailing trends in productivity growth. has gained greater confidence that inflation is moving sustainably toward 2 percent. Economic activity. Real GDP increased 3.1 percent last year, notably faster than in Recent Economic and Financial 2022 despite tighter financial conditions, Developments including elevated longer-term interest rates. Consumer spending grew at a solid pace, Inflation. Consumer price inflation has and housing market activity started to turn slowed notably but remains above 2 percent. back up in the second half of last year after 2 SUMMARy having declined since early 2021. However, the historical averages but with a liability real business fixed investment growth slowed, composition that has become more reliant likely reflecting tighter financial conditions and on nontraditional sources of funding. Most downbeat business sentiment. In contrast to banks maintained high liquidity and stable GDP, manufacturing output was little changed, funding, while bank funding costs continue to on net, last year, a downshift following two increase. (See the box “Developments Related years of robust post-pandemic gains. to Financial Stability” in Part 1.) Financial conditions. Conditions in financial International developments. Following a markets tightened considerably further over the rebound in early 2023, growth in foreign summer and early fall before reversing course economic activity was subdued in the toward the end of the year. The FOMC raised second half of last year. Economic growth the target range for the federal funds rate a was particularly weak in advanced foreign further 25 basis points at its meeting last July, economies (AFEs) as monetary policy bringing the overall increase in the target range tightening weighed on activity and high for this tightening cycle to 525 basis points. inflation eroded real household incomes. The market-implied expected path of the Structural adjustment to higher energy prices federal funds rate has moved up, on net, since in Europe continued to hinder economic the middle of 2023, and yields on longer-term performance, while property-sector weakness nominal Treasury securities are notably higher and sluggish domestic demand restrained on balance. Credit remains generally available Chinese economic activity. Foreign headline to most households and businesses but at inflation has fallen further, reflecting declines elevated interest rates, which have weighed in core and food inflation. However, the pace on financing activity. Lending by banks to of disinflation has varied across countries and households and businesses slowed notably sectors, with the moderation in goods inflation since June as banks continued to tighten generally outpacing that in services inflation. standards and demand for loans softened. Most foreign central banks paused policy Financial stability. Overall, the banking system interest rate hikes in the second half of last remains sound and resilient; although acute year and have since held rates steady. Policy stress in the banking system has receded rate paths implied by financial market pricing since last March, a few areas of risk warrant suggest that central banks in many AFEs are continued monitoring. Upward pressure on expected to begin lowering their policy rates asset valuations continued, with real estate in 2024. Several central banks in emerging prices elevated relative to rents and high market economies have already begun easing price-to-earnings ratios in equity markets. monetary policy. The trade-weighted exchange Borrowing from nonfinancial businesses value of the U.S. dollar has increased slightly, and households continued to increase at a on net, since the middle of last year. pace slower than that of nominal GDP, and the combined debt-to-GDP ratio now sits Monetary Policy close to its 20-year low. Vulnerabilities from financial-sector leverage remain notable. While Interest rate policy. After significantly risk-based bank capital ratios stayed solid tightening the stance of monetary policy and increased broadly, declines in the fair since early 2022, the FOMC has maintained values of fixed-rate assets have been sizable the target range for the policy rate at 5¼ to relative to the regulatory capital at some 5½ percent since its meeting last July. banks. Meanwhile, leverage at hedge funds Although the FOMC judges that the risks to has stabilized at high levels, and leverage achieving its employment and inflation goals at life insurers increased to values close to are moving into better balance, the Committee MONETARy POLICy REPORT: MARCH 2024 3 remains highly attentive to inflation risks. race, ethnicity, and education have narrowed, The Committee has indicated that it does and some gaps reached historical lows in not expect it will be appropriate to reduce 2023. However, despite this narrowing, the target range until it has gained greater significant disparities in absolute levels across confidence that inflation is moving sustainably groups remain. (See the box “Employment toward 2 percent. In considering any and Earnings across Demographic Groups” adjustments to the target range for the federal in Part 1.) funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the Housing sector. The rise in mortgage rates balance of risks. over the past two years has reduced housing demand, resulting in a steep drop in housing Balance sheet policy. The Federal Reserve has activity in 2022 and a marked slowing in continued the process of significantly reducing house price growth from its historically high its holdings of Treasury and agency securities pace. Offsetting factors boosting housing in a predictable manner, contributing to the demand, such as the robust job market and tightening of financial conditions.1 Beginning the increased prevalence of remote work, in June 2022, principal payments from have prevented significant price declines. securities held in the System Open Market High mortgage rates have also discouraged Account have been reinvested only to the some potential sellers with low rates on their extent that they exceeded monthly caps. Under current mortgages from moving, which has this policy, the Federal Reserve has reduced kept the existing home market unusually thin. its securities holdings about $640 billion since The shortage of available existing homes has mid-June 2023, bringing the total reduction in pushed some remaining homebuyers toward securities holdings since the start of balance new homes and supported a modest rebound sheet runoff to about $1.4 trillion. The in construction of single-family homes later FOMC has stated that it intends to maintain in 2023. In contrast, multifamily starts rose securities holdings at amounts consistent with to historically high levels in 2022 but have implementing monetary policy efficiently more recently fallen back because of builders’ and effectively in its ample-reserves regime. concerns about the effect of the significant To ensure a smooth transition, the FOMC amount of new multifamily supply on rents intends to slow and then stop reductions in and property prices. (See the box “Recent its securities holdings when reserve balances Housing Market Developments” in Part 1.) are somewhat above the level that the FOMC judges to be consistent with ample reserves. Federal Reserve’s balance sheet and money markets. The size of the Federal Reserve’s Special Topics balance sheet has decreased since June as the FOMC continued to reduce its securities Employment and earnings across groups. An holdings. Despite ongoing balance sheet exceptionally tight labor market over the past runoff, reserve balances—the largest liability two years has been especially beneficial for on the Federal Reserve’s balance sheet—edged historically disadvantaged groups of workers. up as declines in the usage of the overnight As a result, many of the long-standing reverse repurchase agreement facility— disparities in employment and wages by sex, another Federal Reserve liability—more than matched the decline in assets. (See the box “Developments in the Federal Reserve’s 1. See the May 4, 2022, press release regarding the Balance Sheet and Money Markets” in Part 2.) Plans for Reducing the Size of the Federal Reserve’s Balance Sheet, available on the Board’s website at https:// Monetary policy rules. Simple monetary policy www.federalreserve.gov/newsevents/pressreleases/ monetary20220504b.htm. rules, which prescribe a setting for the policy 4 SUMMARy interest rate in response to the behavior of simple monetary policy rules have decreased a small number of economic variables, can recently and now call for levels of the federal provide useful guidance to policymakers. funds rate that are close to the current target With inflation easing and supply and demand range for the federal funds rate. (See the conditions in labor markets coming into better box “Monetary Policy Rules in the Current balance, the policy rate prescriptions of most Environment” in Part 2.) 5 P 1 art r e f d ecent conomic and inanciaL eveLoPments Domestic Developments 1. Personal consumption expenditures price indexes Inflation has eased but remains elevated Monthly Percent change from year earlier Trimmed mean After surging in 2021 and 2022, inflation Excluding food and energy 7 slowed notably last year. The price index for Total 6 personal consumption expenditures (PCE) 5 rose 2.4 percent over the 12 months ending 4 in January, down from a peak of 7.1 percent 3 in 2022, though still above the Federal Open 2 Market Committee’s (FOMC) longer-run 1 objective of 2 percent (figure 1). The core PCE 0 price index—which excludes volatile food and energy prices—rose 2.8 percent over the 2017 2018 2019 2020 2021 2022 2023 2024 12 months ending in January. More recently, NOTE: Trimmed mean data extend through December 2023. core PCE prices increased at an annual rate SOURCE: For trimmed mean, Federal Reserve Bank of Dallas; for all else, Bureau of Economic Analysis; all via Haver Analytics. of 2.5 percent over the six months ending in January, though measuring inflation over 2. Core personal consumption expenditure price index relatively short periods risks exaggerating Monthly Percent, annual rate the influence of idiosyncratic or temporary 3-month change factors (figure 2). The trimmed mean measure 7 6-month change of PCE prices constructed by the Federal 12-month change 6 Reserve Bank of Dallas—which provides an 5 alternative approach to reducing the influence 4 of idiosyncratic price movements—increased 3 3.3 percent over the 12 months ending 2 in December, somewhat higher than the 1 + core index (figure 1). _0 1 Consumer energy prices have 2017 2018 2019 2020 2021 2022 2023 2024 declined, while food price inflation has slowed markedly SOURCE: Bureau of Economic Analysis, personal consumption expenditures via Haver Analytics. After hovering around $80 per barrel in the 3. Spot and futures prices for crude oil first half of last year, oil prices rose notably Weekly Dollars per barrel in late summer, albeit to levels still well below those seen in 2022, but have since declined, 140 on net, to around $83 per barrel (figure 3). Brent spot price 120 Gasoline prices have followed a similar pattern. The moderation in oil prices last 100 fall reflects weak economic activity abroad 80 and increases in U.S. and other non-OPEC 24-month-ahead 60 (Organization of the Petroleum Exporting futures contracts Countries) oil production. Since late last year, 40 geopolitical tensions in the Middle East and 20 rerouting of shipping away from the Red Sea have placed some upward pressure on oil 2019 2020 2021 2022 2023 2024 NOTE: The data are weekly averages of daily data and extend through February 23, 2024. SOURCE: ICE Brent Futures via Bloomberg. 6 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS 4. 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 Housing services 8 60 12 Food and 50 beverages 10 6 40 8 4 30 6 20 4 Services ex. energy 2 10 2 and housing + + + 0 0 _0 – – 10 Energy 2 Goods ex. food, beverages, and energy 2 20 4 2017 2018 2019 2020 2021 2022 2023 2024 2017 2018 2019 2020 2021 2022 2023 2024 NOTE: The data are monthly. SOURCE: Bureau of Economic Analysis via Haver Analytics. 5. Spot prices for commodities prices. Continuing geopolitical tensions pose an upside risk to energy prices. Natural gas Weekly Week ending January 3, 2014 = 100 prices remain well below the elevated 2022 levels due to strong production and high 180 inventory levels. All told, consumer energy 160 prices fell 4.9 percent in the 12 months ending 140 in January (figure 4, left panel). Industrial metals 120 Food price inflation slowed markedly last 100 year, as prices of agricultural commodities 80 Agriculture and livestock fell (figure 5). This moderation and livestock 60 brought the 12-month change in food prices down to 1.4 percent in January, a substantial 2014 2016 2018 2020 2022 2024 slowing from the 11 percent increase recorded NOTE: The data are weekly averages of daily data and extend through February 23, 2024. over 2022 (figure 4, left panel). SOURCE: For industrial metals, S&P GSCI Industrial Metals Spot Index; for agriculture and livestock, S&P GSCI Agriculture & Livestock Spot Index; both via Haver Analytics. Prices of both energy and food products are of particular importance for lower-income households, for which such necessities account for a large share of expenditures. Reflecting the sharp increases seen in 2021 and 2022, these price indexes are about 25 percent higher than before the pandemic. Core goods prices have been declining as supply bottlenecks ease and import price inflation falls . . . Outside of food and energy prices, there has been significant deceleration across the main spending categories, though disinflation MONETARy POLICy REPORT: MARCH 2024 7 has been more pronounced in some than in 6. Suppliers’ delivery times others (figure 4, right panel). Core goods Monthly Diffusion index prices fell 0.6 percent in the 12 months ending in January, and the deceleration was 80 broad based, as the supply chain issues and 75 other capacity constraints that had earlier Manufacturing 70 boosted inflation so much eased substantially. 65 For example, suppliers’ delivery times had 60 lengthened considerably during the pandemic but have been getting shorter over the past 55 year (figure 6). Core goods inflation was also 50 Nonmanufacturing held down last year by a net decline in nonfuel 45 import prices, which, in turn, largely reflected 2017 2018 2019 2020 2021 2022 2023 2024 falling commodity prices (figure 7). NOTE: Values greater than 50 indicate that more respondents reported longer delivery times relative to a month earlier than reported shorter . . . while core services price inflation has delivery times. been slowing but remains elevated SOURCE: Institute for Supply Management, Report on Business, via Haver Analytics. Price inflation for both housing services and 7. Nonfuel import price index core services other than housing slowed over the past year, though it remains elevated. Monthly Percent change from year earlier Increases in housing services prices began 8 to moderate, coming in at 6.1 percent in the 12 months ending in January, down from a 6 peak of more than 8 percent (figure 4, right 4 panel). This slowing is consistent with the 2 notably smaller increases in market rents on + _0 new housing leases to new tenants seen since 2 late 2022 (figure 8). Because prices for housing services measure the rents paid by all tenants 4 (and the equivalent rent implicitly paid by all 2014 2016 2018 2020 2022 2024 homeowners)—including those whose leases SOURCE: Bureau of Labor Statistics via Haver Analytics. have not yet come up for renewal—they tend to adjust slowly to changes in rental market 8. Housing rents conditions. The softening in market rents Monthly Percent change from month earlier therefore points to a continued deceleration in Zillow housing services prices over the year ahead. 2.5 CoreLogic single-family detached PCE housing services 2.0 Prices for nonhousing core services—a RealPage 1.5 broad group that includes services such as 1.0 travel and dining, financial services, and car .5 repair—rose 3.5 percent in the 12 months + ending in January, down from their recent _0 peak of 5.2 percent (figure 4, right panel). .5 As labor costs are a significant input in these 1.0 service sectors, the ongoing softening of labor 2019 2020 2021 2022 2023 2024 demand and improvements in labor supply should contribute to a further slowing in core NOTE: CoreLogic data extend through December 2023. Zillow, CoreLogic, and RealPage measure market-rate rents—that is, rents for a services price inflation as labor cost growth new lease by a new tenant. SOURCE: Bureau of Economic Analysis, PCE, via Haver Analytics; moderates. CoreLogic, Inc.; Zillow, Inc.; RealPage, Inc.; Federal Reserve Board staff calculations. 8 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS Measures of longer-term inflation expectations have been stable, while shorter-term expectations have fallen back The generally held view among economists and policy analysts is that inflation expectations 9. Measures of inflation expectations influence actual inflation by affecting wage- Percent and price-setting decisions. Survey-based Michigan survey, next 12 months 6.5 measures of expected inflation over a longer Michigan survey, next 5 to 10 years 6.0 horizon have generally been moving sideways SPF, 6 to 10 years ahead 5.5 over the past year, within the range seen during SPF, next 10 years 5.0 the decade before the pandemic, and they 4.5 appear broadly consistent with the FOMC’s 4.0 longer-run 2 percent inflation objective. This 3.5 development is seen for surveys of households, 3.0 2.5 such as the University of Michigan Surveys 2.0 of Consumers, and for surveys of professional 1.5 forecasters (figure 9). For example, the median 2008 2010 2012 2014 2016 2018 2020 2022 2024 forecaster in the Survey of Professional NOTE: The Survey of Professional Forecasters (SPF) data are Forecasters, conducted by the Federal Reserve quarterly and extend through 2024:Q1. The data for the Michigan survey Bank of Philadelphia, continued to expect are monthly and extend through February 2024; the February data are preliminary. PCE price inflation to average 2 percent over SOURCE: University of Michigan Surveys of Consumers; Federal Reserve Bank of Philadelphia, SPF. the five years beginning five years from now. Moreover, inflation expectations over a shorter horizon—which tend to follow observed inflation more closely—have been reversing their earlier run-ups. In the Michigan survey, the median value for inflation expectations over the next year was 3.0 percent in February, well below the peak rate of 5.4 percent 10. Inflation compensation implied by Treasury observed in spring 2022. Expected inflation Inflation-Protected Securities for the next year as measured in the Survey of Consumer Expectations, conducted by Daily Percent the Federal Reserve Bank of New York, has 4.0 also declined, on net, over this period and has 5-year 3.5 returned to the range of values seen before 3.0 the pandemic. 2.5 2.0 Market-based measures of longer-term 5-to-10-year 1.5 inflation compensation, which are based on 1.0 financial instruments linked to inflation such .5 as Treasury Inflation-Protected Securities, 0 are also broadly in line with readings seen in the years before the pandemic and consistent 2016 2017 2018 2019 2020 2021 2022 2023 2024 with inflation returning to 2 percent. These NOTE: The data are at a business-day frequency and are estimated from smoothed nominal and inflation-indexed Treasury yield curves. measures have been little changed, on net, SOURCE: Federal Reserve Bank of New York; Federal Reserve Board since last summer (figure 10). staff calculations. MONETARy POLICy REPORT: MARCH 2024 9 11. Nonfarm payroll employment The labor market remains strong Monthly Thousands of jobs Payroll employment gains have been robust, averaging 239,000 since June of last year. 800 The pace of job gains has nevertheless been 700 softening, having averaged more than 375,000 600 per month in 2022 and about 290,000 in the 500 first half of 2023 (figure 11). This slowing 400 has come primarily from the professional and 300 business services, manufacturing, and leisure and hospitality sectors, which tend to be 200 cyclically sensitive. In contrast, employment 100 growth has remained strong in the health- 2021 2022 2023 2024 care and social assistance sector and at state NOTE: The data shown are a 3-month moving average of the change in and local governments, which tend to be less nonfarm payroll employment. cyclically sensitive and are still recovering from SOURCE: Bureau of Labor Statistics via Haver Analytics. pandemic-era staffing shortages. 12. Civilian unemployment rate Monthly Percent The unemployment rate edged up, on net, 15 since the middle of last year, but at 3.7 percent 14 in January, it is only slightly above its pre- 13 pandemic level and remains very low by 12 11 historical standards (figure 12). Indeed, 10 unemployment rates among most age, 9 educational attainment, sex, and ethnic and 8 7 racial groups are near their respective historical 6 lows (figure 13). (The box “Employment 5 4 and Earnings across Demographic Groups” 3 provides further details.) 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 SOURCE: Bureau of Labor Statistics via Haver Analytics. 13. Unemployment rate, by race and ethnicity Monthly Percent 20 18 Black or African American 16 14 12 Hispanic or Latino 10 White 8 6 Asian 4 2 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 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 Employment and Earnings across Demographic Groups Economic expansions have tended to narrow long- workers was also historically high in early 2023, standing disparities in employment and earnings across although it has since moved down closer to its demographic groups, which can help make up for 2019 level.3 disproportionate losses experienced during downturns. Similarly, the EPOP ratio for prime-age women These benefi ts have been especially pronounced during increased steadily over the past two years and reached the current expansion, which has been characterized a record high in 2023 (fi gure A, right panel). As a by an exceptionally tight labor market and robust result, the EPOP ratio gap between prime-age men demand for workers over the past two years. and women fell to a record low. The recent increase in Among prime-age individuals (ages 25 to 54), female employment is mostly attributable to rising labor employment for Black or African American workers, force participation, which had also been increasing which declined more relative to white and Asian briskly before the pandemic, bolstered by a growing workers in early 2020, reached a historical peak in share of women with a college degree.4 Other factors, 2023 (fi gure A, left panel). As a result, the gap in the including tight labor market conditions and greater employment-to-population (EPOP) ratio between availability of remote-work options, may have also prime-age Black and white workers fell to its lowest contributed to rising prime-age female labor force point in almost 50 years.1 Hispanic or Latino workers participation.5 experienced especially large employment losses in (continued) 2020, due in part to greater exposure to the industries most affected by the pandemic.2 By early 2022, 3. As monthly series have greater sampling variability however, this group’s EPOP ratio gap relative to prime- for smaller groups, we do not plot EPOP ratio estimates for American Indians or Alaska Natives. age white workers had recovered to its 2019 average 4. For a discussion of the contribution of educational and has remained near this historically low level for the attainment to prime-age female labor force participation past two years. The EPOP ratio for prime-age Asian before the pandemic, see Didem Tüzemen and Thao Tran (2019), “The Uneven Recovery in Prime-Age Labor Force Participation,” Federal Reserve Bank of Kansas City, Economic 1. In fact, for the population aged 16 or older, the Review, vol. 104 (Third Quarter), pp. 21–41, https://www. EPOP ratio was the same for Black and white individuals kansascityfed.org/Economic%20Review/documents/652/2019- in January 2024 (not shown). This equivalence, however, The%20Uneven%20Recovery%20in%20Prime-Age%20 partly refl ects the fact that these groups have different age Labor%20Force%20Participation.pdf. distributions, with whites older, on average, and thus more 5. For a discussion on access to remote work and likely to be retired. participation rates, see Maria D. Tito (2024), “Does the 2. On the relationship between occupation, industry, and Ability to Work Remotely Alter Labor Force Attachment? the differential effect of the COvID-19 pandemic across An Analysis of Female Labor Force Participation,” FEDS demographic groups, see Guido Matias Cortes and Eliza Notes (Washington: Board of Governors of the Federal Forsythe (2023), “Heterogeneous Labor Market Impacts of the Reserve System, January 19), https://doi.org/10.17016/2380- COvID-19 Pandemic,” ILR Review, vol. 76 (January), pp. 30–55. 7172.3433. A. Prime-age employment-to-population ratios compared with the 2019 average ratio, by group Race and ethnicity Sex and educational attainment Monthly Percentage points Monthly Percentage points 3 3 + + _0 _0 3 3 6 6 White 9 Women, some college or more 9 Black or African American Women, high school or less 12 12 Hispanic or Latino Men, some college or more Asian 15 Men, high school or less 15 2019 2020 2021 2022 2023 2019 2020 2021 2022 2023 NOTE: The data extend through December 2023. 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 2024 11 Robust labor demand over the past two years has B. Employment-to-population ratios relative to 2019 also reversed pandemic-induced employment losses average, by age across education groups. For both prime-age men and women, the EPOP ratio fell signifi cantly more for Monthly Percentage points workers with a high school diploma or less compared with those with at least some college education, largely 3 + refl ecting industry exposure to pandemic-related _0 closures or some differences in the ability to work remotely across jobs. Notably, the EPOP ratio declined Ages 55+ 3 Ages 25 to 54 similarly for men and women with the same education 6 level, a result that contrasts with those in previous recessions, in which male EPOP losses have historically 9 outpaced female losses.6 The unusually large effect on 12 women during the pandemic also refl ects the industry composition of job losses, as well as caregiving needs.7 Ages 16 to 24 15 While employment disparities across many demographic groups are now within historically narrow 2019 2020 2021 2022 2023 ranges, substantial gender, racial, and ethnic gaps NOTE: The data extend through December 2023. Data before January 2023 are estimated by Federal Reserve Board staff in order to eliminate remain, underscoring long-standing structural factors. discontinuities in the published history. Currently, prime-age women are employed at a rate SOURCE: Bureau of Labor Statistics; U.S. Census Bureau, Current Population Survey; Federal Reserve Board staff calculations. 11 percentage points less than men, while prime-age Black and Hispanic workers are employed at a rate two years have also led to strong nominal wage growth, 3 to 4 percentage points less than white workers. especially for groups at the lower end of the earnings Further, the differential effect of the pandemic on distribution. As shown in the top-left panel of fi gure C, the employment of older workers has proven highly real wage growth—as measured by the Federal Reserve persistent. The EPOP ratio for workers aged 55 or older Bank of Atlanta’s Wage Growth Tracker and defl ated by remains approximately 2 percentage points below its the personal consumption expenditures price index— pre-pandemic level and has changed little since late has been consistently stronger for workers in lower 2021 (fi gure B). This shortfall is wholly attributable to wage quartiles.9 decreases in labor force participation stemming from Stronger wage growth at the bottom of the income increased retirements concentrated among workers distribution is refl ected in the experiences of different aged 60 or older.8 education and demographic groups. In the fi rst two In addition to narrowing many employment gaps, years of the recovery, real wage growth was stronger historically tight labor market conditions over the past for workers with a high school diploma or less relative to workers with a bachelor’s degree or more (fi gure C, 6. See Claudia Goldin (2022), “Understanding the top-right panel) and, in the past two years, has also Economic Impact of COvID-19 on Women,” Brookings Papers on Economic Activity, Spring, pp. 65–110, https://www. been stronger for nonwhite workers relative to white brookings.edu/wp-content/uploads/2022/03/16265-BPEA- workers (fi gure C, bottom-left panel). Wages for men Sp22_Goldin_WEB-Appendix.pdf; and Stefania Albanesi and and women, by contrast, have largely grown in tandem Jiyeon Kim (2021), “Effects of the COvID-19 Recession on the (fi gure C, bottom-right panel).10 In addition to the US Labor Market: Occupation, Family, and Gender,” Journal of Economic Perspectives, vol. 35 (Summer), pp. 3–24. infl uence of a tight labor market, differences in wage 7. On the role of caregiving, see Joshua Montes, (continued on next page) Christopher Smith, and Isabel Leigh (2021), “Caregiving for Children and Parental Labor Force Participation during the Pandemic,” FEDS Notes (Washington: Board of Governors 9. To reduce noise due to sampling variation, which can of the Federal Reserve System, November 5), https://www. be pronounced when considering disaggregated groups’ federalreserve.gov/econres/notes/feds-notes/caregiving-for- wage changes, the series shown in fi gure C are the 12-month children-and-parental-labor-force-participation-during-the- moving averages of the groups’ median 12-month real wage pandemic-20211105.html. changes. Thus, by construction, these series lag the actual real 8. For an analysis on the increase in retirements following wage changes. the pandemic, see Joshua Montes, Christopher Smith, and 10. The measure of real earnings growth shown in the Juliana Dajon (2022), “ ‘The Great Retirement Boom’: The fi gure uses the same price index for all groups, but infl ation Pandemic-Era Surge in Retirements and Implications for Future experiences can differ across demographic groups because Labor Force Participation,” Finance and Economics Discussion of differences in what they purchase or where they shop. Series 2022-081 (Washington: Board of Governors of the See Jacob Orchard (2021), “Cyclical Demand Shifts and Federal Reserve System, November), https://doi.org/10.17016/ Cost of Living Inequality,” working paper, February (revised FEDS.2022.081. September 2022). 12 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS Employment and Earnings (continued) C. Median real wage growth, by group Wage quartil es Educational attainment Monthly Percent Monthly Percent 3rd quartile 1st quartile 4 3 3 2 2nd quartile 2 Associate’s degree 4th quartile 1 High school or less 1 + + _0 _0 1 1 2 Bachelor’s degree or more 2 3 2019 2020 2021 2022 2023 2019 2020 2021 2022 2023 Rac e Sex Monthly Percent Monthly Percent 3 3 2 2 White Women 1 1 Nonwhite + + _0 _0 Men 1 1 2 2 2019 2020 2021 2022 2023 2019 2020 2021 2022 2023 NOTE: The data extend through December 2023. Series show 12-month moving averages of the median percent change in the hourly wage of individuals observed 12 months apart, deflated by the 12-month moving average of the 12-month percent change in the personal consumption expenditures price index. In the top-left 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. growth across groups partially refl ect factors specifi c growth across groups have narrowed considerably. to the post-pandemic recovery, such as the sectoral While the labor market is still tight by historical composition of labor demand and supply. Wages, for standards, factors disproportionately boosting wage instance, grew faster than average in the leisure and growth for the lowest earners have largely faded. In hospitality industry, a relatively low-wage sector that 2023, nominal wage growth slowed for workers with suffered disproportionate employment losses during below-median earnings but stepped up for workers the pandemic, followed by a surge in vacancies that above the median. Even so, the gaps in relative wages employers struggled to fi ll as the economy reopened. between workers in the fi rst three quartiles and those Over the past year, real wages have been rising for in the highest quartile continue to close, albeit at a all groups shown here, and differences in real wage slower pace. MONETARy POLICy REPORT: MARCH 2024 13 Labor demand has been gradually cooling . . . Demand for labor continued to cool last year but remains robust. The Job Openings and Labor Turnover Survey (JOLTS) indicated that there were nearly 9 million job openings at the end of 2023—down about 3 million from the all-time high recorded in March 2022 but still around 2 million above pre-pandemic levels. An alternative measure of job vacancies constructed by the Federal Reserve Board staff using job postings data from the large online job board Indeed also shows that vacancies continued to move gradually lower through mid-February but remained above pre-pandemic levels. In addition, measures of layoffs, such as initial claims for unemployment insurance and the rate of layoffs and discharges in the JOLTS, have remained very low by historical standards. . . . and labor supply has increased 14. Labor force participation rate, by age further . . . Percent Percent Meanwhile, the supply of labor has 67 85 continued to increase on net. The labor force 66 participation rate, which measures the share of 84 people either working or actively seeking work, 65 Ages 16+ 83 continued to trend higher for most of last year 64 82 but has softened in recent months (figure 14). 63 Importantly, labor force participation for 62 Ages 25 to 54 81 prime-age workers increased notably through 80 61 last September and, although it has edged 60 79 down more recently, remains above its pre- pandemic level. 2006200820102012201420162018202020222024 NOTE: The labor force participation rate is a percentage of the relevant Labor supply was also boosted last year by population. Data are monthly, and values before January 2023 are estimated by Federal Reserve Board staff in order to eliminate relatively strong population growth. The discontinuities in the published history. Census Bureau estimates that the resident SOURCE: Bureau of Labor Statistics via Haver Analytics; U.S. Census Bureau; Federal Reserve Board staff calculations. population increased 1.7 million (0.5 percent) in 2023, with almost 70 percent of that increase coming from immigration.2 Last 2. A recent report from the Congressional Budget Office estimates that immigration has been considerably higher than in the Census Bureau’s estimates in recent years; see Congressional Budget Office (2024), The Demographic Outlook: 2024 to 2054 (Washington: CBO, January), https://www.cbo.gov/publication/59697. The labor force estimates published by the Bureau of Labor Statistics are based on the civilian noninstitutionalized population aged 16 or older, which constitutes about 80 percent of the resident population. 14 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS year’s rate of population growth was slightly faster than in 2022 and about twice as fast as in 2020 and 2021, when growth was held down by COVID-19-related increases in mortality and restrictions on immigration. Although population growth has largely returned to its pace from the years preceding the pandemic, it remains well below its average from 1990 to 2015. . . . but the labor market remains relatively tight Even with easing labor demand and rising labor supply, the labor market remains relatively tight. Some indicators suggest that the labor market remains tighter than before the pandemic, while others have returned to their 2019 ranges, when the labor market was also relatively tight. The number of total available jobs (measured by employed workers 15. Available jobs versus available workers plus job openings) still exceeds the number Monthly Millions of available workers (measured by the labor force). This jobs–workers gap was around 175 2.8 million in December, down markedly from 170 its peak of 6.0 million recorded in March 2022 165 but still above its 2019 average of 1.1 million 160 Available workers (figure 15).3 In contrast, the percentage of 155 workers quitting their jobs each month, an 150 Available jobs 145 indicator of the availability of attractive job prospects, was 2.2 percent in December, close 140 to its 2019 average. Surveys indicate that 135 households’ and small businesses’ perceptions 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 of labor market tightness have also come down NOTE: The data extend through December 2023. Available jobs are from their recent peaks. In addition, business employment plus job openings as of the end of the previous month. Available workers are the labor force. Data for employment and labor contacts in nearly all Federal Reserve Districts force before January 2023 are estimated by Federal Reserve Board staff cited signs of a cooling labor market, such in order to eliminate discontinuities in the published history. SOURCE: Bureau of Labor Statistics via Haver Analytics; U.S. Census as larger applicant pools and lower turnover Bureau; Federal Reserve Board staff calculations. rates; however, some employers continued to report difficulty finding workers, particularly employers seeking specialized skills.4 3. The ratio of job openings to unemployment shows that there were 1.4 job openings per unemployed person in December 2023. For comparison, this ratio averaged 1.2 in 2019 and 0.6 over the 10-year period from 2010 to 2019. 4. See the January 2024 Beige Book, available on the Board’s website at https://www.federalreserve.gov/ monetarypolicy/publications/beige-book-default.htm. MONETARy POLICy REPORT: MARCH 2024 15 Wage growth has slowed but 16. Measures of change in hourly compensation remains elevated Percent change from year earlier Consistent with the easing in labor market Atlanta Fed’s Wage Growth Tracker 10 tightness, nominal wage growth slowed in 2023 Average hourly earnings, private sector 9 Employment cost index, private sector but remains elevated (figure 16). Total hourly 8 compensation as measured by the employment 7 cost index increased 4.2 percent over the 6 5 12 months ending in December, a noticeable 4 slowing from the 5.1 percent increase in 2022. 3 Other aggregate measures, such as average 2 hourly earnings (a less comprehensive measure 1 of compensation) and the Federal Reserve 0 Bank of Atlanta’s Wage Growth Tracker, 2017 2018 2019 2020 2021 2022 2023 2024 which reports the median 12-month wage NOTE: For the private-sector employment cost index, change is over the growth of individuals responding to the 12 months ending in the last month of each quarter; for private-sector average hourly earnings, the data are 12-month percent changes; for the Current Population Survey, have slowed as Atlanta Fed’s Wage Growth Tracker, the data are shown as a 3-month well. With PCE prices having risen 2.6 percent moving average of the 12-month percent change. SOURCE: Bureau of Labor Statistics; Federal Reserve Bank of Atlanta, in 2023, these measures suggest that most Wage Growth Tracker; all via Haver Analytics. workers saw increases in the purchasing power of their wages over the past year. Labor productivity strengthened last year The extent to which nominal wage gains raise 17. U.S. labor productivity firms’ costs and act as a source of inflation Quarterly 2017 average = 100 pressure depends importantly on the pace of productivity growth. Labor productivity in the 112 business sector has been extremely variable 110 since the pandemic began, increasing sharply 108 in 2020 and then declining, on average, over 106 104 2021 and 2022 (figure 17). Productivity is 102 reported to have risen a robust 2.7 percent 100 last year. When averaged over the pandemic 98 period, output per hour rose at a moderate 96 average annual rate of 1½ percent, in line with 94 the average rate of growth observed during the 2013 2015 2017 2019 2021 2023 business cycle from the fourth quarter of 2007 to the fourth quarter of 2019. NOTE: The data are output per hour in the business sector. SOURCE: Bureau of Labor Statistics via Haver Analytics. As always, the pace of future productivity growth remains highly uncertain. It is possible that productivity growth could remain at around this same moderate pace. However, it is also possible that the rapid adoption of new technologies like artificial intelligence and robotics—as well as the high rate of new business formation that the pandemic brought about—could boost productivity growth above that pace in coming years. 16 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS 18. Change in real gross domestic product and gross Gross domestic product rose at a solid domestic income pace last year Percent, annual rate Real gross domestic product (GDP) is Gross domestic product reported to have increased at an annual rate Gross domestic income 6 of 4.0 percent in the second half of 2023, 5 up from 2.2 percent in the first half. For 4 2023 as a whole, GDP increased 3.1 percent, 3 notably faster than in 2022 despite restrictive HH11 2 financial conditions, including elevated longer- 1 term interest rates (figure 18).5 Among the + _0 components of GDP, consumer spending rose HH22 solidly in the second half of last year, and 1 residential investment started to turn back up 2016 2017 2018 2019 2020 2021 2022 2023 following its earlier sharp declines, but growth NOTE: The data for gross domestic income extend through 2023:H1. of business investment slowed. The key identifies bars in order from left to right. SOURCE: Bureau of Economic Analysis via Haver Analytics. In contrast to GDP, manufacturing output was little changed, on net, last year, a downshift following two years of robust post- pandemic gains. Motor vehicle production continued to rebound from supply chain disruptions in 2021 and 2022, although last year’s production was held down by strikes at several major automakers. Outside of motor vehicles, industrial production generally 19. Change in real personal consumption expenditures moved sideways last year, but it was down from its post-pandemic peak in early 2022, Percent, annual rate as inventories normalized and new orders 8 fell back. 7 6 Consumer spending growth was resilient 5 even as household finances deteriorated 4 Consumer spending adjusted for inflation grew H1 3 at a solid rate of 3.0 percent in the second half 2 1 of 2023 and 2.7 percent for last year as a whole + _0 (figure 19). Consumers’ resilience in the face H2 1 2016 2017 2018 2019 2020 2021 2022 2023 5. Real gross domestic income (GDI) has been notably weaker than GDP in recent quarters; both series SOURCE: Bureau of Economic Analysis via Haver Analytics. measure the same economic concept, and any difference between the two figures reflects measurement error. GDI reportedly increased at a 0.8 percent pace in the first three quarters of last year after having been unchanged over the four quarters of 2022—well below the corresponding figures for GDP. As a result, productivity calculated from the income side of the national accounts would also be considerably weaker than the published figures over the past couple of years. MONETARy POLICy REPORT: MARCH 2024 17 of tight financial conditions was supported 20. Personal saving rate by the strong labor market and rising real Monthly Percent incomes. Indeed, after declining, on average, in 2021 and 2022, real disposable personal 35 income increased robustly last year. However, 30 last year’s spending was also accompanied by 25 households drawing down their liquid assets, 20 such as checking accounts, and by relying 15 more on credit. Indeed, the saving rate was 3.9 percent in the fourth quarter of 2023, 10 well below pre-pandemic levels (figure 20). In 5 addition, although household wealth relative 0 to income remains high in the aggregate, it has 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 declined, on net, since the end of 2021 and so is likely providing less support to consumer NOTE: The data extend through December 2023. SOURCE: Bureau of Economic Analysis via Haver Analytics. spending. Consumer spending since the pandemic has been more robust than measures of consumer sentiment would suggest. Although sentiment in the Michigan survey 21. Indexes of consumer sentiment has improved markedly in recent months, it 1985 average = 100 February 1966 = 100 remains much further below its pre-pandemic level than does a similar measure from the Conference Board 145 110 Conference Board, which puts more weight on 125 100 labor market conditions (figure 21). 105 90 Consumer financing conditions tightened 85 80 last year 65 70 Credit remains available for most consumers, 45 60 though interest rates on both credit cards Michigan survey 25 50 and auto loans remain higher than the levels observed in 2018 at the peak of the previous 2006200820102012201420162018202020222024 monetary policy tightening cycle. Indeed, NOTE: The data are monthly and extend through February 2024. The interest rates on credit cards have continued February data for the Michigan survey are preliminary. SOURCE: University of Michigan Surveys of Consumers; Conference to increase since the first half of last year. In Board. addition, banks reported continued tightening of lending standards across consumer credit products, in part reflecting lenders’ concerns about further deterioration in credit performance and higher funding costs. Delinquency rates for credit cards rose further over the second half of 2023, while those for auto loans flattened out; both rates are notably above levels observed just before the pandemic. Reflecting these and other factors, consumer credit expanded moderately during the second half of last year, driven by robust growth in credit card balances and modest growth in 18 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS 22. Consumer credit flows auto loans (figure 22). In contrast, student loan balances fell in the second half of last Billions of dollars, monthly rate year, in large part driven by the cancellation Student loans 30 of debt for certain borrowers in income-driven Auto loans Credit cards 25 repayment plans. 20 Residential investment turned around and H2 15 grew modestly in the second half of 2023 10 5 After declining steeply in 2022 on the heels of + _0 the substantial rise in mortgage interest rates, H1 5 residential investment fell a bit further in the 10 first half of 2023 but picked up in the second half of the year. The pickup in housing activity 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 since mid-2023 masked some important NOTE: Student loan balances were little changed in 2023:H1. SOURCE: Federal Reserve Board, Statistical Release G.19, “Consumer differences across components of the market, Credit.” with sales of existing homes much weaker than sales of new homes and with construction of single-family homes remaining relatively solid while multifamily construction declined. (The box “Recent Housing Market Developments” provides further discussion.) Capital spending growth softened amid 23. Change in real business fixed investment tighter financial conditions and subdued Percent, annual rate sentiment Structures 25 Equipment and intangible capital Tighter financial conditions and downbeat 20 business sentiment led to a slowdown in 15 business investment spending growth in the H2 10 second half of 2023 (figure 23). Equipment 5 + investment spending declined in the second _0 half of the year, while investment in H1 5 intellectual property products—which include 10 software and research and development— 15 continued to decelerate from its solid pace of growth over the previous few years. 2016 2017 2018 2019 2020 2021 2022 2023 Investment in nonresidential structures, which NOTE: Business fixed investment is known as “private nonresidential fixed investment” in the national income and product accounts. The key had surged in early 2023 because of a boom identifies bars in order from left to right. Equipment and intangible capital investment was little changed in 2023:H2. in manufacturing construction—especially SOURCE: Bureau of Economic Analysis via Haver Analytics. for factories that produce semiconductors or electric vehicle batteries—also decelerated in the second half of 2023, although the level of structures investment remained much higher than in previous years. Although indicators of business sentiment and profit expectations have improved in recent months, sentiment remains subdued. MONETARy POLICy REPORT: MARCH 2024 19 Recent Housing Market Developments The rise in mortgage interest rates since early 2022 B. Median monthly mortgage payments has reduced the overall demand for housing and slowed activity in the housing sector appreciably. Monthly Dollars The change in mortgage rates was unusually large and rapid, with 30-year fi xed rates rising from about 2,200 3.2 percent in January 2022 to almost 8 percent in 2,000 October 2023, the highest level since 2000 (fi gure A). Although mortgage rates have declined somewhat 1,800 since October, they still averaged around 7 percent in 1,600 February 2024. The run-up in mortgage rates through late 2023, 1,400 combined with a further rise in house prices, resulted 1,200 in a sharp increase in typical mortgage payments and has reduced housing demand and home sales. The 1,000 median monthly principal and interest payment on newly originated home-purchase mortgages for owner- 2019 2020 2021 2022 2023 2024 occupied properties increased from below $1,400 in NOTE: The data shown are median monthly scheduled principal and interest payments on home purchase mortgages for owner-occupied January 2022 to around $1,800 in early 2023 and has properties by month of rate lock. The Optimal Blue data are aggregated remained around that elevated level (fi gure B). As a and anonymized. The data do not contain lender or customer identities result, home sales (including both new and existing or complete rate sheets. SOURCE: Optimal Blue LLC, Optimal Blue Mortgage Price Data. properties) have fallen sharply over the past two years. Home purchases by low-income households have However, several other factors have supported fallen disproportionately more, because mortgage underlying demand for housing, somewhat limiting lenders impose maximums on the ratio of a borrower’s the effect of higher mortgage rates. First, the labor debt service payments to the borrower’s income.1 market has remained strong, with historically low unemployment and real wage growth turning positive A. Mortgage interest rates last year. Second, households may still be gradually adjusting to long-term remote or hybrid work fl exibility Weekly Percent by seeking additional space. Third, a rising fraction of buyers have been able to purchase homes with cash 8 rather than taking out mortgages. The share of homes purchased with cash was about 15 percent in 2020 and 7 increased to about 25 percent in 2023, with the drop in 6 home sales concentrated in mortgage borrowers. Housing supply has also faced constraints, due 5 to both short- and long-term factors. In the short 4 term, higher interest rates and tighter underwriting by banks signifi cantly increased builders’ costs of 3 fi nancing, discouraging new construction. In the long 2 term, despite a surge in construction in late 2020 and 2021, it appears that a variety of factors—including 2014 2016 2018 2020 2022 2024 zoning and other regulatory hurdles—have prevented NOTE: The data are contract rates on 30-year, fixed-rate conventional construction from keeping up with underlying demand, home mortgage commitments and extend through February 22, 2024. resulting in a gross housing vacancy rate that is at a SOURCE: Freddie Mac Primary Mortgage Market Survey via Haver Analytics. historical low.2 (continued on next page) 1. See Daniel Ringo (2022), “Declining Affordability and Home Purchase Borrowing by Lower Income Households,” FEDS Notes (Washington: Board of Governors of the Federal 2. See Joseph Gyourko and Raven Molloy (2015), Reserve System, July 8), https://doi.org/10.17016/2380- “Chapter 19—Regulation and Housing Supply,” Handbook of 7172.3160. Regional and Urban Economics, vol. 5, pp. 1289–337. 20 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS Recent Housing Market Developments (continued) The recent performance of home prices refl ects this have interest rates below 4 percent (fi gure E). If these interplay between housing demand and supply. House homeowners with low mortgage rates want to move price growth slowed rapidly from its historically high to a different home with a new mortgage, their new pace in response to the jump in interest rates, but it mortgage payment would be much higher. As a result, has bounced back recently on a year-over-year basis, many homeowners who might otherwise have moved leaving house price levels near record highs (fi gure C). have instead opted to remain in their current home. The The interplay between demand and supply has net effect has been an unusually thin market for existing played out quite differently across segments of the homes, with a dramatic reduction in the number of housing market. In particular, the contrast between people both selling and bidding on homes. The decline the evolution of new and existing home sales has in the supply of existing homes for sale also makes it been notable (fi gure D). Many households purchased diffi cult for the remaining buyers in the market to fi nd homes or refi nanced when fi xed mortgage rates were their preferred home and may be driving some to the at historically low levels in 2020 and 2021, and, new home market even as overall sales are depressed. as a result, the majority of outstanding mortgages New homebuilders have also been able to offer buyers (continued) C. Growth rate in house prices D. New and existing home sales Monthly Percent change from year earlier Millions, annual rate Millions, annual rate S&P/Case-Shiller 25 CoreLogic 1.4 6.0 20 Zillow 15 1.2 Existing home sales 5.5 10 1.0 5.0 5 + .8 4.5 _0 5 .6 4.0 10 .4 3.5 15 New home sales .2 3.0 20 1989 1994 1999 2004 2009 2014 2019 2024 200620082010 2012201420162018 202020222024 NOTE: CoreLogic and S&P/Case-Shiller data extend through NOTE: The data are monthly. New and existing home sales include December 2023. only single-family sales. SOURCE: CoreLogic, Inc., Home Price Index; Zillow, Inc., Real Estate SOURCE: For new home sales, U.S. Census Bureau; for existing home Data; S&P/Case-Shiller U.S. National Home Price Index. The sales, National Association of Realtors; all via Haver Analytics. S&P/Case-Shiller index is a product of S&P Dow Jones Indices LLC and/or its affiliates. (For Dow Jones Indices licensing information, see the note on the Contents page.) MONETARy POLICy REPORT: MARCH 2024 21 E. Distribution of interest rates on outstanding mortgages F. Private housing starts and permits Monthly Percent Monthly Millions of units, annual rate 100 Single-family starts 1.4 Single-family permits Below 6 percent 90 Multifamily starts 1.2 80 70 1.0 Below 5 percent 60 .8 50 .6 40 30 .4 Below 4 percent 20 .2 10 0 0 2011 2013 2015 2017 2019 2021 2023 2008 2010 2012 2014 2016 2018 2020 2022 2024 NOTE: The data extend through November 2023. The sample only SOURCE: U.S. Census Bureau via Haver Analytics. includes outstanding mortgages current on their payments. SOURCE: Black Knight McDash. properties remained strong through 2022 even as single-family construction declined sharply. Unlike the signifi cant incentives while still maintaining positive cost of buying a home, rental demand is not directly profi t margins. The relative strength in the new home harmed by higher mortgage rates and may even be demand has encouraged builders to increase the rate supported, to some extent, by a shift away from home of new construction after having sharply pulled back in purchases as rates rise. Multifamily projects also take 2022 when rates fi rst started to rise (fi gure F). signifi cantly longer to plan and build than single-family The balance between supply and demand in the projects and are slower to react to changing economic multifamily market—which is dominated by rental conditions. Over the past year, we have seen more new units—is fundamentally different from that in the properties delivered to the market, which contributed to single-family market. Initially, as the pandemic eased, increases in multifamily vacancy rates and a signifi cant market rents surged along with single-family home deceleration in market rents. These developments, prices in response to the increased demand for living combined with concerns about the effect of the large space, whether owned or rented. These higher rents amount of new supply still scheduled to be delivered to encouraged a dramatic increase in multifamily starts market over the next year, have started to drive down from what were already quite strong historical levels, prices of existing multifamily properties. As a result, averaging 510,000 units per year in 2021 and 2022, the rate of new multifamily construction has come compared with an average of 314,000 units per year back down over the past year even as single-family from 2000 to 2020. Construction of multifamily construction has picked back up. 22 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS Business financing conditions were moderately restrictive overall, but credit remained generally available Credit remained generally available to most nonfinancial corporations but at elevated interest rates and amid moderately restrictive financial conditions overall. Banks continued to tighten lending standards for all loan types over the second half of last year, and business loan growth at banks continued to slow. In contrast, issuance of corporate bonds remained solid across credit categories, although well below the levels prevailing at the beginning of the tightening cycle. For small businesses, which are more reliant on bank financing than large businesses, credit conditions tightened further over the second half of last year. Surveys indicate that credit supply for small businesses has tightened further, and interest rates on loans to small businesses moved higher and now stand near the top of the range observed since 2008. Loan default and delinquency rates have also increased and now slightly exceed their pre- pandemic rates. 24. Change in real imports and exports of goods Trade recovered in the second half and services of 2023 Percent, annual rate Real imports remained relatively unchanged Imports for the year as a whole after declining in the Exports 15 first half of last year and then recovering over the second half as domestic demand picked up 10 H2 (figure 24). Despite lackluster foreign growth, 5 exports picked up more strongly than imports + _0 over the second half of the year. As such, net exports added about 0.3 percentage point to H1 5 GDP growth in the fourth quarter of 2023 10 after being neutral for growth in the previous two quarters. The current account deficit 2016 2017 2018 2019 2020 2021 2022 2023 narrowed slightly in the third quarter of 2023 SOURCE: Bureau of Economic Analysis via Haver Analytics. to 2.9 percent of GDP, remaining larger than before the pandemic. Federal fiscal policy actions were roughly neutral for GDP growth in 2023 Federal purchases grew modestly in 2023, and several recently enacted policies began to boost MONETARy POLICy REPORT: MARCH 2024 23 investment and consumption. This support to economic activity was about offset by the unwinding of the remaining pandemic-related fiscal policy support. All told, the contribution of discretionary changes in federal fiscal policy to real GDP growth was roughly neutral last year. 25. Federal receipts and expenditures Annual Percent of nominal GDP The budget deficit and federal debt remain elevated 32 30 After surging to 15 percent of GDP in fiscal 28 year 2020, the budget deficit declined through 26 Expenditures 2022 as the imprint of the pandemic faded 24 (figure 25). The budget deficit edged up to 22 Receipts 6.3 percent of GDP in fiscal 2023 as tax 20 receipts declined from their elevated level in 18 2022 and net interest outlays increased.6 16 14 As a result of the unprecedented fiscal 1999 2002 2005 2008 2011 2014 2017 2020 2023 support enacted early in the pandemic, federal NOTE: The receipts and expenditures data are on a unified-budget basis and are for fiscal years (October through September); gross debt held by the public jumped roughly domestic product (GDP) data are on a 4-quarter basis ending in Q3. 20 percentage points to 100 percent of GDP SOURCE: Department of the Treasury, Financial Management Service; Office of Management and Budget and Bureau of Economic Analysis via in fiscal 2020—the highest debt-to-GDP ratio Haver Analytics. since 1947 (figure 26). After falling slightly through 2022, the debt-to-GDP ratio edged up in 2023, as rising interest rates contributed to 26. Federal government debt and net interest outlays higher net interest outlays. The Congressional Budget Office projects that further increases Percent of nominal GDP Percent of nominal GDP in interest costs, along with positive primary Net interest outlays 3.5 on federal debt 120 deficits—that is, total deficits less interest payments—will produce a steady rise in the 3.0 100 debt-to-GDP ratio in the years to come. 2.5 80 2.0 60 Most state and local government budget 1.5 40 positions remained strong . . . 1.0 20 Debt held by Federal policymakers provided a historically the public .5 0 high level of fiscal support to state and local governments during the pandemic; this aid, 1903 1923 1943 1963 1983 2003 2023 together with robust state tax collections in NOTE: The data for net interest outlays are annual, begin in 1948, and 2021 and 2022, left the sector in a strong extend through 2023. Net interest outlays are the cost of servicing the debt held by the public. Federal debt held by the public equals federal debt less Treasury securities held in federal employee defined-benefit retirement accounts, evaluated at the end of the quarter. The data for federal debt are annual from 1901 to 1951 and a 4-quarter moving average thereafter and extend through 2023:Q3. GDP is gross domestic product. 6. The growth of the deficit between fiscal years 2022 SOURCE: For GDP, Bureau of Economic Analysis via Haver and 2023 would have been larger had it not been for the Analytics; for federal debt, Congressional Budget Office and Federal Reserve Board, Statistical Release Z.1, “Financial Accounts of the Administration’s announced student debt relief program, United States.” which raised the fiscal 2022 deficit $380 billion, and the Supreme Court’s reversal of the policy, which lowered it $330 billion in fiscal 2023. 24 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS 27. State and local tax receipts budget position overall (figure 27). Although state tax revenues weakened in 2023—mainly Quarterly Percent change from year earlier reflecting a normalization of receipts from 30 elevated levels in the previous year as well Total state taxes 25 as the effects of recently enacted tax cuts 20 in some states—taxes as a percentage of 15 GDP remained above recent historical Property taxes 10 norms. Moreover, states’ total balances (that 5 is, including rainy day fund balances and + _0 previous-year surplus funds) continued to 5 be near all-time highs. Nevertheless, budget 10 situations varied widely across the states, with some states—particularly those that depend 2013 2015 2017 2019 2021 2023 heavily on capital gains tax collections—facing NOTE: Receipts shown are year-over-year percent changes of 4-quarter moving averages, begin in 2012:Q4, and extend through 2023:Q3. tighter budget conditions. At the local level, Property taxes are primarily collected by local governments. overall property tax receipts rose briskly SOURCE: U.S. Census Bureau, Quarterly Summary of State and Local Government Tax Revenue. in 2023. 28. State and local government payroll employment . . . contributing to brisk growth in Monthly Millions of jobs employment and construction spending Employment in state and local governments 20.5 rose strongly in 2023, as some pandemic- related headwinds, such as an increase in 20.0 retirements, have abated and wages became 19.5 more competitive relative to those in the private sector (figure 28). Similarly, real 19.0 construction outlays grew rapidly, reflecting easing bottlenecks and support from federal 18.5 grants. By the end of 2023, both employment and construction spending were roughly back 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 to their pre-pandemic levels. SOURCE: Bureau of Labor Statistics via Haver Analytics. 29. Market-implied federal funds rate path Financial Developments Quarterly Percent The expected level of the federal funds rate over the next few years is now higher 5.5 than it was last June on net 5.0 Market-based measures of the expected federal 4.5 funds rate rose considerably over the summer February 27, 2024 4.0 and early fall before moving down toward the June 1, 2023 3.5 end of 2023. On net, the market-implied policy 3.0 rate path rose notably for year-end 2024, and somewhat more modestly for year-end 2025 2.5 and 2026 (figure 29).7 Financial market prices 2023 2024 2025 2026 2027 2028 imply that the federal funds rate will decline 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 1, 2023, is compared with that as of February 27, 2024. The path is estimated with a spline approach, 7. These measures are based on market prices for assuming a term premium of 0 basis points. The June 1, 2023, path extends through 2027:Q2 and the February 27, 2024, path through overnight index swaps for the effective federal funds rate 2028:Q1. and are not adjusted for term premiums. SOURCE: Bloomberg; Federal Reserve Board staff estimates. MONETARy POLICy REPORT: MARCH 2024 25 from current levels following the March 2024 FOMC meeting, reaching about 4.6 percent and about 3.7 percent by year-end 2024 and year-end 2025, respectively. Consistent with these market-implied measures, survey respondents in the Blue Chip Financial Forecasts published at the beginning of February expect the policy rate to begin to decrease in the second quarter of 2024 and reach 4.4 percent by year-end 2024. On net, respondents have significantly revised upward their expectations of the federal funds rate path since last June’s survey. Yields on long-term U.S. nominal Treasury 30. Yields on nominal Treasury securities securities fluctuated considerably Daily Percent Yields on long-term nominal Treasury 2-year securities began to increase in the spring of 5-year 6 10-year 2023 and rose markedly through mid-October 5 before reversing course sharply, with the 4 10-year Treasury yield reaching a peak of 3 about 5 percent before falling to just below 4 percent by the end of last year (figure 30). 2 So far this year, long-term nominal Treasury 1 yields have increased, with the 10-year 0 Treasury yield rising to about 4.4 percent by late February. In contrast, short-term Treasury 2017 2018 2019 2020 2021 2022 2023 2024 yields have been little changed, on net, since SOURCE: Department of the Treasury via Haver Analytics. early June. Yields on other long-term debt fluctuated 31. Corporate bond yields, by securities rating, and with Treasury yields municipal bond yield Corporate bond yields declined across credit Daily Percent categories since June, on net, amid sizable Investment-grade corporate 12 fluctuations that accompanied the observed High-yield corporate large movements in long-term Treasury 10 yields (figure 31). Spreads on corporate 8 bonds over comparable-maturity Treasury 6 securities narrowed notably, on net, especially 4 for speculative-grade bonds, to levels in the lower range of their historical distributions. 2 Municipal Similarly, municipal bond spreads over 0 comparable-maturity Treasury securities narrowed substantially since June and are 2017 2018 2019 2020 2021 2022 2023 2024 now fairly low relative to their historical NOTE: Investment-grade corporate reflects the effective yield of the ICE Bank of America Merrill Lynch (BofAML) triple-B U.S. Corporate distributions across credit ratings. Overall, Index (C0A4). High-yield corporate reflects the effective yield of the ICE corporate and municipal credit quality BofAML High Yield Index (H0A0). Municipal reflects the yield to worst of the ICE BofAML U.S. Municipal Securities Index (U0A0). remained solid, with a low volume of defaults SOURCE: ICE Data Indices, LLC, used with permission. in both markets despite some increase in corporate bond defaults. 26 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS 32. Yield and spread on agency mortgage-backed Yields on agency mortgage-backed securities securities (MBS)—an important pricing factor for home mortgage interest rates—rose notably over the Percent Basis points summer before falling back down toward the 7 250 end of last year (figure 32). So far this year, yields on agency MBS have increased, standing 6 200 in late February at levels notably above those 5 150 in June 2023. The MBS spread decreased 4 Spread slightly since June, on net, but remained 100 3 elevated relative to pre-pandemic levels, at least 50 partly due to high interest rate volatility, which 2 reduces the value of holding MBS. 1 Yield 0 Broad equity price indexes increased 2017 2018 2019 2020 2021 2022 2023 2024 NOTE: The data are daily. Yield shown is for the uniform The S&P 500 index increased significantly mortgage-backed securities 30-year current coupon, the coupon rate at since June, on net, above the record-high levels which new mortgage-backed securities would be priced at par, or face, value for dates after May 31, 2019; for earlier dates, the yield shown is for seen at the end of 2021 (figure 33). Following the Fannie Mae 30-year current coupon. Spread shown is to the average of the 5-year and 10-year nominal Treasury yields. a substantial decline over late summer and SOURCE: Department of the Treasury; J.P. Morgan. Courtesy of J.P. early fall, the S&P 500 index recovered Morgan Chase & Co., Copyright 2024. toward the end of the year, as long-term interest rates declined, and continued to rise 33. Equity prices over the start of 2024. Meanwhile, small-cap Daily December 31, 2019 = 100 firms, whose equity prices have significantly underperformed broad equity indexes, 175 experienced substantial increases in their equity valuations in recent months amid better 150 economic prospects, including expectations of 125 a less restrictive monetary policy. Bank equity S&P 500 index prices rose, on net, retracing some of the 100 declines that had occurred over the first half of 75 2023 and that had been associated with strains Dow Jones bank index in the banking sector. In the case of the largest 50 banks, equity prices rose above their early-2023 2017 2018 2019 2020 2021 2022 2023 2024 levels; regional bank equity prices had only SOURCE: S&P Dow Jones Indices LLC via Bloomberg. (For Dow a partial retracement. One-month option- Jones Indices licensing information, see the note on the Contents page.) implied volatility on the S&P 500 index— the VIX—increased moderately until late October but subsequently declined to reach levels somewhat lower than those prevailing in early June. (For a discussion of financial stability issues, see the box “Developments Related to Financial Stability.”) MONETARy POLICy REPORT: MARCH 2024 27 Developments Related to Financial Stability This discussion reviews vulnerabilities in the U.S. nonfi nancial businesses by private credit funds and fi nancial system. The framework used by the Federal other private investors has been growing rapidly. While Reserve Board for assessing the resilience of the U.S. risks from leverage and investor redemption appear fi nancial system focuses on fi nancial vulnerabilities limited, the sector remains opaque, making it diffi cult in four broad areas: asset valuations, business and to assess vulnerabilities. household debt, leverage in the fi nancial sector, and vulnerabilities in the fi nancial sector remain funding risks. Acute stress in the banking system has notable, as losses in the fair value of long-dated bank receded since last spring, and banks’ regulatory risk- assets remain signifi cant. Risk-based capital ratios based capital ratios remained solid and increased increased broadly across all bank categories and sit broadly, as bank profi ts were robust and banks reduced well above regulatory minimums, driven both by robust capital distributions. Nonetheless, declines in the bank profi tability and by a decrease in shareholder fair value of fi xed-rate assets at some banks have payouts at the largest banks. Credit quality at banks been sizable relative to regulatory capital. valuation remained strong, although the quality of CRE loans pressures increased modestly, with equity markets close backed by offi ce, retail, and multifamily buildings to all-time highs in real terms and real estate prices still continued its decline, a result of the lower demand high relative to fundamentals. Credit to nonfi nancial for downtown real estate prompted by the shift toward businesses and households continued to decrease telework. Some smaller regional and community banks relative to gross domestic product (GDP), and this ratio with high concentrations of CRE loans are also highly now sits close to its 20-year low. However, funding reliant on uninsured deposits, potentially compounding vulnerabilities remain notable. Hedge fund leverage vulnerabilities. Leverage at hedge funds stabilized is elevated, partly due to elevated activity in the cash– at a high level as the Treasury cash–futures basis futures basis trade. (continued on next page) Broad equity prices are now at levels close to historical highs, driven mostly by performance of the largest companies. Nominal long-term Treasury yields A. Private nonfinancial-sector credit-to-GDP ratio rose to a 15-year peak in October but have now fallen to levels close to those from a year ago. Commercial Quarterly Ratio real estate (CRE) prices continued to decline, especially in the offi ce, retail, and multifamily sectors, and 1.8 low levels of transactions in the offi ce sector likely indicated that prices had not yet fully refl ected the 1.6 sector’s weaker fundamentals. Prices of single-family 1.4 residential properties, which held steady through the fi rst quarter of 2023, have started rising again, albeit 1.2 modestly, and remain high relative to market rents. vulnerabilities arising from household and 1.0 nonfi nancial business leverage remain moderate. The combined debt of both sectors as a share of GDP sat .8 close to its lowest level in 20 years and continues to decrease (fi gure A). In the household sector, balance 1981 1988 1995 2002 2009 2016 2023 sheets remain strong, and homeowners’ equity shares NOTE: Data extend through 2023:Q3. The shaded bars with top caps of houses are now at their highest levels in at least indicate periods of business recession as defined by the National Bureau of Economic Research: July 1981 to November 1982, July 1990 to March 30 years. Nonfi nancial businesses’ ability to service 1991, March 2001 to November 2001, December 2007 to June 2009, and debt also remains adequate, as the pass-through of February 2020 to April 2020. GDP is gross domestic product. higher policy rates has so far been muted by the large SOURCE: Federal Reserve Board, Statistical Release Z.1, “Financial Accounts of the United States”; Bureau of Economic Analysis, national share of long-term fi xed-rate debt. Direct lending to income and product accounts; Federal Reserve Board staff calculations. 28 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS Developments Related to Financial Stability (continued) trade continued to grow, suggesting a risk of sudden second half of 2023, mostly because of increases in deleveraging if volatility in Treasury markets increases retail prime funds. unexpectedly. Leverage at life insurers also increased, A routine survey of market contacts on salient although to levels near the middle of its historical shocks to fi nancial stability highlights several important distribution. risks. Adverse developments in longer-term interest In terms of funding risks, liquidity remains ample, rates could potentially strain credit supply in vulnerable and deposits have stabilized recently. The number of sectors. A related risk, the reemergence of banking- banks with large declines in fair value relative to their sector stress at some institutions, might further constrain regulatory capital and heavy reliance on uninsured the supply of credit, particularly at banks with large deposits has declined signifi cantly since March 2023. CRE concentration and a high fraction of uninsured Overall, banks’ reliance on short-term wholesale deposits. Geopolitical risks remain salient, including funding remained much lower than the typical range Russia’s war against Ukraine and potential spillovers of before the banking reforms of the previous decade. the Israel–Hamas war, and could cause strains in parts Money market funds continued to grow throughout the of the U.S. fi nancial system. MONETARy POLICy REPORT: MARCH 2024 29 Major asset markets functioned in an orderly way, but liquidity has remained low Treasury securities market functioning has continued to be orderly, but liquidity remained low by historical standards. The persistence of low liquidity is broadly in line with enduring high interest rate volatility, as future economic conditions and the policy rate path remain particularly uncertain. Market depth—a measure of the availability of contracts at the best quoted prices—for Treasury securities remains near historically low levels, particularly in the case of short- term Treasury securities. With regard to liquidity in the equity market, market depth based on S&P 500 futures was little changed and remained somewhat low compared with pre-COVID levels. Corporate and municipal secondary bond markets continued to function well; transaction costs in these markets were fairly low by historical standards. Short-term funding market conditions remained stable Conditions in overnight bank funding and repurchase agreement (repo) markets remained stable. Since June, the effective federal funds rate and other unsecured overnight rates have been a few basis points below the interest rate on reserve balances, while the Secured Overnight Financing Rate has been at or slightly above the offering rate on the overnight reverse repurchase agreement (ON RRP) facility. Take-up at the ON RRP facility has declined substantially since June. This decline reflects a significant increase in the net supply of Treasury bills and relatively more attractive rates on alternative short-term investments such as private repo. Money market funds (MMFs), the largest investors in the ON RRP facility, accounted for much of the decline in ON RRP take-up as they made a substantial reallocation of their investments toward Treasury bills and private repo. Both prime and government MMFs have seen a notable increase in assets under management since June, as relatively favorable 30 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS yields continue to attract funds previously held on deposit in the banking sector. Weighted average maturities at both prime and government MMFs increased in anticipation of fewer policy rate increases. Bank credit growth continued to slow over the second half of 2023 34. Ratio of total commercial bank credit to nominal The slowdown in bank credit growth was gross domestic product broad based, with growth in outstanding balances for all major loan categories slowing Quarterly Percent from earlier in the year, likely reflecting the effects of higher interest rates, tighter 75 credit availability, and economic uncertainty 70 (figure 34). Banks in the Senior Loan Officer Opinion Survey on Bank Lending Practices 65 reported tighter standards and weaker demand over the third and fourth quarters, continuing 60 trends for standards and demand that have been reported since the middle of 2022. 55 Delinquency rates on bank loans generally rose in the second half of 2023—with the 2005 2008 2011 2014 2017 2020 2023 largest increases for commercial real estate SOURCE: Federal Reserve Board, Statistical Release H.8, “Assets and Liabilities of Commercial Banks in the United States”; Bureau of and consumer loans—but remained around Economic Analysis via Haver Analytics. ranges observed before the pandemic except for consumer loans. Bank profitability moved 35. Profitability of bank holding companies down in the second half of 2023 to levels below those that prevailed before the pandemic Percent, annual rate Percent, annual rate (figure 35). 2.0 30 Return on assets 1.5 International Developments 20 1.0 10 Foreign economic growth slowed in the .5 + + second half of 2023 _0 _0 .5 Return on equity 10 Following a rebound in early 2023, foreign 1.0 activity was subdued overall in the second 20 1.5 half of last year, although with some variation 30 2.0 across countries. In advanced foreign economies (AFEs), several factors restrained 2005 2008 2011 2014201 7 2020 2023 growth, including the tightening of monetary NOTE: The data are quarterly. SOURCE: Federal Reserve Board, Form FR Y-9C, Consolidated policy over the past two years—which weighed Financial Statements for Holding Companies. on credit growth and investment—and an erosion of real household incomes amid high inflation rates. In Europe, ongoing structural adjustment to higher energy prices also continued to hinder the performance of energy-intensive sectors. Economic indicators point to continued weakness in AFE growth in early 2024. MONETARy POLICy REPORT: MARCH 2024 31 In China, a post-pandemic boost to economic growth early in 2023 faded by the second quarter, and property-sector weakness and sluggish domestic demand have remained a constraint on economic activity. Policy stimulus targeting infrastructure and manufacturing investment bolstered Chinese growth in the second half of the year, enabling the government to meet its 2023 growth target. In emerging market economies (EMEs) other than China, economic activity slowed in the second half of last year but was more resilient overall than in the AFEs. Industrial production in emerging Asia excluding China began recovering, supported by a rebound in global demand for high-tech products that was driven in part by the artificial intelligence and electric vehicle sectors. Inflation abroad has continued to ease but remains elevated Foreign headline inflation has continued to decline since the middle of last year, reflecting lower core and food inflation (figure 36). Both the subsiding effects of past global supply bottlenecks and the drag on demand from monetary policy tightening have eased 36. Components of foreign consumer price inflation Advanced foreign economie s Emerging market economies Percent Percent Energy 9 Energy 9 Food Food 8 8 Core Core 7 7 6 6 5 5 4 4 3 3 2 2 1 1 + + _0 _0 1 1 2017–19 2020–21 2022 2023:H1 2023:H2 2017–19 2020–21 2022 2023:H1 2023:H2 avg. avg. avg. avg. NOTE: The advanced foreign economy aggregate is the average of Canada, the euro area, and the U.K., weighted by shares of U.S. non-oil goods imports. The emerging market economy aggregate is the average of Argentina, Brazil, Chile, Colombia, Hong Kong, India, Indonesia, Israel, Malaysia, Mexico, the Philippines, Russia, Saudi Arabia, Singapore, South Korea, Taiwan, Thailand, and Vietnam, weighted by shares of U.S. non-oil goods imports, and begins in 2017:Q2. The inflation measure is the Harmonised Index of Consumer Prices for the euro area and the consumer price index for other economies. The data show percent changes from year-ago levels. SOURCE: Federal Reserve Board staff calculations; Haver Analytics. 32 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS 37. Consumer price inflation in foreign economies inflationary pressures (figure 37). However, the pace of disinflation has varied across sectors Monthly Percent change from year earlier and countries. The deceleration in goods prices abroad has generally outpaced that in 10 services prices, as in the U.S. Inflation remains 8 above target in Europe but has been running 6 near zero in China. Although the flare-up in EMEs ex. China 4 geopolitical tensions in the Middle East and accompanying disruptions to shipping through 2 AFEs ex. Japan + the Red Sea have had only limited effects on _0 consumer prices in general and on global 2 energy prices in particular, further escalation in tensions could disrupt global momentum 2016 2017 2018 2019 2020 2021 2022 2023 2024 toward restoring lower inflation. NOTE: The advanced foreign economy (AFE) aggregate is the average of Canada, the euro area, and the U.K., weighted by shares of U.S. non-oil goods imports. The emerging market economy (EME) aggregate Foreign central banks are maintaining a is the average of Argentina, Brazil, Chile, Colombia, Hong Kong, India, restrictive monetary policy stance Indonesia, Israel, Malaysia, Mexico, the Philippines, Russia, Saudi Arabia, Singapore, South Korea, Taiwan, Thailand, and Vietnam, weighted by shares of U.S. non-oil goods imports. The inflation measure Most foreign central banks paused their is the Harmonised Index of Consumer Prices for the euro area and the consumer price index for other economies. interest rate hikes in the second half of last SOURCE: Federal Reserve Board staff calculations; Haver Analytics. year and have since held policy rates steady, acknowledging the cumulative tightening of policy and progress in lowering inflation. Policy rate paths implied by financial market pricing suggest that many AFE central banks are expected to begin reducing interest rates in 2024. Several EME central banks have already begun easing monetary policy. However, foreign central banks have generally continued to emphasize in their communications that progress toward achieving their inflation goals could slow or even reverse, including from resilience in labor markets, wage growth, or 38. Nominal 10-year government bond yields in geopolitical developments leading to higher selected advanced foreign economies commodity prices and trade costs. Weekly Percent Financial conditions abroad have been Germany volatile but have eased, on balance, U.K. 5 Canada since mid-2023 4 Japan 3 Near-dated AFE sovereign yields declined toward the end of last year as central banks 2 signaled they had reached or neared the end of 1 policy rate tightening. Longer-term sovereign + _0 yields unwound most of the increase registered earlier in 2023 (figure 38). One exception was 1 Japan, where the central bank widened the 2019 2020 2021 2022 2023 2024 band around its yield curve control target, NOTE: The data are weekly averages of daily benchmark yields and allowing yields on 10-year government extend through February 23, 2024. securities to increase, on net, in 2023. SOURCE: Bloomberg. MONETARy POLICy REPORT: MARCH 2024 33 Since mid-2023, the broad dollar index—a 39. U.S. dollar exchange rate index measure of the exchange value of the Weekly Week ending December 27, 2019 = 100 dollar against a trade-weighted basket of Dollar appreciation foreign currencies—increased slightly on net 115 (figure 39). The dollar index was volatile, 110 increasing significantly as U.S. yields rose from 105 July to October and then reversing most of 100 these increases as U.S. yields declined. 95 90 Many major foreign equity indexes rose across 85 AFEs and EMEs, although gains were near 80 zero in the U.K., consistent with stagnant 75 economic activity (figure 40). Chinese equity prices were an exception, with declines amid 2014 2016 2018 2020 2022 2024 pessimism about growth prospects and a NOTE: The data, which are in foreign currency units per dollar, are weekly averages of daily values of the broad dollar index and extend pullback by foreign investors from Chinese through February 23, 2024. As indicated by the arrow, increases in the data reflect U.S. dollar appreciation and decreases reflect U.S. dollar markets. Flows to EME-focused investment depreciation. funds turned negative in mid-2023, as yields SOURCE: Federal Reserve Board staff calculations; Federal Reserve Board, Statistical Release H.10, “Foreign Exchange Rates.” on advanced-economy bonds rose more than those in emerging economies. These outflows 40. Equity indexes for selected foreign economies eased toward the end of the year as AFE yields fell. EME sovereign spreads narrowed Weekly Week ending January 8, 2016 = 100 moderately last year. China 180 Japan 170 Euro area 160 U.K. 150 140 130 120 110 100 90 80 70 2016 2017 2018 2019 2020 2021 2022 2023 2024 NOTE: The data are weekly averages of daily data and extend through February 23, 2024. SOURCE: For the euro area, Dow Jones Euro Stoxx Index; for Japan, Tokyo Stock Price Index; for China, Shanghai Composite Index; for the U.K., FTSE 100 Index; all via Bloomberg. (For Dow Jones Indices licensing information, see the note on the Contents page.) 35 P 2 art m P onetary oLicy After one additional increase in July, the housing, and transportation. In considering Federal Open Market Committee has any adjustments to the target range for the held the federal funds rate steady . . . federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, The Federal Open Market Committee and the balance of risks. The Committee does (FOMC) has maintained the target range for not expect it will be appropriate to reduce the federal funds rate at 5¼ to 5½ percent the target range until it has gained greater since its July 2023 meeting (figure 41). The confidence that inflation is moving sustainably Committee views the policy rate as likely at toward 2 percent. its peak for this tightening cycle; since early 2022, the FOMC raised the target range . . . and has continued the process of a total of 525 basis points. The FOMC’s significantly reducing its holdings of policy tightening actions have reflected its Treasury and agency securities commitment to return inflation to its 2 percent objective. Restoring price stability is essential The FOMC began reducing its securities to achieve a sustained period of strong labor holdings in June 2022 and, since then, market conditions that benefit all. has continued to implement its plan for significantly reducing the size of the Federal As labor market tightness has eased and Reserve’s balance sheet in a predictable progress on inflation has continued, the risks manner.8 Since September 2022, principal to achieving the Committee’s employment and payments from securities held in the System inflation goals have been moving into better balance. Even so, the Committee remains 8. See the May 4, 2022, press release regarding the highly attentive to inflation risks and is acutely Plans for Reducing the Size of the Federal Reserve’s aware that high inflation imposes significant Balance Sheet, available on the Board’s website at https:// hardship, especially on those least able to www.federalreserve.gov/newsevents/pressreleases/ meet the higher costs of essentials, like food, monetary20220504b.htm. 41. Selected interest rates Daily Percent 6 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 2024 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. 36 PART 2: MONETARy POLICy Open Market Account (SOMA) have been the FOMC intends to slow and then stop reinvested only to the extent that they exceeded reductions in its securities holdings when monthly caps of $60 billion per month for reserve balances are somewhat above the level Treasury securities and $35 billion per month that the FOMC judges to be consistent with for agency debt and agency mortgage-backed ample reserves. Once balance sheet runoff has securities. As a result of these actions, the ceased, reserve balances will likely continue SOMA holdings of Treasury and agency to decline at a slower pace—reflecting growth securities have declined about $1.4 trillion in other Federal Reserve liabilities—until since the start of balance sheet reduction to the FOMC judges that reserve balances are around $7.1 trillion, a level equivalent to about at an ample level. Thereafter, the FOMC 25 percent of U.S. nominal gross domestic will manage securities holdings as needed to product as compared with a peak of 35 percent maintain ample reserves over time. reached at the end of 2021 (figure 42). Despite this decline in SOMA holdings, reserve The FOMC will continue to monitor the balances increased $217 billion, to a level of implications of incoming information for around $3.5 trillion, as the corresponding the economic outlook decline in the Federal Reserve’s liabilities was concentrated in usage of the overnight As already indicated, the FOMC is strongly reverse repurchase agreement facility. (See the committed to returning inflation to its box “Developments in the Federal Reserve’s 2 percent objective, and, in considering any Balance Sheet and Money Markets.”) adjustments to the target range for the federal funds rate, the Committee will carefully assess The FOMC has stated that it intends to incoming data, the evolving outlook, and maintain securities holdings at amounts the balance of risks. Its assessments will take consistent with implementing monetary into account a wide range of information, policy efficiently and effectively in its ample- including readings on labor market conditions, reserves regime. To ensure a smooth transition, inflation pressures and inflation expectations, 42. 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 Reverse repurchase agreements 9 Capital and other liabilities 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 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 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 21, 2024. SOURCE: Federal Reserve Board, Statistical Release H.4.1, “Factors Affecting Reserve Balances.” MONETARy POLICy REPORT: MARCH 2024 37 and financial and international developments. and the Federal Reserve System’s community The Committee has noted that it is also development outreach. prepared to adjust its approach to reducing the size of the balance sheet in light of economic Policymakers also routinely consult and financial developments. prescriptions for the policy interest rate provided by various monetary policy rules. In addition to considering a wide range of These rule prescriptions can provide useful economic and financial data, the FOMC benchmarks for the FOMC. However, simple gathers information from business contacts rules cannot capture all of the complex and other informed parties around the considerations that go into the formation country, as summarized in the Beige Book. of appropriate monetary policy, and many The Federal Reserve has regular arrangements practical considerations make it undesirable under which it hears from a broad range of for the FOMC to adhere strictly to the participants in the U.S. economy about how prescriptions of any specific rule. Nevertheless, monetary policy affects people’s daily lives some principles of good monetary policy can and livelihoods. In particular, the Federal be brought out by examining these simple Reserve has continued to gather insights into rules. (See the box “Monetary Policy Rules in these matters through the Fed Listens initiative the Current Environment.”) 38 PART 2: MONETARy POLICy Developments in the Federal Reserve’s Balance Sheet and Money Markets The Federal Open Market Committee (FOMC) in June 2022 (fi gures A and B). This discussion reviews continued to reduce the size of the Federal Reserve’s recent developments in the Federal Reserve’s balance System Open Market Account (SOMA) portfolio, sheet and money market conditions. consistent with its plans for reducing the size of the While the reduction in the size of the SOMA portfolio Federal Reserve’s balance sheet. Since the time of the has continued as planned, amid the banking-sector June 2023 report, total Federal Reserve assets have developments of spring 2023, the Federal Reserve decreased $806 billion, leaving the total size of the provided liquidity to help ensure the stability of the balance sheet at $7.6 trillion, $1.3 trillion smaller since banking system and the ongoing provision of money the reduction in the size of the SOMA portfolio began (continued) A. Balance sheet comparison Billions of dollars Change (since Change Fed’s balance sheet February 21, 2024 June 14, 2023 (since June 2023) reduction began on June 1, 2022) Assets Total securities Treasury securities 4,661 5,160 −499 −1,109 Agency debt and MBS 2,417 2,561 −144 −293 Net unamortized premiums 274 298 −24 −63 Repurchase agreements 0 0 0 0 Loans and lending facilities PPPLF 3 8 −5 −17 Discount window 2 4 −2 2 BTFP 164 102 62 164 Other credit extensions 0 180 −180 0 Other loans and lending facilities 15 28 −13 −20 Central bank liquidity swaps 0 0 0 0 Other assets 44 48 −4 2 Total assets 7,582 8,388 −806 −1,333 Liabilities Federal Reserve notes 2,280 2,292 −12 50 Reserves held by depository institutions 3,523 3,306 217 166 Reverse repurchase agreements Foreign offi cial and international accounts 340 328 12 74 Others 575 2,109 −1,534 −1,390 U.S. Treasury General Account 789 135 654 8 Other deposits 164 220 −56 −84 Other liabilities and capital −89 −2 −87 −157 Total liabilities and capital 7,582 8,388 −806 −1,333 Note: MBS is mortgage-backed securities. PPPLF is Paycheck Protection Program Liquidity Facility. BTFP is Bank Term Funding Program. Components may not sum to totals because of rounding. SourCe: Federal Reserve Board, Statistical Release H.4.1, “Factors Aff ecting Reserve Balances.” MONETARy POLICy REPORT: MARCH 2024 39 B. Federal Reserve assets C. Federal Reserve liabilities Weekly Trillions of dollars Weekly Trillions of dollars Other assets 13 Reverse repurchase agreements 13 Loans 12 Deposits of depository institutions (reserves) 12 Central bank liquidity swaps 11 U.S. Treasury General Account 11 Repurchase agreements 10 Other deposits 10 Agency debt and MBS 9 Capital and other liabilities 9 Treasury securities 8 Federal Reserve notes 8 held outright 7 7 6 6 5 5 4 4 3 3 2 2 1 1 2019 2020 2021 2022 2023 2024 2019 2020 2021 2022 2023 2024 NOTE: MBS is mortgage-backed securities. The key identifies shaded areas in NOTE: “Capital and other liabilities” includes Treasury contributions and is order from top to bottom. The data extend through February 21, 2024. negative on February 21, 2024, because of the deferred asset that the Federal SOURCE: Federal Reserve Board, Statistical Release H.4.1, “Factors Affecting Reserve reports. The key identifies shaded areas in order from top to bottom. The Reserve Balances.” data extend through February 21, 2024. SOURCE: Federal Reserve Board, Statistical Release H.4.1, “Factors Affecting Reserve Balances.” and credit to the economy.1 Loans under the Bank Term Despite the ongoing reduction in the Federal Funding Program—which made additional funding and Reserve’s securities holdings, reserve balances—the liquidity available to eligible depository institutions to largest liability item on the Federal Reserve’s balance support American businesses and households and which sheet—have increased $217 billion since June 2023, will cease making new loans as scheduled on March 11, given other changes in the composition of the Federal 2024—have increased $62 billion since June 2023 Reserve’s liabilities over this period.3 Since June 2023, (fi gure A).2 usage of the overnight reverse repurchase agreement (ON RRP) facility has declined $1.5 trillion, while 1. The loans that were extended to depository institutions balances in the Treasury General Account have (DIs) placed into Federal Deposit Insurance Corporation increased $654 billion (fi gures A and C). On net, (FDIC) receivership in March 2023 have been fully repaid. changes in these and other nonreserve liabilities have The Federal Reserve Banks’ loans to these DIs are secured resulted in an increase in reserve balances. by pledged collateral, and the FDIC provides repayment guarantees. For additional information, see Board of Governors After remaining above $2 trillion during the fi rst half of the Federal Reserve System (2024), “Additional Information of 2023, usage of the ON RRP facility has declined to on Other Credit Extensions,” webpage, January 4, https://www. (continued on next page) federalreserve.gov/monetarypolicy/additional-information-on- other-credit-extensions.htm. 2. The Bank Term Funding Program (BTFP) was established under section 13(3) of the Federal Reserve Act with the the current interest rate environment. After March 11, 2024, approval of the Secretary of the Treasury. The BTFP offers loans banks and other DIs will continue to have ready access to of up to one year to banks, savings associations, credit unions, the discount window to meet liquidity needs. For additional and other eligible DIs against collateral such as U.S. Treasury information, see Board of Governors of the Federal Reserve securities, U.S. agency securities, and U.S. agency mortgage- System (2024), “Federal Reserve Board Announces the Bank backed securities. For more details, see Board of Governors Term Funding Program (BTFP) Will Cease Making New of the Federal Reserve System (2024), “Bank Term Funding Loans as Scheduled on March 11,” press release, January 24, Program,” webpage, February 13, https://www.federalreserve. https://www.federalreserve.gov/newsevents/pressreleases/ gov/financial-stability/bank-term-funding-program.htm. monetary20240124a.htm. The interest rate applicable to new BTFP loans has been 3. Reserve balances consist of deposits held at the Federal adjusted such that the rate on new loans extended from Reserve Banks by DIs, such as commercial banks, savings January 25, 2024, through program expiration will be no banks, credit unions, thrift institutions, and U.S. branches lower than the interest rate on reserve balances in effect on and agencies of foreign banks. Reserve balances allow DIs to the day the loan is made. This rate adjustment ensures that facilitate daily payment fl ows, both in ordinary times and in the BTFP continues to support the goals of the program in stress scenarios, without borrowing funds or selling assets. 40 PART 2: MONETARy POLICy Federal Reserve’s Balance Sheet and Money Markets (continued) about $575 billion amid the ongoing reduction in the Reserve’s deferred asset increased $82 billion since last Federal Reserve’s balance sheet and the substantial June to a level of $152 billion.4 Negative net income increase in net supply of Treasury securities. Reduced and the associated deferred asset do not affect the usage of the ON RRP facility largely refl ects money Federal Reserve’s conduct of monetary policy or its market funds shifting their portfolio toward higher- ability to meet its fi nancial obligations.5 yielding investments, including Treasury bills and private-market repurchase agreements. The ON RRP facility is intended to help keep the 4. The deferred asset is equal to the cumulative shortfall of effective federal funds rate within the target range. The net income and represents the amount of future net income facility continued to serve this intended purpose, and that will need to be realized before remittances to the Treasury resume. Although remittances are suspended at the time of this the Federal Reserve’s administered rates—the interest report, over the past decade and a half, the Federal Reserve rate on reserve balances and the ON RRP offering has remitted over $1 trillion to the Treasury. rate—were highly effective at maintaining the effective 5. Net income is expected to turn positive again as interest federal funds rate within the target range as the FOMC expenses fall, and remittances will resume once the temporary deferred asset falls to zero. As a result of the ongoing tightened the stance of monetary policy. reduction in the size of the Federal Reserve’s balance sheet, The Federal Reserve’s expenses have continued to it is expected that interest expenses will fall over time in line exceed its income over recent months. The Federal with the decline in the Federal Reserve’s liabilities. MONETARy POLICy REPORT: MARCH 2024 41 Monetary Policy Rules in the Current Environment As part of their monetary policy deliberations, these rules, along with a “balanced approach policymakers regularly consult the prescriptions (shortfalls)” rule, which responds to the unemployment of a variety of simple interest rate rules without rate only when it is higher than its estimated longer- mechanically following the prescriptions of any run level.2 All of the simple rules shown embody key particular rule. Simple interest rate rules relate a design principles of good monetary policy, including policy interest rate, such as the federal funds rate, to a the requirement that the policy rate should be adjusted small number of other economic variables—typically by enough over time to ensure a return of infl ation to including the current deviation of infl ation from its the central bank’s longer-run objective and to anchor target value and a measure of resource slack in the longer-term infl ation expectations at levels consistent economy. with that objective. Since 2021, infl ation has run above the Federal All fi ve rules feature the difference between infl ation Open Market Committee’s (FOMC) 2 percent longer- and the FOMC’s longer-run objective of 2 percent. The run objective, and labor market conditions have been fi ve rules use the unemployment rate gap, measured tight. Although infl ation remains elevated, it has eased as the difference between an estimate of the rate of considerably over the past year, and labor supply and unemployment in the longer run (uLR) and the current t demand have come into better balance. Against this unemployment rate; the fi rst-difference rule includes backdrop, the simple monetary policy rules considered the change in the unemployment rate gap rather in this discussion have called for elevated levels of the than its level.3 All but the fi rst-difference rule include federal funds rate over 2021, 2022, and the fi rst half of an estimate of the neutral real interest rate in the 2023, but the rates prescribed by these rules have now longer run (rLR).4 t declined to values close to the current target range for (continued on next page) the federal funds rate at 5¼ to 5½ percent. In support of its goals of maximum employment and infl ation at rule is based on a rule suggested by Athanasios Orphanides the rate of 2 percent over the longer run, the FOMC has (2003), “Historical Monetary Policy Analysis and the Taylor maintained the federal funds rate at 5¼ to 5½ percent Rule,” Journal of Monetary Economics, vol. 50 (July), pp. 983– 1022. A review of policy rules is provided in John B. Taylor since July while continuing to reduce its holdings and John C. Williams (2011), “Simple and Robust Rules for of Treasury securities and agency debt and agency Monetary Policy,” in Benjamin M. Friedman and Michael mortgage-backed securities. Woodford, eds., Handbook of Monetary Economics, vol. 3B (Amsterdam: North-Holland), pp. 829–59. The same volume of the Handbook of Monetary Economics also discusses Selected Policy Rules: Descriptions approaches to deriving policy rate prescriptions other than through the use of simple rules. In many economic models, desirable economic 2. The balanced-approach (shortfalls) rule responds outcomes can be achieved over time if monetary asymmetrically to unemployment rates above or below their policy responds to changes in economic conditions estimated longer-run value: When unemployment is above that value, the policy rates are identical to those prescribed by in a manner that is predictable and adheres to some the balanced-approach rule, whereas when unemployment key design principles. In recognition of this idea, is below that value, policy rates do not rise because of economists have analyzed many monetary policy further declines in the unemployment rate. As a result, the rules, including the well-known Taylor (1993) rule, the prescription of the balanced-approach (shortfalls) rule has been less restrictive than that of the balanced-approach rule “balanced approach” rule, the “adjusted Taylor (1993)” since 2022:Q1. rule, and the “fi rst difference” rule.1 Figure A shows 3. Implementations of simple rules often use the output gap as a measure of resource slack in the economy. The rules described in fi gure A instead use the unemployment rate gap 1. The Taylor (1993) rule was introduced in John B. Taylor because that gap better captures the FOMC’s statutory goal (1993), “Discretion versus Policy Rules in Practice,” Carnegie- to promote maximum employment. Movements in these Rochester Conference Series on Public Policy, vol. 39 alternative measures of resource utilization tend to be highly (December), pp. 195–214. The balanced-approach rule was correlated. For more information, see the note below fi gure A. analyzed in John B. Taylor (1999), “A Historical Analysis of 4. The neutral real interest rate in the longer run (r tLR) is Monetary Policy Rules,” in John B. Taylor, ed., Monetary Policy the level of the real federal funds rate that is expected to be Rules (Chicago: University of Chicago Press), pp. 319–41. The consistent, in the longer run, with maximum employment adjusted Taylor (1993) rule was studied in David Reifschneider and stable infl ation. Like u tLR, r tLR is determined largely by and John C. Williams (2000), “Three Lessons for Monetary nonmonetary factors. The fi rst-difference rule shown in Policy in a Low-Infl ation Era,” Journal of Money, Credit and fi gure A does not require an estimate of r tLR, a feature that is Banking, vol. 32 (November), pp. 936–66. The fi rst-difference touted by proponents of such rules as providing an element of 42 PART 2: MONETARy POLICy Monetary Policy Rules (continued) 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 realized nominal federal funds rate for quarter t−1, πt is the 4-quarter price inflation for quarter t, 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 Federal Open Market Committee’s 2 percent longer-run objective, πLR. 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 (ELB) of 12.5 basis points. The Taylor (1993) rule and other policy rules are generally written in terms of the deviation of real output from its full capacity level. In these equations, the output gap has been replaced with the gap between the rate of unemployment in the longer run and its actual level (using a relationship known as Okun’s law) to represent the rules in terms of the unemployment rate. The rules are implemented as responding to core personal consumption expenditures (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. Box note 1 provides references for the policy rules. Unlike the other simple rules featured here, prescribed by the standard Taylor (1993) rule until after the adjusted Taylor (1993) rule recognizes that the the economy begins to recover. federal funds rate cannot be reduced materially below the effective lower bound (ELB). By contrast, Policy Rules: Limitations during the pandemic-induced recession, the standard Taylor (1993) rule prescribed policy rates that were far As benchmarks for monetary policy, simple below zero. To make up for the cumulative shortfall in policy rules have important limitations. One of these policy accommodation following a recession during limitations is that the simple policy rules mechanically which the federal funds rate is constrained by its ELB, respond to only a small set of economic variables and the adjusted Taylor (1993) rule prescribes delaying thus necessarily abstract from many of the factors that the return of the policy rate to the (positive) levels the FOMC considers when it assesses the appropriate setting of the policy rate. In addition, the structure of the economy and current economic conditions differ robustness. However, this rule has its own shortcomings. For in important respects from those prevailing when example, research suggests that this sort of rule often results the simple policy rules were originally devised and in greater volatility in employment and infl ation than what proposed. As a result, most simple policy rules do not would be obtained under the Taylor (1993) and balanced- approach rules. (continued) MONETARy POLICy REPORT: MARCH 2024 43 take into account the ELB on interest rates, which limits considered. For each quarterly period, the fi gure reports the extent to which the policy rate can be lowered to the policy rates prescribed by the rules, taking as given support the economy. This constraint was particularly the prevailing economic conditions and survey-based evident during the pandemic-driven recession, when estimates of uLR and rLR at the time. All of the rules t t the lower bound on the policy rate motivated the considered called for a highly accommodative stance FOMC’s other policy actions to support the economy. of monetary policy in response to the pandemic-driven Relatedly, another limitation is that simple policy rules recession, followed by positive values as infl ation do not explicitly take into account other important tools picked up and labor market conditions strengthened. In of monetary policy, such as balance sheet policies. 2022 and during the fi rst half of 2023, the prescriptions Finally, simple policy rules are not forward looking of the simple rules for the federal funds rate were and do not allow for important risk-management between 4 and 8 percent; these values are well above considerations, associated with uncertainty about the levels observed before the pandemic and refl ect, in economic relationships and the evolution of the large part, elevated infl ation readings. Because infl ation economy, that factor into FOMC decisions. has eased recently, the policy rates prescribed by these rules have now declined to values that are close to the federal funds rate. Selected Policy Rules: Prescriptions Figure B shows historical prescriptions for the federal funds rate under the fi ve simple rules B. Historical federal funds rate prescriptions from simple policy rules Percent 9 6 3 + _0 3 Federal funds rate 6 Taylor (1993) rule Adjusted Taylor (1993) rule 9 Balanced-approach rule 12 Balanced-approach (shortfalls) rule 15 First-difference rule 18 2018 2019 2020 2021 2022 2023 2024 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, the unemployment rate, and inflation used in the computation of the rules’ prescriptions are interpolations to quarterly values of projections from the Survey of Primary Dealers. 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 2024. SOURCE: Federal Reserve Bank of Philadelphia; Federal Reserve Bank of New York, Survey of Primary Dealers; 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 12–13, 2023, 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 12–13, 2023, 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 2023 to 2026 “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 2023 Percent Median1 Central tendency2 Range3 Variable Longer Longer Longer 2023 2024 2025 2026 2023 2024 2025 2026 2023 2024 2025 2026 run run run Change in real GDP ..... 2.6 1.4 1.8 1.9 1.8 2.5–2.7 1.2–1.7 1.5–2.0 1.8–2.0 1.7–2.0 2.5–2.7 0.8–2.5 1.4–2.5 1.6–2.5 1.6–2.5 September projection 2.1 1.5 1.8 1.8 1.8 1.9–2.2 1.2–1.8 1.6–2.0 1.7–2.0 1.7–2.0 1.8–2.6 0.4–2.5 1.4–2.5 1.6–2.5 1.6–2.5 Unemployment rate ..... 3.8 4.1 4.1 4.1 4.1 3.8 4.0–4.2 4.0–4.2 3.9–4.3 3.8–4.3 3.7–4.0 3.9–4.5 3.8–4.7 3.8–4.7 3.5–4.3 September projection 3.8 4.1 4.1 4.0 4.0 3.7–3.9 3.9–4.4 3.9–4.3 3.8–4.3 3.8–4.3 3.7–4.0 3.7–4.5 3.7–4.7 3.7–4.5 3.5–4.3 PCE inflation .......... 2.8 2.4 2.1 2.0 2.0 2.7–2.9 2.2–2.5 2.0–2.2 2.0 2.0 2.7–3.2 2.1–2.7 2.0–2.5 2.0–2.3 2.0 September projection 3.3 2.5 2.2 2.0 2.0 3.2–3.4 2.3–2.7 2.0–2.3 2.0–2.2 2.0 3.1–3.8 2.1–3.5 2.0–2.9 2.0–2.7 2.0 Core PCE inflation4 ..... 3.2 2.4 2.2 2.0 3.2–3.3 2.4–2.7 2.0–2.2 2.0–2.1 3.2–3.7 2.3–3.0 2.0–2.6 2.0–2.3 September projection 3.7 2.6 2.3 2.0 3.6–3.9 2.5–2.8 2.0–2.4 2.0–2.3 3.5–4.2 2.3–3.6 2.0–3.0 2.0–2.9 Memo: Projected appropriate policy path Federal funds rate ....... 5.4 4.6 3.6 2.9 2.5 5.4 4.4–4.9 3.1–3.9 2.5–3.1 2.5–3.0 5.4 3.9–5.4 2.4–5.4 2.4–4.9 2.4–3.8 September projection 5.6 5.1 3.9 2.9 2.5 5.4–5.6 4.6–5.4 3.4–4.9 2.5–4.1 2.5–3.3 5.4–5.6 4.4–6.1 2.6–5.6 2.4–4.9 2.4–3.8 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 spec- ified 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 19–20, 2023. 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 19–20, 2023, meeting, and one participant did not submit such projections in conjunction with the December 12–13, 2023, 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, 2023–26 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 2018 2019 2020 2021 2022 2023 2024 2025 2026 Longer run Percent Unemployment rate 7 6 5 4 3 2 1 2018 2019 2020 2021 2022 2023 2024 2025 2026 Longer run Percent PCE inflation 7 6 5 4 3 2 1 2018 2019 2020 2021 2022 2023 2024 2025 2026 Longer run Percent Core PCE inflation 7 6 5 4 3 2 1 2018 2019 2020 2021 2022 2023 2024 2025 2026 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 2024 47 Figure 2. FOMC participants’ assessments of appropriate monetary policy: Midpoint of target range or target level for the federal funds rate Percent 7.0 6.5 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 2023 2024 2025 2026 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, 2023–26 and over the longer run Number of participants 2023 20 December projections 18 September projections 16 14 12 10 8 6 4 2 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− 0.3 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 0.2− 0.4− 0.6− 0.8− 1.0− 1.2− 1.4− 1.6− 1.8− 2.0− 2.2− 2.4− 2.6− 0.3 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 0.2− 0.4− 0.6− 0.8− 1.0− 1.2− 1.4− 1.6− 1.8− 2.0− 2.2− 2.4− 2.6− 0.3 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 2026 20 18 16 14 12 10 8 6 4 2 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− 0.3 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 0.2− 0.4− 0.6− 0.8− 1.0− 1.2− 1.4− 1.6− 1.8− 2.0− 2.2− 2.4− 2.6− 0.3 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 2024 49 Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2023–26 and over the longer run Number of participants 2023 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− 3.3 3.5 3.7 3.9 4.1 4.3 4.5 4.7 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− 3.3 3.5 3.7 3.9 4.1 4.3 4.5 4.7 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− 3.3 3.5 3.7 3.9 4.1 4.3 4.5 4.7 Percent range Number of participants 2026 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− 3.3 3.5 3.7 3.9 4.1 4.3 4.5 4.7 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− 3.3 3.5 3.7 3.9 4.1 4.3 4.5 4.7 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, 2023–26 and over the longer run Number of participants 2023 20 December projections 18 September projections 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− 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 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− 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 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− 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 Percent range Number of participants 2026 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− 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 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− 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 Percent range Note: Definitions of variables and other explanations are in the notes to table 1. MONETARy POLICy REPORT: MARCH 2024 51 Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2023–26 Number of participants 2023 20 December projections 18 September projections 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− 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 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− 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 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− 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 Percent range Number of participants 2026 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− 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 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, 2023–26 and over the longer run Number of participants 2023 20 December projections 18 September projections 16 14 12 10 8 6 4 2 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− 5.88− 6.13− 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 6.12 6.37 Percent range Number of participants 2024 20 18 16 14 12 10 8 6 4 2 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− 5.88− 6.13− 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 6.12 6.37 Percent range Number of participants 2025 20 18 16 14 12 10 8 6 4 2 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− 5.88− 6.13− 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 6.12 6.37 Percent range Number of participants 2026 20 18 16 14 12 10 8 6 4 2 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− 5.88− 6.13− 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 6.12 6.37 Percent range Number of participants Longer run 20 18 16 14 12 10 8 6 4 2 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− 5.88− 6.13− 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 6.12 6.37 Percent range Note: Definitions of variables and other explanations are in the notes to table 1. MONETARy POLICy REPORT: MARCH 2024 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 Actual 3 2 1 0 −1 −2 −3 2018 2019 2020 2021 2022 2023 2024 2025 2026 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 5 Actual 4 3 2 1 2018 2019 2020 2021 2022 2023 2024 2025 2026 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 2024 55 Figure 4.C. Uncertainty and risks in projections of PCE inflation Median projection and confidence interval based on historical forecast errors Percent PCE inflation Median of projections 7 70% confidence interval 6 5 4 Actual 3 2 1 2018 2019 2020 2021 2022 2023 2024 2025 2026 FOMC participants’ assessments of uncertainty and risks around their economic projections Number of participants Number of participants Uncertainty about PCE inflation Risks to PCE inflation December projections December projections 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 2023 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 2023 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 2023 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 2023 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 2024 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 2023 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 2023 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 2023 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 2023 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 7 Midpoint of target range Median of projections 70% confidence interval* 6 5 4 Actual 3 2 1 0 2018 2019 2020 2021 2022 2023 2024 2025 2026 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 2024 59 Table 2. Average historical projection error ranges Percentage points Variable 2023 2024 2025 2026 Change in real GDP1 ....... ±0.8 ±1.7 ±2.1 ±2.2 Unemployment rate1 ....... ±0.1 ±1.1 ±1.6 ±2.0 Total consumer prices2 ..... ±0.3 ±1.6 ±1.6 ±1.7 Short-term interest rates3 ... ±0.1 ±1.4 ±1.9 ±2.5 Note: Error ranges shown are measured as plus or minus the root mean squared error of projections for 2003 through 2022 that were released in the winter by various private and government forecasters. As described in the box “Forecast Uncertainty,” 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 cal cu- lated 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 2.2 to 3.8 percent in the current year, 1.3 to monetary policy among policymakers and can aid 4.7 percent in the second year, 0.9 to 5.1 percent in public understanding of the basis for policy actions. the third year, and 0.8 to 5.2 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 relationships used to help produce economic forecasts the current year, 0.4 to 3.6 percent in the second and are necessarily imperfect descriptions of the real world, third years, and 0.3 to 3.7 percent in the fourth year. 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 variable with economic forecasts. For example, suppose a is greater than, smaller than, or broadly similar to participant projects that real gross domestic product 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 assessments of the uncertainty surrounding their the projections are broadly balanced, the numbers projections are summarized in the bottom-left panels (continued) MONETARy POLICy REPORT: MARCH 2024 61 of those fi gures. Participants also provide judgments as assessments of appropriate monetary policy and are to whether the risks to their projections are weighted on an end-of-year basis. However, the forecast errors to the upside, are weighted to the downside, or should provide a sense of the uncertainty around the are broadly balanced. That is, while the symmetric future path of the federal funds rate generated by the historical fan charts shown in the top panels of fi gures uncertainty about the macroeconomic variables as 4.A through 4.C imply that the risks to participants’ well as additional adjustments to monetary policy that projections are balanced, participants may judge that would be appropriate to offset the effects of shocks to there is a greater risk that a given variable will be above the economy. rather than below their projections. These judgments If at some point in the future the confi dence interval are summarized in the lower-right panels of fi gures 4.A around the federal funds rate were to extend below through 4.C. zero, it would be truncated at zero for purposes of As with real activity and infl ation, the outlook the fan chart shown in fi gure 5; zero is the bottom of for the future path of the federal funds rate is subject the lowest target range for the federal funds rate that to considerable uncertainty. This uncertainty arises has been adopted by the Committee in the past. This primarily because each participant’s assessment of approach to the construction of the federal funds rate the appropriate stance of monetary policy depends fan chart would be merely a convention; it would importantly on the evolution of real activity and not have any implications for possible future policy infl ation over time. If economic conditions evolve decisions regarding the use of negative interest rates to in an unexpected manner, then assessments of the provide additional monetary policy accommodation appropriate setting of the federal funds rate would if doing so were appropriate. In such situations, the change from that point forward. The fi nal line in Committee could also employ other tools, including table 2 shows the error ranges for forecasts of short- forward guidance and asset purchases, to provide term interest rates. They suggest that the historical additional accommodation. confi dence intervals associated with projections While fi gures 4.A through 4.C provide information of the federal funds rate are quite wide. It should on the uncertainty around the economic projections, be noted, however, that these confi dence intervals fi gure 1 provides information on the range of views are not strictly consistent with the projections for across FOMC participants. A comparison of fi gure 1 the federal funds rate, as these projections are not with fi gures 4.A through 4.C shows that the dispersion forecasts of the most likely quarterly outcomes but of the projections across participants is much smaller rather are projections of participants’ individual than the average forecast errors over the past 20 years. 63 a bbreviations AFE advanced foreign economy BTFP Bank Term Funding Program COVID-19 coronavirus disease 2019 CRE commercial real estate DI depository institution ELB effective lower bound EME emerging market economy EPOP ratio employment-to-population ratio FDIC Federal Deposit Insurance Corporation FOMC Federal Open Market Committee; also, the Committee GDI gross domestic income GDP gross domestic product JOLTS Job Openings and Labor Turnover Survey MBS mortgage-backed securities MMF money market fund ON RRP overnight reverse repurchase agreement OPEC Organization of the Petroleum Exporting Countries PCE personal consumption expenditures repo repurchase agreement 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 1, 2024 M P r onetary olicy ePort March 1, 2024 Board of Governors of the Federal Reserve System

Federal Reserve (2024, February 29). Monetary Policy Report. Monetary Policy Reports, Federal Reserve. https://whenthefedspeaks.com/doc/monetary_policy_report_20240301

@misc{wtfs_monetary_policy_report_20240301,
  author = {Federal Reserve},
  title = {Monetary Policy Report},
  year = {2024},
  month = {Feb},
  howpublished = {Monetary Policy Reports, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/monetary_policy_report_20240301},
  note = {Retrieved via When the Fed Speaks corpus}
}