Monetary Policy Report

For use at 11:00 a.m. EDT July 5, 2024 M P r onetary olicy ePort July 5, 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., July 5, 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Special Topics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Part 1: Recent Economic and Financial Developments . . . . . . . . . . . . . . . . . . . . . 5 Domestic Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Financial Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 International Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Part 2: Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41 Part 3: Summary of Economic Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53 Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .71 List of Boxes Housing Services Inflation and Market Rent Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Employment and Earnings across Demographic Groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Developments Related to Financial Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Monetary Policy Independence, Transparency, and Accountability . . . . . . . . . . . . . . . . . . . . 42 Developments in the Federal Reserve’s Balance Sheet and Money Markets . . . . . . . . . . . . . . 47 Monetary Policy Rules in the Current Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Forecast Uncertainty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Note: This report reflects information that was publicly available as of noon EDT on July 2, 2024. Unless otherwise stated, the time series in the figures extend through, for daily data, June 28, 2024; for monthly data, May 2024; and, for quarterly data, 2024:Q1 . In bar charts, except as noted, the change for a given period is measured to its final quarter from the final quarter of the preceding period . For figures 26, 37, and 43, 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, omis- sions, or interruptions of any index or the data included therein . 1 s ummary Inflation eased notably last year and has Recent Economic and Financial shown modest further progress so far this Developments year, but it remains above the Federal Open Market Committee’s (FOMC) objective of Inflation. Although personal consumption 2 percent. Job gains have been strong, and the expenditures (PCE) price inflation slowed unemployment rate is still low. Meanwhile, as notably last year and has shown modest job vacancies continued to decline and labor further progress this year, it remains above the supply continued to increase, the labor market FOMC’s longer-run objective of 2 percent. moved into better balance over the first half of The PCE price index rose 2.6 percent over the year. Real gross domestic product (GDP) the 12 months ending in May, down from the growth was modest in the first quarter, while 4.0 percent pace over the preceding 12 months growth in private domestic demand remained and a peak of 7.1 percent in June 2022. robust, supported by slower but still-solid The core PCE price index—which excludes increases in consumer spending, moderate food and energy prices and is generally growth in capital spending, and a sharp pickup considered a better guide to the direction in residential investment. of future inflation—also rose 2.6 percent in the 12 months ending in May, down from The FOMC has maintained the target range 4.7 percent a year ago and slower than the for the federal funds rate at 5¼ to 5½ percent 2.9 percent pace at the end of last year. On a since its July 2023 meeting. In addition, 12-month basis, core goods price inflation and the Committee has continued to reduce its housing services price inflation continued to holdings of Treasury securities and agency ease over the first part of the year, while core mortgage-backed securities. The Committee nonhousing services price inflation flattened does not expect it will be appropriate to out after slowing notably last year. Measures reduce the target range until it has gained of longer-term inflation expectations are greater confidence that inflation is moving within the range of values seen in the decade sustainably toward 2 percent. Reducing policy before the pandemic and continue to be restraint too soon or too much could result in broadly consistent with the FOMC’s longer- a reversal of the progress on inflation. At the run objective of 2 percent. same time, reducing policy restraint too late or too little could unduly weaken economic The labor market. The labor market continued activity and employment. In considering any to rebalance over the first half of this year, adjustments to the target range for the federal and it remained strong. Job gains were solid, funds rate, the Committee will carefully assess averaging 248,000 per month over the first five incoming data, the evolving outlook, and the months of the year, and the unemployment balance of risks. rate remained low. Labor demand has eased, as job openings have declined in many sectors of The FOMC is strongly committed to the economy, and labor supply has continued returning inflation to its 2 percent objective. to increase, supported by a strong pace of The Committee remains highly attentive immigration. With cooling labor demand and to inflation risks and is acutely aware that rising labor supply, the unemployment rate high inflation imposes significant hardship, edged up to 4.0 percent in May. The balance especially on those least able to meet the higher between labor demand and supply appears costs of essentials. similar to that in the period immediately 2 SUMMARy before the pandemic, when the labor market quarter of 2024 to levels above their longer- was relatively tight but not overheated. run averages. Nominal wage growth continued to slow in the first part of the year but remains above a Financial stability. The financial system pace consistent with 2 percent inflation over remains sound and resilient. The balance the longer term, given prevailing trends in sheets of nonfinancial businesses and productivity growth. households stayed strong, with the combined credit-to-GDP ratio standing near its two- Economic activity. Real GDP growth is decade low. Business debt continued to decline reported to have moderated in the first in real terms, and debt-servicing capacity quarter after having increased at a robust remained solid for most public firms, in pace in the second half of last year. Much large part due to strong earnings, large cash of the slowdown was due to sizable drags buffers, and low borrowing costs on existing in the volatile categories of net exports and debt. However, there were also signs of inventory investment; growth in private vulnerabilities building in the financial system. domestic final purchases—which includes In asset markets, corporate bond spreads consumer spending, business fixed investment, narrowed, equity prices rose faster than and residential investment—also moved a expected earnings, and residential property little lower in the first quarter but remained prices remained high relative to market rents. solid. Real consumption growth slowed in the Moreover, in the banking sector, some banks’ first quarter from a strong pace in the second fair value losses on fixed-rate assets remained half of last year, reflecting a decline in goods sizable, despite most of them continuing to spending. Real business fixed investment report solid capital levels. Additionally, parts grew at a moderate pace in the first quarter of banks’ commercial real estate portfolios despite high interest rates, supported by strong are facing stress. Some banks’ reliance on sales growth and improvements in business uninsured deposits remained high. Even so, sentiment and profit expectations. Activity in liquidity at most domestic banks remained the housing sector picked up sharply in the ample, with limited reliance on short-term first quarter as a result of a jump in existing wholesale funding. Bond mutual funds’ home sales and rising construction of single- exposure to interest rate risk stayed elevated, family homes. and data through the third quarter of 2023 show that hedge fund leverage had grown to Financial conditions. Financial conditions historical highs, driven primarily by borrowing appear somewhat restrictive on balance. by the largest hedge funds. (See the box Treasury yields and the market-implied “Developments Related to Financial Stability” expected path of the federal funds rate have in Part 1.) moved up, on net, since the beginning of the year, while broad equity prices have International developments. Foreign economic increased. Credit remains generally available activity appears to have improved in the first to most households and businesses but at quarter after a soft patch in the second half elevated interest rates, which have weighed on of last year. In advanced foreign economies, financing activity. The pace of bank lending growth rates returned to moderate levels to households and businesses increased in the despite the effects of restrictive monetary first five months of the year but continues policy as lower inflation improved real to be somewhat tepid. Delinquency rates on household incomes. In emerging market small business loans stayed slightly above economies, growth was supported by a pre-pandemic levels, and delinquency rates for recovery in exports and rising global demand credit cards, auto loans, and commercial real for high-tech products, with the rise in activity estate loans continued to increase in the first in China in the first quarter being particularly MONETARy POLICy REPORT: JULy 2024 3 outsized. Nonetheless, other factors continued securities in a predictable manner.1 Beginning to weigh on economic growth: Data indicated in June 2022, principal payments from ongoing weakness in China’s property sector, securities held in the System Open Market and in Europe, energy-intensive sectors Account have been reinvested only to the continue to struggle, reflecting their ongoing extent that they exceeded monthly caps. Under adjustment to past increases in energy prices this policy, the Federal Reserve has reduced following Russia’s 2022 invasion of Ukraine. its securities holdings about $1.7 trillion since the start of balance sheet reduction. The Foreign headline inflation has continued to FOMC has stated that it intends to maintain decline since the middle of last year, but the securities holdings at amounts consistent with pace of disinflation has been gradual and implementing monetary policy efficiently and uneven across countries and economic sectors. effectively in its ample-reserves regime. To Still, many foreign central banks have noted ensure a smooth transition from abundant to this progress in lowering inflation, and some ample reserve balances, the FOMC slowed have begun to cut their policy rates. A notable the pace of decline of its securities holdings exception is Japan, which ended its negative at the beginning of June and intends to interest rate policy and yield curve control in stop reductions when reserve balances are March amid persistently high inflation. The somewhat above the level that the Committee trade-weighted exchange value of the dollar judges to be consistent with ample reserves. rose significantly, consistent with widening gaps between U.S. and foreign interest rates. Special Topics Monetary Policy Housing services inflation. The PCE price index for housing services started accelerating Interest rate policy. The FOMC has in 2021, notably increasing its contribution maintained the target range for the policy to core PCE inflation. Because this index rate at 5¼ to 5½ percent since its July 2023 calculates average rent for all tenants—both meeting. The Committee judges that the risks new tenants and existing tenants—its changes to achieving its employment and inflation tend to lag changes in market rent measures goals have moved toward better balance for new leases. Therefore, measures of market over the past year. The Committee perceives rent growth for new leases can help predict the economic outlook to be uncertain future changes in the PCE price index. Since and remains highly attentive to inflation mid-2022, market rents have decelerated risks. The Committee has indicated that and returned to a growth rate similar to or it does not expect it will be appropriate to below their average pre-pandemic pace, while reduce the target range until it has gained the PCE index continues to show elevated greater confidence that inflation is moving inflation, reflecting the gradual pass-through sustainably toward 2 percent. Policy is of market rates to existing tenants. As this well positioned to deal with the risks and process continues, PCE housing services uncertainties the Committee faces in pursuing inflation should gradually decline, though both sides of its dual mandate. In considering much uncertainty remains about the extent any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. 1. See the May 4, 2022, press release regarding the Plans for Reducing the Size of the Federal Reserve’s Balance sheet policy. The Federal Reserve Balance Sheet, available on the Board’s website at https:// has continued the process of significantly www.federalreserve.gov/newsevents/pressreleases/ reducing its holdings of Treasury and agency monetary20220504b.htm. 4 SUMMARy and timing. (See the box “Housing Services information about FOMC decisions through Inflation and Market Rent Measures” policy communications and a variety of in Part 1.) publications. The means by which the Federal Reserve informs the American people Employment and earnings across groups. A about its monetary policy decisions include strong labor market over the past two years official FOMC statements, monetary policy has been especially beneficial for historically reports, and Committee meeting minutes disadvantaged groups of workers. As a and transcripts, as well as speeches, press result, many of the long-standing disparities conferences, and congressional testimony in employment and wages by sex, race, given by Federal Reserve officials. (See ethnicity, and education have narrowed, and the box “Monetary Policy Independence, some gaps reached historical lows in 2023 Transparency, and Accountability” in Part 2.) and the first half of 2024. However, despite this narrowing, significant disparities in Federal Reserve’s balance sheet and money absolute levels across groups remain. (See markets. The size of the Federal Reserve’s the box “Employment and Earnings across balance sheet has continued to decrease Demographic Groups” in Part 1.) since February as the FOMC has reduced its securities holdings. Reserve balances, the Monetary policy independence, transparency, largest liability on the Federal Reserve’s balance and accountability. Congress has established sheet, and usage of the overnight reverse a statutory framework that specifies the repurchase agreement facility—another Federal long-run objectives of monetary policy— Reserve liability—both declined. (See the maximum employment and stable prices— box “Developments in the Federal Reserve’s and gives the Federal Reserve operational Balance Sheet and Money Markets” in Part 2.) independence in conducting monetary policy. In this framework, the Federal Reserve Monetary policy rules. Simple monetary policy makes determinations about the monetary rules, which prescribe a setting for the policy policy actions that are most appropriate interest rate in response to the behavior of for achieving the dual-mandate goals that a small number of economic variables, can Congress has assigned to it. The Federal provide useful guidance to policymakers. With Reserve recognizes that independence is inflation easing over the past year, the policy a trust given to it by Congress and the rate prescriptions of most simple monetary American people and that with independence policy rules have decreased recently and now comes the need to be transparent about, call for levels of the federal funds rate that are and accountable for, its monetary policy close to or below the current target range for decisions. Transparency also improves the federal funds rate. (See the box “Monetary monetary policy’s effectiveness. The Federal Policy Rules in the Current Environment” Reserve promotes transparency by providing in Part 2.) 5 P 1 art r e f d ecent conomic and inanciaL eveLoPments Domestic Developments Inflation eased notably last year and has shown modest further progress in recent months 1. Personal consumption expenditures price indexes Inflation stepped down markedly last year Monthly Percent change from year earlier and has shown modest further progress so far this year. Inflation remains elevated, Trimmed mean 7 Total though, and is still above the Federal Open Excluding food and energy 6 Market Committee’s (FOMC) longer-run 5 objective of 2 percent. The price index for 4 personal consumption expenditures (PCE) 3 rose 2.6 percent over the 12 months ending in May, down from the 4.0 percent pace a year 2 ago but little changed since the end of last year 1 (figure 1). After having slowed markedly in the 0 second half of 2023, monthly core PCE price 2017 2018 2019 2020 2021 2022 2023 2024 inflation—which excludes food and energy prices and is generally considered a better SOURCE: For trimmed mean, Federal Reserve Bank of Dallas; for all else, Bureau of Economic Analysis; all via Haver Analytics. guide to the direction of future inflation— firmed in the first quarter of this year and then eased somewhat in April and May. As a 2. Core personal consumption expenditures price index result, the 12-month change in core PCE prices Monthly Percent, annual rate declined from the 4.7 percent pace in May 3-month change of last year to 2.9 percent in December and 6-month change 7 moved down further this year, to 2.6 percent 12-month change 6 in May (figure 2). A similar message is 5 evident from the trimmed mean measure 4 of PCE prices constructed by the Federal 3 Reserve Bank of Dallas, which provides an 2 alternative approach to reducing the influence 1 + of idiosyncratic price movements. The index _0 increased 2.8 percent over the 12 months 1 ending in May, a pace that is somewhat slower 2017 2018 2019 2020 2021 2022 2023 2024 than at the end of last year (as shown in SOURCE: Bureau of Economic Analysis, personal consumption figure 1). expenditures via Haver Analytics. Consumer energy prices have increased, while food price inflation has flattened out PCE energy prices increased 4.8 percent in the 12 months ending in May after having declined 12.3 percent over the preceding 12 months 6 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS 3. Subcomponents of personal consumption expenditures price indexes Food and energy Components of core prices Percent change from year earlier Percent change from year earlier Monthly Percent change from year earlier 70 14 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. 4. Spot and futures prices for crude oil (figure 3, left panel). Oil prices increased, on Weekly Dollars per barrel net, in the first half of this year (figure 4). Prices rose amid concerns about escalation 140 Brent spot price of the conflict in the Middle East, additional 120 costs of rerouting some oil shipping away 100 from the Red Sea, and ongoing production 80 cuts by OPEC (Organization of the Petroleum Exporting Countries) and its allies. Continuing 24-month-ahead 60 futures contracts geopolitical tensions, including tensions 40 emanating from the conflicts in the Middle 20 East and Ukraine, pose an upside risk to energy prices. 2019 2020 2021 2022 2023 2024 NOTE: The data are weekly averages of daily data and extend through Prices of agricultural commodities and June 28, 2024. SOURCE: ICE Brent Futures via Bloomberg. livestock edged up, on net, over the first half of this year after having come down markedly 5. Spot prices for commodities in 2022 and 2023 from the highs reached at the start of Russia’s war on Ukraine in early 2022 Weekly Week ending January 4, 2019 = 100 (figure 5). As a result of these movements, the 200 12-month change in PCE food prices slowed 180 substantially from its peak of 12.2 percent in Industrial metals August 2022 to just 1.2 percent in May (as 160 shown in figure 3, left panel). 140 120 Prices of both energy and food products are Agriculture and livestock of particular importance for lower-income 100 households, for which such necessities account 80 for a large share of expenditures. Reflecting the sharp increases seen in 2021 and 2022, these 2019 2020 2021 2022 2023 2024 price indexes are 25 percent and 32 percent NOTE: The data are weekly averages of daily data and extend through June 28, 2024. higher than in 2019, for food and energy, SOURCE: For industrial metals, S&P GSCI Industrial Metals Spot respectively. Index; for agriculture and livestock, S&P GSCI Agriculture & Livestock Spot Index; both via Haver Analytics. MONETARy POLICy REPORT: JULy 2024 7 Core goods prices increased modestly this year after having declined sharply in the second half of 2023 In assessing the outlook for inflation, it is helpful to consider three separate components of core prices: core goods, housing services, and core nonhousing services. After posting notable declines in the second half of last 6. Nonfuel import price index year, core goods prices increased modestly, Monthly Percent change from year earlier on net, over the first months of this year. This development likely reflects, in part, movements 8 in nonfuel import prices, which turned up in 6 recent months after having declined, on net, 4 over 2023 (figure 6). Smoothing through these 2 monthly movements, prices for core goods over + the 12 months ending in May moved down _0 1.1 percent, similar to their pre-pandemic rate 2 of decline, after having increased 2.5 percent 4 over the previous 12-month period (figure 3, right panel). The progress on inflation for 2014 2016 2018 2020 2022 2024 core goods reflects improvements in supply– SOURCE: Bureau of Labor Statistics via Haver Analytics. demand imbalances. Indeed, the supply chain issues and other capacity constraints that had earlier boosted inflation so much continued to ease, though at a more gradual pace this year than over the past two years, and supply– demand conditions in goods markets appear 7. Reasons for operating below full capacity to be relatively balanced. For example, the shares of respondents to the Quarterly Survey Quarterly Percent of Plant Capacity Utilization citing insufficient supply of labor or materials as reasons 50 for producing below capacity, which had Insufficient supply 40 of labor increased considerably during the pandemic, 30 have continued to fall and are now near pre- pandemic levels (figure 7). Insufficient supply 20 of materials Housing services price inflation 10 continued to slow gradually but remains 0 elevated . . . 2019 2020 2021 2022 2023 2024 The 12-month change in housing services NOTE: The series are the share of firms selecting each reason for prices moved down from more than 8 percent operating below full capacity. in May 2023 to 5.5 percent in May of this year SOURCE: U.S. Census Bureau: Quarterly Survey of Plant Capacity Utilization. but is still well above its pre-pandemic level (as shown in figure 3, right panel). Market rent inflation, which measures increases in rents for new housing leases to new tenants, has fallen markedly since late 2022 to near pre-pandemic rates, and this slowdown points to continued easing of housing services inflation over the 8 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS year ahead. (The box “Housing Services Inflation and Market Rent Measures” provides further details.) . . . while core nonhousing services price inflation flattened out so far this year Finally, price inflation for core nonhousing services—a broad group that includes services such as travel and dining, financial services, and car repair—slowed last year but flattened out, on net, in the first five months of this year. Core nonhousing services prices rose 3.4 percent in the 12 months ending in May, down from 4.7 percent a year ago but little changed since the end of last year (as shown in figure 3, right panel). The lack of further progress this year is due in large part to price increases in volatile categories—for example, portfolio management services, which can be influenced by idiosyncratic factors, such as swings in the stock market, more than supply and demand conditions. Because labor is a significant input to these service sectors, the ongoing deceleration in labor costs—supported by softening labor demand and improvements in labor supply—suggests that disinflation will eventually resume for this category. Measures of longer-term inflation expectations have been stable; shorter- term expectations have been volatile but 8. Measures of inflation expectations are generally lower than a year earlier Percent The generally held view among economists Michigan survey, next 12 months 6.5 and policymakers is that inflation expectations Michigan survey, next 5 to 10 years 6.0 SPF, next 10 years influence actual inflation by affecting wage- 5.5 SPF, 6 to 10 years ahead and price-setting decisions. Survey-based 5.0 measures of expected inflation over a longer 4.5 4.0 horizon have generally been moving sideways 3.5 over the past year, within the range seen during 3.0 the decade before the pandemic, and they 2.5 appear broadly consistent with the FOMC’s 2.0 longer-run 2 percent inflation objective. This 1.5 development is seen for surveys of households, 2010 2012 2014 2016 2018 2020 2022 2024 such as the University of Michigan Surveys NOTE: The data for the Michigan survey are monthly and extend of Consumers, and for surveys of professional through June 2024. The Survey of Professional Forecasters (SPF) data are quarterly and extend through 2024:Q2. forecasters (figure 8). For example, the median SOURCE: University of Michigan Surveys of Consumers; Federal Reserve Bank of Philadelphia, SPF. forecaster in the Survey of Professional MONETARy POLICy REPORT: JULy 2024 9 Housing Services Infl ation and Market Rent Measures The price index for housing services includes rents A. Contributions to 12-month change in core explicitly paid by renters as well as implicit rents that personal consumption expenditures price index homeowners would have to pay if they were renting their homes known as owners’ equivalent rent (OER) . Monthly Percentage points This index is an important component of the price Core goods 6 index for personal consumption expenditures (PCE), Core services ex. housing composing about 15 .5 percent of the total PCE price Housing services 5 index . Housing services prices started accelerating 4 in 2021, and, as fi gure A illustrates, the contribution 3 of these prices to the 12-month change in the core PCE price index increased notably, reaching a peak 2 of 1 .4 percentage points in 2023 . In May 2024, the 1 contribution of this component stood at 1 .0 percentage + point, down from its peak but still well above the _0 0 .5 percentage point that was typical before the 1 COvID-19 pandemic . The PCE price index for housing services is derived 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 from two components of the consumer price index SOURCE: Bureau of Economic Analysis via Haver Analytics; Federal (CPI): rent of primary residence and OER .1 The rent of Reserve Board staff calculations. primary residence index measures the average rent paid by tenants . OER estimates the rent that homeowners units, they are typically smaller for continuing tenants would pay if they were renting their homes without renewing their lease than they are for new tenants .3 furnishings or utilities and is derived from rental data This lag implies that measures of rent growth for for units in the same neighborhood, with an adjustment new leases can help predict future changes in the for structure type .2 PCE price index for housing services . Over the past Because the price index for housing services few decades, private fi rms have started publishing measures average rent for all tenants—both new various “market rent” measures that track the average tenants and existing tenants—its changes are more rent for new leases by new tenants .4 For example, the subdued and tend to lag changes in rent measures for (continued on next page) new leases, described later . Because rental agreements typically last for 12 months, most renters will not see an immediate increase in their rent even if the rent for new 3 . See Ben Houck (2022), “Housing Leases in the leases increases sharply . Additionally, the Bureau of U .S . Rental Market,” Spotlight on Statistics (Washington: Labor Statistics, the agency responsible for computing Bureau of Labor Statistics, September), https://www .bls .gov/ the CPI, reports that when rent increases occur for spotlight/2022/housing-leases-in-the-u-s-rental-market/ home .htm . 4 . PCE prices for housing services differ from these market rent measures for reasons beyond the fact that market rent 1 . The sum of the weights of these two components in the measures are limited to new leases to new tenants . In addition, total CPI is 34 .4 percent, considerably higher than their weight the discrepancy arises from the methodology used for index in the total PCE price index . construction (for example, the rent measures used in the PCE 2 . The typical structure type varies signifi cantly across price index sample a given residence only once every six owner- and tenant-occupied units: Owner-occupied homes months), the representativeness of the sample, and the way in are mostly single-family units, while renter-occupied homes which the measure controls for quality adjustments . Moreover, are roughly evenly divided between single-family and market rent measures capture the “asking” prices posted by multifamily units . Constructing the OER measure involves landlords, while the rent measures used in the PCE price index reweighting the sample of rent quotes for a given area to gauge the rent that tenants actually pay . Among these factors, refl ect the relative importance of owner-occupied housing in whether all leases are used (as opposed to only new leases) that area . See slide 13 of Robert Cage (2019), “Measurement appears to be the main contributor to this discrepancy . See of Owner Occupied Housing in the U .S . Consumer Price Brian Adams, Lara Loewenstein, Hugh Montag, and Randal Index” (Washington: Bureau of Labor Statistics, November 15), verbrugge (2024), “Disentangling Rent Index Differences: https://www .bea .gov/system/files/2019-11/bea_tac_nov2019_ Data, Methods, and Scope,” American Economic Review: cage .pdf . Insights, vol . 6 (June), pp . 230–45 . 10 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS Housing Services Infl ation (continued) CoreLogic Single-Family Rent Index measures changes Figure B illustrates that, historically, the year-over- in average market rents for single-family homes . year change in market rents is an informative leading Other measures include the Zillow, Apartment List, indicator for the year-over-year change in PCE housing and RealPage indexes, which vary in terms of the type (continued) of unit they cover (single-family versus multifamily), their methodologies, and the representativeness of the multifamily apartment buildings . The Apartment List National national rental market .5 Rent Index, available beginning in 2017, measures changes in median market rents across the entire rental market for both 5 . The Zillow Observed Rent Index for single-family single-family and multifamily units . To calculate unit-level rent residences, available beginning in 2015, focuses on changes growth, all these measures, including the CoreLogic index, in asking rents for single-family units . The RealPage Rent use the repeat-rent methodology to control for differences Index, available beginning in 1996, measures changes in property characteristics among the units listed for rent in in average market rents across professionally managed different periods . B. Housing rents Monthly Percent change from year earlier PCE housing services 21 Apartment List single-family and multifamily units Zillow single-family units 18 RealPage multifamily units CoreLogic single-family detached units 15 12 9 6 3 + _0 3 6 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 NOTE: CoreLogic data extend through April 2024, Zillow data start in January 2016, and Apartment List data start in January 2018 and extend through June 2024. Zillow, CoreLogic, Apartment List, and RealPage measure market-rate rents—that is, rents for a new lease by a new tenant. PCE is personal consumption expenditures. SOURCE: Bureau of Economic Analysis, PCE, via Haver Analytics; CoreLogic, Inc.; Zillow, Inc.; Apartment List, Inc. via Haver Analytics; RealPage, Inc.; Federal Reserve Board staff calculations. MONETARy POLICy REPORT: JULy 2024 11 services prices, with the market rent measure typically contracts typically last for a year and rents for existing leading the PCE measure by one year .6 This relationship tenants take some time to catch up to the rents charged is particularly evident in the periods following the to new tenants . In particular, the rise in measures of Great Recession and the COvID-19 pandemic . For market rents, including the CoreLogic Single-Family example, PCE housing services infl ation reached a peak Rent Index and the Zillow Observed Rent Index, from of 8 .3 percent in April 2023, exactly one year after the the onset of the pandemic until now has been larger 12-month change for the CoreLogic index reached its than the corresponding increase in the PCE price peak of 13 .8 percent . index for housing services, suggesting that the PCE Since mid-2022, each of these measures of market price measure has not yet fully caught up with the rents has decelerated and returned to a growth rate current state of the rental market .8 However, as long similar to or below its average pre-pandemic pace .7 as market rents continue to increase moderately, PCE While the PCE price index for housing services also housing services infl ation should gradually decline began decelerating in mid-2023, its current rate of and eventually return to its pre-pandemic pace as well . increase remains well above the average rate seen However, signifi cant uncertainty remains regarding the in the years before the pandemic . As noted earlier, timing of this decline and whether market rent infl ation changes in the PCE price index for housing services will, in fact, remain moderate . tend to lag changes in market rents because rental 6 . Several studies use market rent measures to predict housing services infl ation . See, for instance, Marijn A . Bolhuis, Judd N .L . Cramer, and Lawrence H . Summers (2022), “The Coming Rise in Residential Infl ation,” Review of Finance, vol . 26 (September), pp . 1051–72; and Kevin J . Lansing, Luiz E . Oliveira, and Adam Hale Shapiro (2022), “Will Rising Rents Push Up Future Infl ation?” FRBSF Economic Letter 2022-03 (San Francisco: Federal Reserve Bank of San Francisco, February), https://www .frbsf .org/wp-content/ uploads/sites/4/el2022-03 .pdf . 7 . In addition, the Bureau of Labor Statistics has recently 8 . Between January 2020 and April 2024, the CoreLogic started publishing a quarterly rent index for new tenants (the Single-Family Rent Index and the Zillow Observed Rent Index New Tenant Rent Index) . While the New Tenant Rent Index have increased 32 percent and 38 percent, respectively, while is subject to revision with each release, the year-over-year PCE prices for housing services have increased 23 percent . growth of this index declined from its peak of 12 .9 percent in See Christopher D . Cotton (2024), “A Faster Convergence of the second quarter of 2022 to 0 .4 percent in the fi rst quarter Shelter Prices and Market Rent: Implications for Infl ation,” of 2024, the lowest reading since the second quarter of 2010 . Current Policy Perspectives 2024-4 (Boston: Federal Reserve See Bureau of Labor Statistics (n .d .), “New Tenant Rent Index,” Bank of Boston, June), https://www .bostonfed .org/-/media/ webpage, https://www .bls .gov/pir/new-tenant-rent .htm . Documents/Workingpapers/PDF/2024/cpp20240617 .pdf . 12 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS Forecasters, conducted by the Federal Reserve Bank of Philadelphia, continued to expect PCE price inflation to average 2 percent over the five years beginning five years from now. Inflation expectations over a shorter horizon— which tend to follow observed inflation more closely and tend to be more volatile—have moved down, on net, since the middle of 2022 to near the range seen during the decade before the pandemic. In recent months, the median value for inflation expectations over the next year as measured in the Michigan survey has been generally lower than readings 9. Inflation compensation implied by Treasury from a year earlier. Similarly, expected Inflation-Protected Securities inflation for the next year as measured in the Survey of Consumer Expectations, conducted Daily Percent by the Federal Reserve Bank of New York, has 4.0 also declined, on average, from a year earlier. 5-year 3.5 3.0 Market-based measures of longer-term 2.5 inflation compensation, which are based on 2.0 financial instruments linked to inflation such 5-to-10-year 1.5 as Treasury Inflation-Protected Securities, are 1.0 also broadly in line with readings seen in the .5 years before the pandemic and consistent with 0 PCE inflation returning to 2 percent. These measures have been little changed, on net, 2016 2017 2018 2019 2020 2021 2022 2023 2024 since the beginning of the year (figure 9). NOTE: The data are at a business-day frequency and are estimated from smoothed nominal and inflation-indexed Treasury yield curves. SOURCE: Federal Reserve Bank of New York; Federal Reserve Board The labor market remains strong staff calculations. Payroll employment gains have been strong, averaging 248,000 per month over the first five 10. Nonfarm payroll employment months of the year. Job gains slowed from the first half to the second half of last year but Monthly Thousands of jobs appear to have picked up, on net, so far this year (figure 10). Recent job gains have been 800 broad based, with over 60 percent of industries 700 expanding their employment, on net, over the 600 three months ending in May. That said, gains 500 have been particularly strong in health care 400 and in state and local governments, where 300 employment remains below the levels implied 200 by pre-pandemic trends.2 100 2. Administrative data from the Quarterly Census 2021 2022 2023 2024 of Employment and Wages (QCEW) suggest that job NOTE: The data shown are a 3-month moving average of the change in growth last year was solid, but not as strong as reported nonfarm payroll employment. SOURCE: Bureau of Labor Statistics via Haver Analytics. in the Current Employment Statistics (CES). The CES MONETARy POLICy REPORT: JULy 2024 13 The unemployment rate has edged up since the 11. Civilian unemployment rate middle of 2023 but was still at a historically Monthly Percent low level of 4.0 percent in May. Through May, the unemployment rate has remained 15 14 at or below 4 percent for over two years 13 (figure 11). Unemployment rates among most 12 11 age, educational attainment, sex, and ethnic 10 and racial groups remain near their respective 9 historical lows (figure 12). 8 7 6 Labor demand has been gradually 5 cooling . . . 4 3 Demand for labor remained strong in the 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 first half of 2024 but has continued to cool SOURCE: Bureau of Labor Statistics via Haver Analytics. gradually, on net, from its very elevated levels of early 2022. Job openings, as measured in the Job Openings and Labor Turnover Survey (JOLTS), have continued to fall from their all- time high recorded in March 2022 but are payroll data will be revised in early 2025, when the Bureau of Labor Statistics benchmarks these data to employment counts from the QCEW as part of its annual benchmarking process. 12. Unemployment rate, by race and ethnicity Monthly Percent 20 18 Black or African American 16 14 12 Hispanic or Latino 10 White 8 6 Asian 4 2 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. 14 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS still slightly above pre-pandemic levels.3 An alternative measure of job vacancies using job postings data from the large online job board Indeed also shows that while vacancies have proceeded to move gradually lower through the first half of 2024, they have remained above pre-pandemic levels.4 Consistent with the decline in job vacancies, the National Federation of Independent Business (NFIB) survey indicated that on net, in May, fewer firms planned to add workers over the next three months than was the case at the end of 2023; firms’ hiring plans reported in the NFIB survey have been trending down since the middle of 2021. The cooling in labor demand has been mostly due to reductions in firm hiring, as indicators of layoffs, such as initial claims for unemployment insurance and the rate of layoffs and discharges in the JOLTS report, have remained at historically low levels. . . . and labor supply has increased further . . . Meanwhile, the supply of labor has continued to increase on net. While labor force participation has leveled off over the past year, the U.S. population increased strongly because of high levels of immigration. The labor force participation rate (LFPR)— which measures the share of people either working or actively seeking work—increased solidly from the beginning of 2021 through the middle of 2023 but appears to have 3. Some analysts have noted that the vacancy-posting behavior of firms may have changed since 2019 in ways that lift the number of vacancies. For example, multi- establishment firms may be posting vacancies for a single job opening at several or all of its establishments if the new job allows workers to work remotely from any establishment. These multiple job postings may result in overcounting of job vacancies in establishment- level measures, such as those from JOLTS and Indeed. Alternatively, after having experienced an exceptionally strong labor market in 2022, firms may now be more willing to post vacancies for positions that they are unlikely to fill immediately. 4. Indeed job postings data are available on the company’s Hiring Lab portal at https://data.indeed.com/ #/postings. MONETARY POLICY REPORT: JULY 2024 15 flattened out at a relatively high level since 13. Labor force participation rate then. The LFPR was 62.5 percent in May, Monthly Percent a touch below its average level over the past 12 months (figure 13). Notably, the post- 67 pandemic recovery in the LFPR has differed 66 widely across demographic groups, with the 65 participation rate for women aged 25 to 54 64 reaching all-time highs in recent months and 63 the participation rate for individuals older than 55 exhibiting no signs of recovery. (The 62 box “Employment and Earnings across 61 Demographic Groups” provides further 60 details.) 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Labor supply has also been boosted in recent NOTE: Data are monthly, and values before January 2024 are estimated by Federal Reserve Board staff in order to eliminate years by relatively strong population growth discontinuities in the published history. SOURCE: Bureau of Labor Statistics via Haver Analytics. due to a notable expansion in immigration. Though official estimates by the Census Bureau show a robust increase in population growth in 2022 and 2023, recent estimates by the Congressional Budget Office indicate that actual population growth may have been considerably higher. The most recent data suggest that immigration is somewhat slower than the strong rates seen late last year.5 . . . resulting in a normalization of labor market conditions With cooling labor demand and rising labor supply, the labor market became gradually less tight over the first half of this year, although it nevertheless remains strong. The balance between demand and supply in the labor market appears similar to that during the period immediately before the pandemic. 5. A recent report from the Congressional Budget Office (CBO) estimates that immigration in 2022 and 2023 was considerably higher than in the Census Bureau’s estimates. See Congressional Budget Office (2024), The Demographic Outlook: 2024 to 2054 (Washington: CBO, January), https://www.cbo.gov/publication/59697. Recent studies have put more weight on the CBO estimates, in part because the Census Bureau is using lagged estimates of immigration from the American Community Survey, while the CBO is using more recent, high-frequency data. See Wendy Edelberg and Tara Watson (2024), “New Immigration Estimates Help Make Sense of the Pace of Employment,” Hamilton Project (Washington: Brookings Institution, March), https://www.brookings.edu/ wp-content/uploads/2024/03/20240307_Immigration Employment_Paper.pdf. 16 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS Employment and Earnings across Demographic Groups At the aggregate level, solid labor demand and Among prime-age people (aged 25 to 54), the improved labor supply, together with ongoing gains employment-to-population (EPOP) ratio for Black or in productivity and falling infl ation, have resulted in African American workers remained near its historical high rates of employment and rising real wages over peak in the fi rst half of 2024, and the gap in the EPOP the past year . This solid labor market performance has ratio between prime-age Black and white workers been broadly shared and has been especially benefi cial fell to its lowest point in almost 50 years . Similarly, for historically disadvantaged groups of workers . prime-age Hispanic or Latino workers’ EPOP ratio As a result, many of the long-standing disparities in has increased notably over the fi rst part of 2024 and employment and wages by sex, race, ethnicity, and is now more than 1 percentage point above its 2019 education have narrowed, and some gaps reached level (fi gure A, top-left panel) . That improvement has historical lows in 2023 and the fi rst half of 2024 . further reduced the EPOP ratio gap between Hispanic However, despite this narrowing, signifi cant disparities or Latino workers and white workers from already in absolute levels across groups remain . (continued) 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 2024 2019 2020 2021 2022 2023 2024 Disabilit y Monthly Percentage points 12 9 6 3 + _0 3 People with a disability 6 People without a disability 9 12 2019 2020 2021 2022 2023 2024 NOTE: Prime age is 25 to 54. All series are seasonally adjusted by the Federal Reserve Board staff. SOURCE: Bureau of Labor Statistics; U.S. Census Bureau, Current Population Survey; Federal Reserve Board staff calculations. MONETARy POLICy REPORT: JULy 2024 17 historically low levels . Although the EPOP ratio for B. Employment-to-population ratios relative to 2019 prime-age Asian workers has moved somewhat lower average, by age over the past year, it remains historically high and above its 2019 level .1 Monthly Percentage points The EPOP ratio for prime-age women has continued to increase steadily, reaching another record high in the 3 fi rst few months of 2024, whereas the EPOP ratio for + _0 prime-age men has been mostly fl at over the past year, near its level in the year before the pandemic (fi gure A, 3 Ages 55+ Ages 25 to 54 top-right panel) . As a result, the EPOP ratio gap 6 between prime-age men and women fell to a record low this year . The increase in the female EPOP ratio 9 relative to the pre-pandemic period is (almost) entirely 12 attributable to rising labor force participation, which had also been increasing briskly before the pandemic, Ages 16 to 24 15 consistent with a growing share of women with a college degree .2 Other factors, including strong labor 2019 2020 2021 2022 2023 2024 market conditions and greater availability of remote- NOTE: Data before January 2023 are estimated by Federal Reserve work options, may have also contributed to rising Board staff in order to eliminate discontinuities in the published history. prime-age female labor force participation .3 SOURCE: Bureau of Labor Statistics; U.S. Census Bureau, Current Population Survey; Federal Reserve Board staff calculations. Among prime-age persons with a disability, the EPOP ratio has surged well above its 2019 level during the average employment rate for this group .4 For the past few years (fi gure A, bottom panel) . Some of persons without a disability, the EPOP ratio is little this increase is likely due to the unique labor market changed from its 2019 level . circumstances of the past few years . With tight labor Although most groups have shown robust market conditions, employers may have been relatively employment gains over the past few years, the more likely to hire persons with a disability than in EPOP ratio for people aged 55 or older remains other times . Additionally, the rise of remote work may approximately 2 percentage points below its 2019 have enabled persons with a disability to work without level and has changed little since late 2021 (fi gure B) . the challenges of on-site work . However, some of the This shortfall is attributable to a persistent increase in increase could stem from a change in the composition the rate of retirement among this group . Most of the of this group, as the number of persons with a disability increase in retirement relative to 2019 is due to the rose following the pandemic, which may have raised continued aging of the baby-boom generation, a trend that was expected to have occurred even without the pandemic .5 However, retirements have also been (continued on next page) 1 . As monthly series have greater sampling variability for smaller groups, we do not plot EPOP ratio estimates for American Indians or Alaska Natives . 2 . For a discussion of the contribution of educational attainment to prime-age female labor force participation 4 . The increase in the number of persons with a disability before the pandemic, see Didem Tüzemen and Thao Tran may be linked to cases of long COvID, which, while (2019), “The Uneven Recovery in Prime-Age Labor Force debilitating, might not limit work as much as other types Participation,” Federal Reserve Bank of Kansas City, Economic of disabilities . As a result, an infl ux of relatively higher- Review, vol . 104 (Third Quarter), pp . 21–41, https://www . employment individuals into the disabled category could have kansascityfed .org/Economic%20Review/documents/652/2019- raised employment rates for this group even if no individual’s The%20Uneven%20Recovery%20in%20Prime-Age%20 employment changed . Labor%20Force%20Participation .pdf . 5 . For example, as baby boomers have continued to age, 3 . For a discussion on access to remote work and the median age of the population aged 55 or older increased participation rates, see Maria D . Tito (2024), “Does the from 66 in 2019 to 67 in the fi rst half of 2024, and the median Ability to Work Remotely Alter Labor Force Attachment? age of that group is expected to continue increasing into An Analysis of Female Labor Force Participation,” FEDS the future . This shift in the composition of the 55-or-older Notes (Washington: Board of Governors of the Federal population has naturally lowered the observed EPOP ratio for Reserve System, January 19), https://doi .org/10 .17016/2380- this group nearly 0 .5 percentage point per year, as EPOP ratios 7172 .3433 . are lower at older ages . 18 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS Employment and Earnings (continued) C. Median real wage growth, by group elevated above the level expected from aging alone, by the Federal Reserve Bank of Atlanta’s Wage Growth Wage quartil es Ra ce mostly for individuals aged 65 or older .6 Tracker and defl ated by the personal consumption Monthly Percent Monthly Percent While employment disparities across many expenditures price index—was consistently stronger for demographic groups are now within historically narrow workers in lower wage quartiles compared with the top 3rd quartile 1st quartile 4 3 ranges, substantial gender, racial, and ethnic gaps quartiles during the pandemic and early recovery, but 3 remain, underscoring long-standing structural factors . now all quartiles are experiencing similar growth .7 2 Currently, prime-age women are employed at a rate Strong wage growth across the income distribution 2nd quartile 2 White 10 percentage points less than men, while prime-age is refl ected in the experiences of different demographic 4th quartile 1 Nonwhite 1 Black and Hispanic workers are employed at a rate groups . Wage growth for nonwhite workers has been a + + 3 to 4 percentage points less than white workers . bit stronger than that for white workers for much of the _0 _0 Similar to employment, a continued strong labor past year (fi gure C, top-right panel) . Wages for women 1 1 market has supported strong nominal wage growth, and and men have grown essentially in tandem over the 2 as infl ation has come down, that strong nominal wage past year (fi gure C, bottom-left panel) .8 Real wage 2 3 growth has translated into higher real wage growth . growth for workers with a high school diploma or less Real wage growth has been comparatively robust for remains strong and has been rising a bit faster than for 2019 2020 2021 2022 2023 2024 2019 2020 2021 2022 2023 2024 historically disadvantaged groups . As shown in the top- workers with more education, on average, over the past S ex Educational attainme nt left panel of fi gure C, real wage growth—as measured few years (fi gure C, bottom-right panel) . (continued) Monthly Percent Monthly Percent 3 3 2 2 Women Associate’s degree High school or less 7 . To reduce noise due to sampling variation, which can 1 1 be pronounced when considering disaggregated groups’ + + wage changes, the series shown in fi gure C are the 12-month _0 _0 moving averages of the groups’ median 12-month real wage changes . Thus, by construction, these series lag the actual real Men 1 1 wage changes . Wage data extend through March 2024 only to Bachelor’s degree or more avoid complications stemming from changes in the underlying 2 2 6 . For an analysis on the increase in retirements following data source . the pandemic, see Joshua Montes, Christopher Smith, and 8 . The measure of real wage growth shown in the fi gure 2019 2020 2021 2022 2023 2024 2019 2020 2021 2022 2023 2024 Juliana Dajon (2022), “ ‘The Great Retirement Boom’: The 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 NOTE: The data extend through March 2024. Series show 12-month moving averages of the median percent change in the hourly wage of individuals Labor Force Participation,” Finance and Economics Discussion of differences in what they purchase or where they shop . observed 12 months apart, deflated by the 12-month moving average of the 12-month percent change in the personal consumption expenditures price Series 2022-081 (Washington: Board of Governors of the See Jacob Orchard (2021), “Cyclical Demand Shifts and 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 Federal Reserve System, November), https://doi .org/10 .17016/ Cost of Living Inequality,” working paper, February (revised top 25 percent are assigned to the 4th quartile. FEDS .2022 .081 . September 2022) . SOURCE: Federal Reserve Bank of Atlanta, Wage Growth Tracker; Bureau of Labor Statistics; U.S. Census Bureau, Current Population Survey. MONETARy POLICy REPORT: JULy 2024 19 C. Median real wage growth, by group Wage quartil es Ra ce Monthly Percent Monthly Percent 3rd quartile 1st quartile 4 3 3 2 2nd quartile 2 White 4th quartile 1 Nonwhite 1 + + _0 _0 1 1 2 2 3 2019 2020 2021 2022 2023 2024 2019 2020 2021 2022 2023 2024 S ex Educational attainme nt Monthly Percent Monthly Percent 3 3 2 2 Women Associate’s degree High school or less 1 1 + + _0 _0 Men 1 1 Bachelor’s degree or more 2 2 2019 2020 2021 2022 2023 2024 2019 2020 2021 2022 2023 2024 NOTE: The data extend through March 2024. 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. 20 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS A variety of labor market indicators support this assessment. The ratio of job openings to unemployment has fallen notably from its peak of about 2.0 in spring 2022 to 1.2 in May, the same as its average in 2019. Similarly, the gap between the number of total available 14. Available jobs versus available workers jobs (measured by employed workers plus job openings) and the number of available workers Monthly Millions (measured by the size of the labor force) has 175 also moved down markedly from its peak of 170 6.1 million in spring 2022 to 1.4 million in 165 May and is only a bit above its 2019 average of Available workers 160 1.2 million (figure 14). The unemployment rate 155 has continued to edge up this year and reached 150 4.0 percent in May, modestly higher than in Available jobs 145 2019. In addition, the percentage of workers 140 quitting their jobs each month, an indicator 135 of the availability of attractive job prospects, has continued to move down this year and, 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 though still elevated, is now modestly below NOTE: Available jobs are employment plus job openings as of the end of the previous month. Available workers are the labor force. Data for its pre-pandemic level. Similarly, the share employment and labor force before January 2024 are estimated by of respondents to the Conference Board Federal Reserve Board staff in order to eliminate discontinuities in the published history. Consumer Confidence Survey reporting that SOURCE: Bureau of Labor Statistics via Haver Analytics; U.S. Census Bureau; Federal Reserve Board staff calculations. jobs are plentiful has continued to move down and is somewhat lower than its level in 2019. Furthermore, the NFIB survey indicates that firms’ perceptions of labor market tightness have come down from their recent peaks and returned to their pre-pandemic range. Finally, business contacts surveyed for the Federal Reserve’s May 2024 Beige Book reported signs of a cooling labor market—including easing in hiring plans, better labor availability, and 15. Measures of change in hourly compensation modest wage growth—and, similar to 2019, Percent change from year earlier cited some difficulty finding workers in selected Atlanta Fed’s Wage Growth Tracker 10 industries or areas.6 Average hourly earnings, private sector 9 Employment cost index, private sector 8 Wage growth remains elevated but 7 has slowed 6 5 Consistent with the easing in labor market 4 tightness, nominal wage growth continued to 3 slow so far this year, though it remains above 2 its pre-pandemic pace and likely too high, 1 0 given productivity trends, to be consistent with 2 percent inflation over time (figure 15). Total 2016 2017 2018 2019 2020 2021 2022 2023 2024 hourly compensation, as measured by the NOTE: For the private-sector employment cost index, change is over the 12 months ending in the last month of each quarter; for private- sector average hourly earnings, the data are 12-month percent changes; for the Atlanta Fed’s Wage Growth Tracker, the data are shown as a 3-month moving average of the 12-month percent change and extend 6. See the May 2024 Beige Book, available on the through March 2024. Board’s website at https://www.federalreserve.gov/ SourCe: Bureau of Labor Statistics; Federal Reserve Bank of Atlanta, Wage Growth Tracker; all via Haver Analytics. monetarypolicy/beigebook202405.htm. MONETARy POLICy REPORT: JULy 2024 21 employment cost index, increased 4.1 percent over the 12 months ending in March, a noticeable slowing from the peak increase of 5.5 percent in mid-2022. Other aggregate measures of labor compensation, such as average hourly earnings (a less comprehensive measure of compensation) and the Federal Reserve Bank of Atlanta’s Wage Growth Tracker (which reports the median 12-month wage growth of individuals responding to the Current Population Survey), have also continued to slow from their recent peaks in 2022 but remain well above their pre-pandemic growth rates. Wage growth has not normalized to the same extent as the measures of labor market tightness cited earlier, suggesting that there is some persistence in the adjustment process to past shocks. With PCE prices having risen 2.6 percent over the 12 months through May, these nominal wage measures suggest that most workers saw increases in the purchasing power of their wages over the past year. Labor productivity has increased at a moderate pace with significant volatility The extent to which nominal wage gains raise firms’ costs and act as a source of inflation pressure depends importantly on the pace of 16. U.S. labor productivity productivity growth. Labor productivity in the Quarterly 2017 average = 100 business sector—the ratio of output to hours worked—has been extremely volatile since the 112 pandemic began. It increased sharply in 2020, 110 moved roughly sideways in 2021, declined 108 106 strongly in 2022, and then rebounded solidly 104 in 2023 (figure 16). Averaging through these 102 large swings, business-sector productivity has 100 increased at a moderate annual average rate of 98 1½ percent since the onset of the pandemic, in 96 line with the average rate of growth observed 94 during the previous business cycle (from the 2014 2016 2018 2020 2022 2024 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. The pace of future productivity growth is highly uncertain. It is possible that productivity growth could remain at around its current moderate pace. However, it is also possible that the rapid adoption of new technologies like artificial intelligence (AI) 22 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS and robotics, as well as the high rate of new business formation brought about by the pandemic, could boost productivity growth above that pace in coming years. Growth in gross domestic product moderated in the first quarter, but private 17. Change in real gross domestic product and gross domestic income domestic demand remained solid Percent, annual rate After expanding at a robust pace in the second Gross domestic product half of last year despite restrictive financial Gross domestic income 6 conditions, real gross domestic product (GDP) 5 decelerated to a moderate annual growth 4 rate of 1.4 percent in the first quarter of this 3 year (figure 17). The step-down was due in H1 Q1 2 large part to sizable drags from net exports and inventory investment; these categories 1 + of expenditures tend to be volatile even in _0 H2 normal times and have been even more so since 1 the pandemic. Growth in private domestic 2016 2017 2018 2019 2020 2021 2022 2023 2024 final purchases—that is, consumer spending, business fixed investment, and residential NOTE: The key identifies bars in order from left to right. SOURCE: Bureau of Economic Analysis via Haver Analytics. investment—also moderated in the first quarter but remained solid.7 Among these components of GDP, consumer spending rose strongly in the second half of last year and decelerated in the first quarter as goods spending declined while services spending continued to rise solidly. Business fixed investment increased at a moderate pace in the first quarter as a result of strength in nontransportation equipment spending and intellectual property investment, while nonresidential structures slowed after surging in 2023. Residential investment grew rapidly in the first quarter, reflecting, for the most part, increases in existing home sales and construction of single-family homes. 7. Real gross domestic income (GDI) has been notably weaker than GDP in recent years; both series measure the same economic concept, and any difference between the two figures reflects measurement error in one or both series. GDI is reported to have increased at a pace only slightly slower than GDP in the first quarter but had risen notably less than GDP over the previous three years. As a result, productivity calculated from the income side of the national accounts would be considerably weaker than the published figures over the past three years. MONETARy POLICy REPORT: JULy 2024 23 After having returned to pre-pandemic levels in late 2021, manufacturing output has been little changed, on net, since then. While motor vehicle production has continued to rebound from earlier disruptions, factory production outside of motor vehicles has drifted down somewhat. The diffusion indexes of new orders from various national and regional surveys of manufacturers remained mostly soft in June, suggesting continued modest weakness in coming months. 18. Change in real personal consumption expenditures Consumer spending growth has been Percent, annual rate resilient but eased this year 8 Consumer spending adjusted for inflation grew 7 at a solid rate of 2.7 percent in 2023 but slowed 6 in the first quarter to a moderate 1.5 percent 5 pace (figure 18). The resilience in consumer 4 spending last year in the face of high interest H1 3 rates likely reflected strong job gains and rising Q1 2 1 real wages. Indeed, real disposable personal + income increased at a robust 3.8 percent rate _0 H2 1 in 2023. In addition, last year’s spending was bolstered by households drawing down their 2016 2017 2018 2019 2020 2021 2022 2023 2024 liquid assets, such as checking accounts, and SOURCE: Bureau of Economic Analysis via Haver Analytics. relying more on credit. More recently, the easing in consumer spending growth in the first quarter was accompanied by a softening in some household spending fundamentals along with somewhat restrictive financial conditions. Disposable personal income growth moderated in the first quarter after a robust pace last year. While household finances appear healthy in the aggregate, credit card and auto loan delinquencies continued to rise in the first quarter, suggesting that a growing share of households are experiencing some financial stress. Despite the recent easing in consumer spending growth, households continue to spend more of their income than is typical. The saving rate—the difference between current income and spending, as a share of income—was 3.8 percent in the first quarter and has been well below its pre-pandemic average of over 6 percent for nine consecutive 24 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS 19. Personal saving rate quarters (figure 19). This low saving rate likely reflects in large part the effects of high wealth Monthly Percent and still-strong balance sheets of higher- 35 income households. 30 Consumer spending since the pandemic has 25 been more robust than measures of consumer 20 sentiment would suggest. The indexes of 15 consumer sentiment published by both the 10 University of Michigan and the Conference 5 Board remain well below their pre-pandemic 0 levels. Although the Michigan survey index has improved markedly since spring 2022, it 2014 2016 2018 2020 2022 2024 is further below its pre-pandemic level than SOURCE: Bureau of Economic Analysis via Haver Analytics. the Conference Board index, which puts more weight on labor market conditions (figure 20). 20. Indexes of consumer sentiment Consumer financing conditions remain 1985 average = 100 February 1966 = 100 somewhat restrictive Conference Board 145 110 Consumer financing conditions have been 125 100 somewhat restrictive, reflecting high borrowing costs and tight bank lending standards. Interest 105 90 rates for consumer credit products such as 85 80 new credit cards and auto loans edged down 65 70 in recent months but remained elevated. In the April Senior Loan Officer Opinion Survey on 45 60 Bank Lending Practices (SLOOS), conducted Michigan survey 25 50 by the Federal Reserve Board, banks reported continued tightening of lending standards 2006200820102012201420162018202020222024 for consumer loans in the first quarter, likely NOTE: The data are monthly and extend through June 2024. SOURCE: University of Michigan Surveys of Consumers; Conference reflecting increases in delinquency rates. Board. Indeed, credit card and auto loan delinquency rates—measured as the fraction of balances 21. Consumer credit flows that are at least 30 days past due—have increased from their 2021 lows and are above Billions of dollars, monthly rate the levels observed just before the pandemic. Student loans 30 Auto loans Credit cards 25 Even so, financing has been generally available 20 to support consumer spending. Consumer 15 credit expanded moderately, on net, during Q1 10 the first four months of the year, driven by 5 still-solid growth in credit card balances and + Apr. _0 modest growth in auto loans and student loans 5 (figure 21). 10 2012 2014 2016 2018 2020 2022 2024 NOTE: Credit card balances were little changed in 2011 and 2012. SOURCE: Federal Reserve Board, Statistical Release G.19, “Consumer Credit.” MONETARy POLICy REPORT: JULy 2024 25 Residential investment turned around and 22. Mortgage interest rates has increased since mid-2023 Weekly Percent After rising sharply between early 2022 and late 2023, mortgage interest rates have fallen 8 back some since last fall but, at around 7 7 percent, remain well above their pre- 6 pandemic peak in 2018 (figure 22). Following 5 the sharp rise in mortgage rates, residential investment declined steeply in 2022 and fell 4 further in the first half of last year but has 3 picked up since mid-2023. Solid income 2 growth and the declines in interest rates late last year have provided support for residential 2016 2018 2020 2022 2024 investment demand so far this year. Indeed, NOTE: The data are contract rates on 30-year, fixed-rate conventional residential investment rose sharply in the home mortgage commitments and extend through June 27, 2024. SOURCE: Freddie Mac Primary Mortgage Market Survey via Haver first quarter. Analytics. 23. Distribution of interest rates on outstanding mortgages Sales of existing homes have moved up a touch this year but remain at very low levels. Monthly Percent Relatively high mortgage interest rates and 100 house prices have reduced affordability and Below 6 percent 90 depressed homebuying sentiment. Moreover, 80 70 though new listings of existing homes have Below 5 percent 60 increased modestly this year, the supply of 50 existing homes for sale remains quite low, 40 as many homeowners are reportedly “rate 30 Below 4 percent 20 locked”—unwilling to move and take out 10 a new mortgage while mortgage rates are 0 relatively high. Many households purchased 2010 2012 2014 2016 2018 2020 2022 2024 homes or refinanced when fixed mortgage rates NOTE: The sample only includes outstanding mortgages current on were at historically low levels in 2020 and 2021, their payments. SOURCE: ICE, McDash®. and, as a result, the majority of outstanding mortgages have interest rates below 4 percent 24. New and existing home sales (figure 23). Millions, annual rate Millions, annual rate In contrast to existing home sales, sales of 1.4 6.0 new homes declined when mortgage rates first increased, but they bounced back fairly 1.2 Existing home sales 5.5 quickly and have remained around their pre- 1.0 5.0 pandemic levels. The new home market has .8 4.5 likely been supported by demand from buyers .6 4.0 who are unable to find homes in the existing home market and by homebuilder interest rate .4 3.5 New home sales incentives (figure 24). .2 3.0 200620082010 2012201420162018 202020222024 NOTE: The data are monthly. New and existing home sales include only single-family sales. SOURCE: For new home sales, U.S. Census Bureau; for existing home sales, National Association of Realtors; all via Haver Analytics. 26 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS 25. Private housing starts and permits The relative strength in new home demand encouraged builders to increase housing Monthly Millions of units, annual rate construction last year, boosting starts and Single-family starts 1.4 permits for single-family housing (figure 25). Single-family permits Multifamily starts 1.2 In recent months, though, single-family housing starts and permits have drifted 1.0 back down, likely because of high builder .8 inventories and some easing in new home .6 demand. Reflecting these demand and supply .4 factors, house price growth slowed rapidly in .2 2022 from a historically high pace and has 0 remained moderate since then (figure 26). 2008 2010 2012 2014 2016 2018 2020 2022 2024 The balance of demand and supply in the SOURCE: U.S. Census Bureau via Haver Analytics. multifamily housing market is fundamentally different from that in the single-family housing 26. Growth rate in house prices market, as it is dominated by rental units. Monthly Percent change from year earlier Sharp increases in rents in 2021 and 2022 S&P/Case-Shiller encouraged a dramatic increase in multifamily 25 CoreLogic 20 starts in those years, creating large amounts Zillow 15 of new supply. With many units still under 10 construction and weak rental growth since 5 2022, multifamily starts have been declining + _0 since last year (as shown in figure 25).8 5 10 Capital spending increased at a 15 moderate pace 20 Business investment spending rose moderately 1989 1994 1999 2004 2009 2014 2019 2024 in 2023 and in the first quarter of this NOTE: S&P/Case-Shiller data extend through April 2024. year, supported by strong sales growth and SOURCE: CoreLogic, Inc., Home Price Index; Zillow, Inc., Real Estate Data; S&P/Case-Shiller U.S. National Home Price Index. The improvements in business sentiment and 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 profit expectations—and despite high interest the note on the Contents page.) rates (figure 27). However, the sources of strength in business investment shifted 27. Change in real business fixed investment recently. Investment in structures—which Percent, annual rate had surged in early 2023 because of a boom Structures in manufacturing construction, especially 25 Equipment and intangible capital for factories that produce semiconductors or 20 electric vehicle batteries—decelerated in the 15 H2 second half of 2023 and has slowed further so 10 Q1 far this year, although the level of structures 5 + investment remains much higher than in _0 H1 5 10 8. For additional discussion, see the box “Recent 15 Housing Market Developments” in Board of Governors of the Federal Reserve System (2024), Monetary Policy 2016 2018 2020 2022 2024 Report (Washington: Board of Governors, March), NOTE: Business fixed investment is known as “private nonresidential pp. 19–21, https://www.federalreserve.gov/publications/ fixed investment” in the national income and product accounts. The key files/20240301_mprfullreport.pdf. identifies bars in order from left to right. SOURCE: Bureau of Economic Analysis via Haver Analytics. MONETARy POLICy REPORT: JULy 2024 27 previous years. Starting late last year, growth in business investment in nontransportation equipment and intellectual property stepped up, supported by gains in high-technology equipment spending and software investment. Business financing conditions are somewhat restrictive, but credit remains generally available Although businesses face somewhat restrictive financing conditions, as interest rates are still elevated, credit remains generally available to most nonfinancial corporations. Banks continued to tighten lending standards for all business loan types over the first quarter of this year, and even though business loan growth at banks increased in the first five months of the year, it stayed tepid. In contrast, issuance of corporate bonds remained strong so far this year, although well below the levels that prevailed at the beginning of the tightening cycle. For small businesses, which are more reliant on bank financing than large businesses, credit conditions remained tight but stable over the first half of this year. Surveys indicate that credit supply for small businesses tightened modestly, while interest rates on loans to small businesses were little changed, staying near the top of the range observed since 2008. In addition, while loan default rates have continued to increase, delinquency rates stabilized in the first part of the year at levels that slightly exceeded their pre-pandemic rates. Finally, loan originations have remained stable over the past year and above the range observed before the pandemic, suggesting that credit continues to be available for small businesses. Net exports were a drag on GDP growth On balance, net exports subtracted 0.7 percentage point from U.S. GDP growth in the first quarter of this year after having contributed about one-tenth to annualized GDP growth in the second half of last year. After moderate growth in the second half of 28 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS 28. Change in real imports and exports of goods last year, real imports of goods and services and services have stepped up further this year despite some deceleration in U.S. GDP growth. By contrast, Percent, annual rate real export growth has slowed significantly, Imports Exports 15 as some categories with especially strong growth in the second half of last year declined 10 Q1 this year, particularly industrial supplies and H2 5 materials (figure 28). The current account + deficit as a share of GDP widened slightly in _0 the first quarter of 2024 and remains wider H1 5 than before the pandemic. 10 Federal fiscal policy actions were roughly neutral for GDP growth last year and so 2016 2017 2018 2019 2020 2021 2022 2023 2024 far this year SOURCE: Bureau of Economic Analysis via Haver Analytics. Federal purchases grew modestly in 2023 and moved sideways in the first quarter of the year. The overall contribution of discretionary federal fiscal policy to real GDP growth appears to have been roughly neutral last year and in the first quarter of this year, as the unwinding of pandemic-related policies offset 29. Federal receipts and expenditures the boost to consumption and investment from Annual Percent of nominal GDP policies enacted after the pandemic. 32 The budget deficit and federal debt 30 remain elevated 28 26 After surging to about 15 percent of GDP in Expenditures 24 fiscal year 2020, the budget deficit declined 22 through fiscal 2022 as the imprint of the Receipts 20 pandemic faded (figure 29). The budget deficit 18 moved up to 6.3 percent of GDP in fiscal 16 2023 as net interest outlays increased, while 14 tax receipts declined from their elevated level 1997 2000 2003 2006 2009 2012 2015 2018 2021 2024 in 2022. Debt service costs have moved up NOTE: Through 2023, the receipts and expenditures data are on a sharply in recent years—as a result of higher unified-budget basis and are for fiscal years (October to September); gross domestic product (GDP) is for the 4 quarters ending in Q3. For interest rates and a higher level of debt—and 2024, receipts and expenditures are for the 12 months ending in May; GDP is the average of 2023:Q4 and 2024:Q1. are at their highest level in over two decades. SOURCE: Department of the Treasury, Financial Management Service; The primary deficit—the difference between Office of Management and Budget and Bureau of Economic Analysis via Haver Analytics. noninterest outlays and receipts—has moved down, on net, since fiscal 2020 and moved sideways in 2022 to 2023, as the effects of a decline in noninterest outlays as a share of GDP were offset by a decline in receipts as a share of GDP. As a result of the unprecedented fiscal support enacted early in the pandemic, federal debt held by the public jumped roughly 20 percentage MONETARy POLICy REPORT: JULy 2024 29 points to close to 100 percent of GDP in 30. Federal government debt and net interest outlays 2020—the highest debt-to-GDP ratio since Percent of nominal GDP Percent of nominal GDP 1947 (figure 30). The debt-to-GDP ratio has Net interest outlays moved roughly sideways since then, as upward 3.5 on federal debt 120 pressure from large primary deficits has been 3.0 100 offset by strong nominal GDP growth. 2.5 80 Most state and local government budget 2.0 60 positions remained strong . . . 1.5 40 Federal policymakers provided a historically 1.0 20 Debt held by high level of fiscal support to state and local the public .5 0 governments during the pandemic; this aid, together with robust state tax collections 1904 1924 1944 1964 1984 2004 2024 in 2021 and 2022, left the sector in a strong NOTE: The data for net interest outlays are annual, begin in 1948, and budget position overall (figure 31). Although extend through 2023. Net interest outlays are the cost of servicing the debt held by the public, offset by certain types of interest income the state tax revenues weakened in 2023 and early government receives. Federal debt held by the public equals federal debt excluding most intragovernmental debt, evaluated at the end of the this year—mainly reflecting a normalization quarter. The data for federal debt are annual from 1901 to 1951 and a of receipts from elevated levels in 2022, as 4-quarter moving average thereafter. GDP is gross domestic product. SOURCE: For GDP, Bureau of Economic Analysis via Haver well as the effects of recently enacted tax Analytics; for federal debt, Congressional Budget Office and Federal Reserve Board, Statistical Release Z.1, “Financial Accounts of the cuts in some states—taxes as a percentage United States.” of GDP remained near recent historical norms. Moreover, states’ total balances—that 31. State and local tax receipts is, including rainy day fund balances and Quarterly Percent change from year earlier previous-year surplus funds—continued to be near all-time highs. Nevertheless, budget 30 Total state taxes situations varied widely across states, with 25 some states—particularly those that depend 20 heavily on capital gains tax collections—facing 15 tighter budget conditions. At the local level, Property taxes 10 overall property tax receipts rose briskly in 5 + 2023 and continued to increase at an elevated _0 rate in the first quarter. 5 10 . . . contributing to brisk growth in employment and construction spending 2012 2014 2016 2018 2020 2022 2024 NOTE: Receipts shown are year-over-year percent changes of 4-quarter Employment in state and local governments moving averages and begin in 2012:Q4. Property taxes are primarily collected by local governments. rose strongly in 2023 and early this year and SOURCE: U.S. Census Bureau, Quarterly Summary of State and Local Government Tax Revenue. has now recovered from the drop during the pandemic, though it is still below the level implied by the pre-pandemic trend (figure 32). This surge in state and local employment reflects the waning of pandemic-related headwinds such as a big increase in retirements early in the pandemic and slower wage growth relative to that in the private sector. Similarly, real construction outlays grew at a historically high rate last year, reflecting easing bottlenecks and support from federal grants, and are now somewhat above their pre-pandemic levels. 30 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS 32. State and local government payroll employment Financial Developments Monthly Millions of jobs The expected level of the federal funds rate over the next few years is higher 20.5 since the beginning of the year 20.0 Over the late winter and early spring, the market-implied federal funds rate path moved 19.5 up, boosted by above-expectations inflation data that prompted market participants to 19.0 reassess the monetary policy restraint required to return inflation to 2 percent. The rise in 18.5 the path was partially reversed since late April amid mixed but generally softer-than- 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 expected data on real activity and inflation. SOURCE: Bureau of Labor Statistics via Haver Analytics. Since the beginning of the year, on net, the 33. Market-implied federal funds rate path market-implied federal funds rate path rose substantially (figure 33). Financial market Quarterly Percent prices currently suggest that investors expect 5.5 the federal funds rate to decline to about 4.9 percent and 4.0 percent by year-ends 2024 5.0 and 2025, respectively. Roughly consistent with 4.5 market-implied measures, respondents to the June 28, 2024 4.0 Blue Chip Financial Forecasts survey have significantly revised upward their expectations December 29, 2023 3.5 for the path of the federal funds rate, with 3.0 the average respondent in the July survey 2.5 expecting the federal funds rate to decline to 5.0 percent in the fourth quarter of 2024— 2023 2024 2025 2026 2027 2028 0.6 percentage point higher than anticipated at 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 end of last year. The implied path as of December 29, 2023, is compared with that as of June 28, 2024. The path is estimated with a spline approach, assuming a term premium of 0 basis points. The December 29, 2023, path extends Yields on U.S. nominal Treasury securities through 2027:Q4 and the June 28, 2024, path through 2028:Q2. are higher on net SOURCE: Bloomberg; Federal Reserve Board staff estimates. Consistent with the upward revision in the 34. Yields on nominal Treasury securities market-implied federal funds rate path, Daily Percent yields on shorter-term Treasury securities 2-year rose notably between mid-February and late 5-year 6 April before retracing some of the increase 10-year 5 afterward. Yields on longer-term nominal 4 Treasury securities moved similarly with yields on shorter-term nominal Treasury securities. 3 On balance, nominal Treasury yields are 2 moderately higher than at the beginning of the 1 year across the maturity spectrum (figure 34). An increase in real yields—as measured 0 by yields on Treasury Inflation-Protected 2017 2018 2019 2020 2021 2022 2023 2024 Securities—accounted for a large portion of SOURCE: Department of the Treasury via Haver Analytics. the rise in nominal Treasury yields, especially at longer maturities. MONETARy POLICy REPORT: JULy 2024 31 Yields on other long-term debt fluctuated 35. Corporate bond yields, by securities rating, and with Treasury yields municipal bond yield Yields on corporate bonds generally followed Daily Percent the movements in longer-term Treasury yields Investment-grade corporate 12 and increased since the beginning of the year High-yield corporate for both the investment- and speculative-grade 10 segments of the market (figure 35). Both yield 8 spreads on investment- and speculative-grade 6 corporate bonds over comparable-maturity 4 Treasury securities remain near the low end of their respective historical distributions 2 Municipal as corporate bond investors appeared to be 0 pricing in a generally optimistic outlook. Yields on municipal bonds remain at elevated 2017 2018 2019 2020 2021 2022 2023 2024 levels relative to rates prevailing before the NOTE: Investment-grade corporate reflects the effective yield of the ICE Bank of America Merrill Lynch (BofAML) triple-B U.S. Corporate recent tightening cycle, having increased Index (C0A4). High-yield corporate reflects the effective yield of the ICE moderately since January. Meanwhile, BofAML High Yield Index (H0A0). Municipal reflects the yield to worst of the ICE BofAML U.S. Municipal Securities Index (U0A0). spreads of municipal bond yields to yields SOURCE: ICE Data Indices, LLC, used with permission. on comparable-maturity Treasury securities were relatively little changed, on net, and are 36. Yield and spread on agency mortgage-backed securities at compressed levels relative to their historical distribution. Yields on agency mortgage- Percent Basis points backed securities (MBS)—an important influence on home mortgage interest rates— 7 250 increased since the start of the year (figure 36). 6 200 Agency MBS spreads to Treasury securities 5 remain elevated relative to pre-pandemic levels, 150 due in part to elevated interest rate volatility, 4 Spread 100 which increases the risk of holding MBS. 3 50 2 Broad equity price indexes increased 1 Yield 0 Broad equity price indexes rose substantially since the start of the year, on net, led by large 2017 2018 2019 2020 2021 2022 2023 2024 technology firms (figure 37). While equity NOTE: The data are daily. Yield shown is for the uniform mortgage-backed securities 30-year current coupon, the coupon rate at prices remained sensitive to inflation news, which new mortgage-backed securities would be priced at par, or face, equity investors appeared to be generally value for dates after May 31, 2019; for earlier dates, the yield shown is for the Fannie Mae 30-year current coupon. Spread shown is to the average sanguine about the prospect of inflation of the 5-year and 10-year nominal Treasury yields. coming down without a sharp downturn in SOURCE: Department of the Treasury; J.P. Morgan. Courtesy of J.P. Morgan Chase & Co., Copyright 2024. activity. First-quarter corporate earnings releases, which were generally solid, also supported equity valuations. Meanwhile, equity prices for small-cap firms were little changed. Equity prices for large banks increased, on net, while equity prices for regional banks declined, reflecting lingering concerns about the health of these banks related in part to the quality of their commercial real estate loans. One-month option-implied volatility on the S&P 500 32 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS 37. Equity prices index—the VIX—fluctuated somewhat, reaching its peak so far this year in early Daily December 31, 2019 = 100 April amid increased inflation concerns and geopolitical tensions, but quickly retraced and 175 ended the period little changed (figure 38). 150 Currently, the VIX stands close to its typical historical level that was observed before the 125 S&P 500 index pandemic. (For a discussion of financial 100 stability issues, see the box “Developments Related to Financial Stability.”) 75 Dow Jones bank index 50 Major asset markets functioned in an orderly manner, despite some indicators 2017 2018 2019 2020 2021 2022 2023 2024 pointing to low liquidity SOURCE: S&P Dow Jones Indices LLC via Bloomberg. (For Dow Jones Indices licensing information, see the note on the Contents page.) Functioning of the Treasury securities market has continued to be orderly. While a number 38. S&P 500 volatility of measures of Treasury market liquidity remain low by historical standards, some of Daily Percent these measures—such as on-the-run securities 90 market depth, a measure of the availability 80 of securities to transact at the best quoted 70 prices—improved modestly since January. 60 Liquidity in the equity market remained low 50 VIX compared with pre-pandemic levels, and 40 liquidity conditions deteriorated slightly since 30 the beginning of the year. The depth of the 20 S&P 500 futures market decreased a bit, and 10 Expected volatility the price impact increased slightly. Corporate 0 and municipal bond markets continued 2016 2018 2020 2022 2024 to function well, and trading conditions NOTE: The VIX is an option-implied volatility measure that represents remained stable; transaction costs in these the expected annualized variability of the S&P 500 index over the following 30 days. The expected volatility series shows a forecast of markets continued to be fairly low by historical 1-month realized volatility, using a heterogeneous autoregressive model based on 5-minute S&P 500 returns. standards. SOURCE: Cboe Volatility Index® (VIX®) via Bloomberg; Refinitiv DataScope; Federal Reserve Board staff estimates. Short-term funding market conditions remained stable Conditions in overnight money markets remained stable, with spreads of money market rates to the Federal Reserve’s administered rates roughly unchanged outside of month-end dates. Since the beginning of the year, the effective federal funds rate has stayed 7 basis points below the interest rate on reserve balances, and other unsecured overnight rates have been around similar levels with limited volatility. The Secured Overnight Financing Rate has remained 1 or 2 basis points above the offering rate on the overnight MONETARy POLICy REPORT: JULy 2024 33 Developments Related to Financial Stability This discussion reviews vulnerabilities in the U .S . A. Private nonfinancial-sector credit-to-GDP ratio fi nancial system . The framework used by the Federal Reserve Board for assessing the resilience of the U .S . Quarterly Ratio fi nancial system focuses on fi nancial vulnerabilities in four broad areas: asset valuations, business and 1.8 household debt, leverage in the fi nancial sector, and funding risks . All told, the fi nancial system remains 1.6 sound and resilient . valuations increased to levels that 1.4 were high relative to fundamentals across major asset classes, with equity prices growing faster than expected 1.2 earnings and residential property prices remaining high relative to market rents . Credit to nonfi nancial 1.0 businesses and households relative to gross domestic .8 product (GDP) continued to decline, falling to nearly a two-decade low . Most banks continued to report solid capital levels, but fair value losses on fi xed-rate assets 1982 1989 1996 2003 2010 2017 2024 remained sizable . In addition, some banks continued NOTE: The shaded bars with top caps indicate periods of business to rely signifi cantly on uninsured deposits . Hedge fund recession as defined by the National Bureau of Economic Research: January 1980 to July 1980, July 1981 to November 1982, July 1990 to leverage grew to historical highs, driven primarily by March 1991, March 2001 to November 2001, December 2007 to June borrowing by the largest hedge funds . 2009, and February 2020 to April 2020. GDP is gross domestic product. SOURCE: Federal Reserve Board, Statistical Release Z.1, “Financial valuations rose further to levels that were high Accounts of the United States”; Bureau of Economic Analysis, national relative to fundamentals across major asset classes . income and product accounts; Federal Reserve Board staff calculations. Equity prices grew faster than expected earnings, pushing the compensation for equity risk—computed as the difference between the inverse of the forward B. Nonfinancial business and household debt-to-GDP price-to-earnings ratio and expected real yields on ratios 10-year Treasury securities—to its lowest level since 2007 . Corporate bond spreads narrowed and currently Ratio Ratio stand at levels close to historical lows . Amid limited supply of homes available for sale, residential property 1.1 Household 1.0 prices remained high relative to market rents, standing 1.0 .9 near their peaks . Conditions in commercial real estate .9 (CRE) markets continued to deteriorate, with declining .8 .8 transaction prices in most segments refl ecting weak .7 .7 demand . Nominal long-term Treasury yields increased moderately since the beginning of the year and stayed .6 .6 Nonfinancial business close to their highest levels over the past decade and .5 .5 a half . .4 The balance sheets of nonfi nancial businesses and .4 .3 households remained strong . The combined debt of both sectors as a share of GDP continued to decline 1982 1989 1996 2003 2010 2017 2024 and sat close to its lowest level in two decades NOTE: The data are quarterly. The shaded bars with top caps indicate (fi gure A) . The decline is due to decreases in both periods of business recession as defined by the National Bureau of business- and household-sector debt relative to GDP Economic Research: July 1981 to November 1982, July 1990 to March 1991, March 2001 to November 2001, December 2007 to June 2009, and (fi gure B) . Furthermore, business debt continued to February 2020 to April 2020. GDP is gross domestic product. decline in real terms, and debt-servicing capacity SOURCE: Federal Reserve Board, Statistical Release Z.1, “Financial Accounts of the United States”; Bureau of Economic Analysis, national (continued on next page) income and product accounts; Federal Reserve Board staff calculations. 34 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS Developments Related to Financial Stability (continued) stayed solid for most public fi rms—in large part due to for CRE and consumer loans—could put downward strong earnings, large cash buffers, and low borrowing pressure on banks’ profi ts and their ability to build costs on existing debt . In addition, the pass-through of capital through retained earnings . Outside the banking higher interest rates into debt-servicing costs continues sector, hedge fund leverage stayed near historical highs, to be muted because the share of long-term, fi xed-rate partly due to funds’ substantial positions in the Treasury liabilities remained sizable . Corporate bond default futures basis trade . Leverage at broker-dealers continued rates have returned to their average levels, rising from to be near historically low levels, but limited capacity or their low points in 2021 but declining from their peaks willingness of broker-dealers to intermediate in Treasury in the second half of 2023, suggesting that credit markets during market stress remained a structural quality is stabilizing with pockets of stress continuing vulnerability . Life insurers’ leverage increased and stood for the riskiest borrowers . Expectations of year-ahead around its median . defaults stayed somewhat elevated relative to their Liquidity at most domestic banks remained ample, history . Household balance sheets are still sound, as with limited reliance on short-term wholesale funding . most homeowners have ample home equity cushions However, some banks’ reliance on uninsured deposits and strong credit histories . Borrowers with prime credit remained high, and bond mutual funds’ exposure to scores—for whom delinquency rates remained low and interest rate risk continued to be signifi cant . Structural stable across credit markets—correspond to more than vulnerabilities remained in other short-term funding 60 percent of all borrowers and continued to account markets . Prime and tax-exempt money market funds, as for most of household debt outstanding . well as other cash-investment vehicles and stablecoins, Regarding vulnerabilities in the fi nancial sector, most continued to be vulnerable to runs . Bond and loan banks continued to report capital levels well above funds remain susceptible to redemptions during regulatory requirements . However, fair value losses on periods of stress, with more severe pressures possible fi xed-rate assets remained sizable for some banks, while if assets become more illiquid or redemptions become parts of banks’ CRE portfolios are facing stress . Despite a unusually large . In addition, life insurers continued to moderation in deposit outfl ows, higher funding costs— rely on a higher-than-average share of nontraditional together with expected increases in loss provisions liabilities . MONETARy POLICy REPORT: JULy 2024 35 reverse repurchase agreement (ON RRP) facility, except for short-lived upward pressure around month-ends. Take-up at the ON RRP facility declined in the first quarter, reflecting an increase in the net supply of Treasury bills and the associated upward pressure on bill yields relative to the offered rate on ON RRP investments as well as relatively more attractive rates on other short-term investments such as private repurchase agreements. However, the pace of decline in take-up slowed somewhat in the second quarter, primarily because of a decline in net bill supply. (See the box “Developments in the Federal Reserve’s Balance Sheet and Money Markets” in Part 2.) Assets under management of prime and government money market funds (MMFs), the largest investors in the ON RRP facility, trended up as they continued to offer favorable yields relative to most bank deposits. Prime MMFs increased liquid asset holdings and decreased weighted average maturities to satisfy the Securities and Exchange Commission’s reform requirements that became effective in April. Several institutional prime funds announced conversions to government funds, while a handful announced closures, citing the reform’s liquidity fees starting in October as the main driver behind the decision. However, these announced conversions and closures are unlikely to materially affect the funds’ usage of the ON RRP facility, because only minor additional portfolio changes will be required for conversions and because the decline in money fund assets due to funds closing is likely too small relative to total investments in the facility. Bank credit continued to expand at a slow pace Banks’ total loan holdings grew at about a 2 percent annualized rate in the first five months of the year, modestly up from a 1.3 percent rate in the fourth quarter of 2023. The still-tepid loan growth likely reflects the effects of higher interest rates, tighter credit standards, and economic uncertainty 36 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS 39. Ratio of total commercial bank credit to nominal (figure 39). Banks in the SLOOS reported gross domestic product generally tighter standards and weaker demand over the first quarter of 2024, extending Quarterly Percent trends for standards and demand that have been reported since the middle of 2022. 75 Delinquency rates continued to climb to above 70 their longer-run average for commercial real estate and consumer loans in the first quarter 65 of 2024 but remained in ranges observed before the pandemic across most other credit 60 segments. Bank profitability picked up in the first quarter—reversing the dip in the fourth 55 quarter of 2023—mainly driven by recent rising noninterest income and reduced loan 2006 2009 2012 2015 2018 2021 2024 loss provisions. Bank profitability levels are SOURCE: Federal Reserve Board, Statistical Release H.8, “Assets and Liabilities of Commercial Banks in the United States”; Bureau of still below those that prevailed before the Economic Analysis via Haver Analytics. pandemic, reflecting rising funding costs and subdued loan demand (figure 40). 40. Profitability of bank holding companies Percent, annual rate Percent, annual rate International Developments 2.0 Return on assets 30 Foreign economic growth rose after a soft 1.5 20 patch in the second half of 2023 1.0 .5 10 After a soft patch in the second half of 2023, + + _0 _0 foreign activity appears to have improved in .5 Return on equity both advanced foreign economies (AFEs) 10 1.0 and emerging market economies (EMEs). 20 1.5 In AFEs, growth rates returned to moderate 2.0 30 levels despite the effects of restrictive monetary policy as lower inflation improved 2006 2009 2012 2015 2018 2021 2024 real household incomes. In Europe, energy- NOTE: The data are quarterly. intensive sectors continue to struggle amid SOURCE: Federal Reserve Board, Form FR Y-9C, Consolidated Financial Statements for Holding Companies. ongoing structural adjustment to past increases in energy prices following Russia’s 2022 invasion of Ukraine. In EMEs, economic growth was supported by a rebound in exports. In addition, industrial production in emerging Asia was supported by rising global demand for high-tech products, driven in part by the AI and electric vehicle sectors. China was a significant contributor to the pickup in foreign aggregate growth, boosted by both strong exports and fiscal policy support, even though household spending expanded only moderately. Notably, activity in China’s property sector remained extremely weak and house prices fell sharply, MONETARy POLICy REPORT: JULy 2024 37 prompting the authorities to introduce new 41. Consumer price inflation in foreign economies policy support measures. Monthly Percent change from year earlier Inflation abroad continued to ease but 10 remains above central bank targets in most regions 8 6 Foreign headline inflation has continued to EMEs ex. China Foreign stabilize overall since the middle of last year, 4 primarily reflecting disinflation in AFE food 2 and energy prices (figures 41 and 42). That AFEs ex. Japan + _0 said, the pace of disinflation has proved to 2 be slower than expected and uneven across countries and economic sectors. As in the 2016 2017 2018 2019 2020 2021 2022 2023 2024 U.S., the deceleration in goods prices abroad NOTE: The advanced foreign economy (AFE) aggregate is the average has generally outpaced that in services prices. 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 Inflation remains above target in Europe is the average of Argentina, Brazil, Chile, Colombia, Hong Kong, India, but has been near zero in China. In many Indonesia, Israel, Malaysia, Mexico, the Philippines, Russia, Saudi Arabia, Singapore, South Korea, Taiwan, Thailand, and Vietnam, economies, the main risks to continued weighted by shares of U.S. non-oil goods imports. The foreign aggregate is the import-weighted average of all aforementioned countries. The disinflation include both domestic factors, inflation measure is the Harmonised Index of Consumer Prices for the such as sustained wage pressures, and external euro area and the consumer price index for other economies. SOURCE: Federal Reserve Board staff calculations; Haver Analytics. geopolitical factors, such as Russia’s war against Ukraine and developments in the Middle East, which pose risks for supply chain disruptions, increased trade costs, and higher energy prices. 42. Components of foreign consumer price inflation Advanced foreign economies 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 2024:Q1 2017–19 2020–21 2022 2023:H1 2023:H2 2024:Q1 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. 38 PART 1: RECENT ECONOMIC AND FINANCIAL DEvELOPMENTS Foreign central banks cut policy rates but remain cautious Many foreign central banks have noted progress in lowering inflation and easing resource tightness and have indicated that they expect further progress. Some have begun to cut their policy rates while continuing to stress a data-dependent approach. In EMEs, several central banks began easing monetary policy late in 2023. AFE central banks began to cut rates in the second quarter. The Swiss National Bank, Sweden’s Riksbank, the Bank of Canada, and the European Central Bank all cut their policy rates amid 43. Equity indexes for selected foreign economies easing inflation. Policy rate paths implied by Weekly Week ending January 4, 2019 = 100 financial market pricing indicate that markets China expect other AFE central banks to begin Japan 200 reducing interest rates later this year. Still, U.K. Euro area 175 most foreign central bank communications have also emphasized upside risks to inflation 150 from persistent core services inflation, currency 125 depreciation, and geopolitical tensions. Japan has been a notable exception: Amid 100 persistently high Japanese inflation, the Bank 75 of Japan (BOJ) ended its negative interest rate policy and yield curve control in March. 2019 2020 2021 2022 2023 2024 NOTE: The data are weekly averages of daily data and extend through Equity prices rose even as sovereign bond June 28, 2024. yields in advanced foreign economies SOURCE: For the euro area, Dow Jones Euro Stoxx Index; for Japan, Tokyo Stock Price Index; for China, Shanghai Composite Index; for the increased U.K., FTSE 100 Index; all via Bloomberg. (For Dow Jones Indices licensing information, see the note on the Contents page.) Foreign equity indexes rose significantly across AFEs and EMEs, consistent with 44. Nominal 10-year government bond yields in selected advanced foreign economies above-expectations economic data and strong corporate earnings in many economies Weekly Percent (figure 43). Nevertheless, investors withdrew U.K. from EME-focused investment funds as higher Germany 5 advanced-economy yields weighed on their Japan 4 Canada demand for EME assets. In addition, some 3 recent elections abroad contributed to notable movements in equities and other asset prices. 2 1 AFE sovereign bond yields increased + _0 significantly in early 2024 and are up notably 1 since the start of the year in Germany, Japan, and the U.K. (figure 44). These increases 2019 2020 2021 2022 2023 2024 were driven by stronger-than-expected global NOTE: The data are weekly averages of daily benchmark yields and activity data and spillovers from higher U.S. extend through June 28, 2024. SOURCE: Bloomberg. yields. Relative to late 2023, market-implied MONETARy POLICy REPORT: JULy 2024 39 paths for policy rates now indicate a later start to easing and fewer rate cuts by many central banks. In Japan, yields were further supported by three BOJ tightening actions: raising policy 45. U.S. dollar exchange rate index rates from negative 0.1 percent to a band of 0 to 0.1 percent, discontinuing the yield curve Weekly Week ending December 27, 2019 = 100 control framework, and issuing guidance Dollar appreciation 115 pointing to a potential reduction in sovereign 110 bond purchases. 105 100 The exchange value of the dollar rose 95 notably 90 Since year-end 2023, the broad dollar index—a 85 measure of the exchange value of the dollar 80 against a trade-weighted basket of foreign 75 currencies—increased significantly, on net, 2014 2016 2018 2020 2022 2024 reflecting dollar appreciation against both NOTE: The data, which are in foreign currency units per dollar, are AFE and EME currencies (figure 45). The weekly averages of daily values of the broad dollar index and extend increase in the dollar index was consistent through June 28, 2024. As indicated by the arrow, increases in the data reflect U.S. dollar appreciation and decreases reflect U.S. dollar with a widening of interest rate differentials depreciation. SOURCE: Federal Reserve Board staff calculations; Federal Reserve between the U.S. and the rest of the world. Board, Statistical Release H.10, “Foreign Exchange Rates.” 41 P 2 art m P onetary oLicy The Federal Open Market Committee has commitment to return inflation to its 2 percent held the federal funds rate steady . . . objective. Restoring price stability is essential to achieving maximum employment and The Federal Reserve conducts monetary stable prices over the long run that benefit all policy to promote its statutory goals of Americans. maximum employment and price stability. (See the box “Monetary Policy Independence, With labor market tightness continuing to ease Transparency, and Accountability.”) Inflation gradually and inflation easing over the past has eased over the past year but has remained year, the risks to achieving the Committee’s elevated while the economy has continued employment and inflation goals have moved to expand at a solid pace. Job gains have toward better balance. The Committee remains been strong, and the unemployment rate has highly attentive to inflation risks and is acutely remained low. Against this backdrop, the aware that high inflation imposes significant Federal Open Market Committee (FOMC) hardship, especially on those least able to has maintained a restrictive stance of policy meet the higher costs of essentials, like food, at recent meetings to keep demand in line housing, and transportation. In considering with supply and reduce inflationary pressures. any adjustments to the target range for the Since its July 2023 meeting, the Committee federal funds rate, the Committee will carefully has maintained the target range for the federal assess incoming data, the evolving outlook, funds rate at 5¼ to 5½ percent, after having and the balance of risks. The Committee does raised the target range a total of 525 basis not expect it will be appropriate to reduce points starting in early 2022 (figure 46). The the target range until it has gained greater FOMC’s policy tightening actions and current confidence that inflation is moving sustainably policy stance reflect the Committee’s strong toward 2 percent. 46. 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. 42 PART 2: MONETARy POLICy Monetary Policy Independence, Transparency, and Accountability Monetary policy is carried out by the Federal monetary policy has become an international norm, Reserve in pursuit of maximum employment and price and economic research indicates that economic stability—the dual-mandate goals assigned to it by performance has tended to be better when central Congress . Congress has also given the Federal Reserve banks have such independence .2 operational independence . Under this arrangement, Because the Federal Reserve is accountable to the Federal Reserve, rather than other parts of the Congress and has been granted independence in government, makes determinations about the monetary (continued) policy actions that are most appropriate for achieving the dual-mandate goals . This arrangement allows monetary policy decisions to be insulated from short- term political infl uences . See Paul A . volcker (1982), “Panel Discussion,” in Federal There is broad support for the principles underlying Reserve’s First Monetary Policy Report for 1982, hearings before the Committee on Banking, Housing, and Urban Affairs, independent monetary policy . It is widely understood U .S . Senate, February 11 and 25, Senate Hearing 97-48, that the monetary policy actions that deliver maximum 97th Cong . (Washington: U .S . Government Printing Offi ce), employment and price stability in the longer run may quoted text on p . 28, https://fraser .stlouisfed .org/title/monetary- involve restraining measures that entail short-run policy-oversight-671/federal-reserve-s-fi rst-monetary-policy- report-1982-22312; Paul A . volcker (1987), remarks in Federal economic costs, while actions that raise output and Reserve’s Second Monetary Policy Report for 1987, hearing employment to unsustainable levels have no long-run before the Committee on Banking, Housing, and Urban real benefi ts and may lead to elevated infl ation rates . Affairs, U .S . Senate, July 23, 100th Cong . (Washington: U .S . These considerations highlight the value of monetary Government Printing Offi ce), quoted text on p . 45, https:// policy being carried out by an independent agency fraser .stlouisfed .org/title/monetary-policy-oversight-671/ federal-reserve-s-second-monetary-policy-report-1987-22373; whose decisions are based on the congressionally Alan Greenspan (1994), remarks in The Federal Reserve assigned dual mandate .1 Operational independence of Accountability Act of 1993, hearing before the Committee on Banking, Finance, and Urban Affairs, U .S . House of Representatives, October 13, 1993, 103rd Cong . (Washington: 1 . The same basic case for independence has been sketched U .S . Government Printing Offi ce), quoted text on p . 40, by successive Federal Reserve Chairs . For example, Paul https://fraser .stlouisfed .org/title/federal-reserve-accountability- volcker noted in congressional testimony in February 1982 act-1993-1154; Ben S . Bernanke (2010), “Central Bank that “Congress deliberately set us up with an insulation from Independence, Transparency, and Accountability,” speech that kind of political pressure, and that that is a trust that delivered at the Institute for Monetary and Economic Studies you have given us and that we mean to discharge,” and he International Conference, Bank of Japan, Tokyo, May 25, elaborated in July 1987: “[Not] responding to all the short- quoted text in paragraph 2, https://www .federalreserve .gov/ term political considerations that exist to produce easier newsevents/speech/bernanke20100525a .htm; Janet L . yellen money than the basic situation warrants and the long-term (2010), “Macroprudential Supervision and Monetary Policy in health of the currency and the economy warrants . . . [is] the Post-crisis World,” speech delivered at the Annual Meeting the basic justifi cation for the independence of the Federal of the National Association for Business Economics, Denver, Reserve .” Alan Greenspan testifi ed in October 1993 that Colo ., October 11, quoted text in paragraph 44, https://www . there was “an awareness that independence of the central federalreserve .gov/newsevents/speech/yellen20101011a . bank is an element in keeping infl ation down .” Ben Bernanke htm; and Jerome H . Powell (2023), “Panel on ‘Central Bank remarked in May 2010: “It is important that we maintain and Independence and the Mandate—Evolving views,’ ” speech protect . . . the ability of central banks to make monetary delivered at the Symposium on Central Bank Independence, policy decisions based on what is good for the economy Sveriges Riksbank, Stockholm, Sweden, January 10, in the longer run, independent of short-term political quoted text in paragraph 2, https://www .federalreserve . considerations .” Also in 2010, Janet yellen (who was at the gov/newsevents/speech/powell20230110a .htm . A detailed time vice Chair of the Federal Reserve Board and who later discussion of the issues involved is provided by Paul Tucker served as Federal Reserve Chair) observed: “The principle (2018), Unelected Power: The Quest for Legitimacy in Central of central bank independence in the conduct of monetary Banking and the Regulatory State (Princeton, N .J .: Princeton policy is widely accepted as vital to achieving maximum University Press) . employment and price stability .” Chair Jerome Powell likewise 2 . See, for example, Christopher Crowe and Ellen E . Meade stated in January 2023 that “the case for monetary policy (2008), “Central Bank Independence and Transparency: independence lies in the benefi ts of insulating monetary Evolution and Effectiveness,” European Journal of Political policy decisions from short-term political considerations .” Economy, vol . 24 (December), pp . 763–77 . MONETARy POLICy REPORT: JULy 2024 43 the setting of monetary policy, it is vitally important the 1980s regularly gave congressional testimony and that the Federal Reserve be transparent to Congress speeches on monetary policy . Nevertheless, important and the American people about its monetary policy aspects of transparency were missing . The FOMC actions . Transparency requires that the Federal Open in these decades did not provide, in a systematic Market Committee (FOMC) explain the reasons for and timely manner, information on its monetary its monetary policy decisions, including how these policy decisions .4 In particular, it did not follow a decisions relate to its statutory goals . This feature of regular practice of issuing, after policy meetings, an transparency underlies the FOMC’s assessment that announcement of Committee policy actions and the “transparency and accountability . . . are essential in a rationale for those actions . The situation changed democratic society .”3 starting in the mid-1990s . Refl ecting on this change, Specifi cally, monetary policy transparency consists in 2023 Chair Powell noted: “Over the past several of the process in which the Federal Reserve provides to decades we have steadily broadened our efforts to the American people and their elected representatives provide meaningful transparency about the basis for, information about the objectives and strategy of and consequences of, the decisions we make .”5 monetary policy, announces its decisions regarding the The shift to greater transparency has refl ected setting of its policy instruments, explains the reasoning not only the fact that transparency supports the behind those decisions, and provides detailed records Federal Reserve’s accountability, but also widespread of monetary policy committee meetings . The Federal acceptance that transparency can contribute to the Reserve promotes monetary policy transparency in effectiveness of monetary policy . Explanations to the multiple ways, including through testimony given general public of the FOMC’s decisions, strategy, and by Federal Reserve policymakers at congressional plans tend to enhance the effects of monetary policy hearings, speeches by the Chair and other FOMC actions on fi nancial conditions, economic activity, meeting participants on economic and policy and infl ation . For example, a numerical infl ation developments, the FOMC’s postmeeting statements, objective can be helpful in anchoring longer-run the published minutes and transcripts of each infl ation expectations, while forward guidance (which FOMC meeting, the quarterly Summary of Economic is at times provided in FOMC statements) about the Projections (SEP), the Chair’s press conferences, and federal funds rate can infl uence key longer-term interest dialogues between FOMC participants and community rates by shaping the private sector’s assessment of the representatives across the country . likely future course of the funds rate . Consequently, A strong emphasis on transparency has the FOMC has observed that clarity about monetary characterized the past 30 years of U .S . monetary policy . (continued on next page) Previously, Federal Reserve offi cials from the 1950s to 3 . See the FOMC’s Statement on Longer-Run Goals and Monetary Policy Strategy (quoted text in paragraph 1), 4 . See David E . Lindsey (2003), “A Modern History of available on the Board’s website at https://www .federalreserve . FOMC Communication: 1975–2002,” memorandum to the gov/monetarypolicy/files/fomc_longerrungoals .pdf . More Federal Open Market Committee, Board of Governors of specifi cally, paragraph 1 of this statement indicates that “the the Federal Reserve System, Division of Monetary Affairs, Committee seeks to explain its monetary policy decisions June 24, https://www .federalreserve .gov/monetarypolicy/files/ to the public as clearly as possible” and that “such clarity FOMC20030624memo01 .pdf; and Ben S . Bernanke (2013), facilitates . . . transparency and accountability, which are “A Century of US Central Banking: Goals, Frameworks, essential in a democratic society .” In the same spirit, a major Accountability,” Journal of Economic Perspectives, vol . 27 contribution to the research literature on the practice of (Fall), pp . 3–16 . monetary policy—the 1999 book Infl ation Targeting—earlier 5 . See Powell, “Panel on ‘Central Bank Independence,’ ” observed: “Transparency and communication together in box note 1 (quoted text in paragraph 4) . See also Alan enhance accountability .” See Ben S . Bernanke, Thomas S . Blinder (2002), “Through the Looking Glass: Central Laubach, Frederic S . Mishkin, and Adam S . Posen (1999), Bank Transparency,” CEPS Working Paper 86 (Princeton, Infl ation Targeting: Lessons from the International Experience N .J .: Princeton University Department of Economics, (Princeton N .J .: Princeton University Press), quoted text December), https://gceps .princeton .edu/wp-content/ on p . 296 . uploads/2017/01/86blinder .pdf . 44 PART 2: MONETARy POLICy Monetary Policy Independence (continued) policy decisions “increases the effectiveness of At the end of 2007, the FOMC began publishing, monetary policy .”6 on a quarterly basis, the SEP, which distills information Today the acceptance of the need for, and benefi ts about individual meeting participants’ economic of, monetary policy transparency is refl ected in the projections . Since then, numerous features have been large volume of material that the FOMC and the added to the SEP, including longer-run projections individual Committee participants provide about their in 2009 and federal funds rate projections in 2012 . decisions and thinking .7 A major step in the direction In 2011, Chair Bernanke started holding regular of greater transparency took place in 1994, when postmeeting press conferences . In 2019, Chair Powell announcements of policy changes began to be issued initiated the practice of holding press conferences after after FOMC meetings . By the end of the decade, these every FOMC meeting . releases had evolved into the now standard and key With regard to its strategy, in January 2012 the part of the Committee’s policy communications—a FOMC issued a Statement on Longer-Run Goals and statement released by the Committee after each Monetary Policy Strategy, or “consensus statement .” The meeting that announces the decision on the federal consensus statement has been reaffi rmed in the years funds rate target range and any other policy actions, since 2012, and it has been revised several times . From puts that decision in the context of the Committee’s its inception, the consensus statement made the price- assessment of incoming data and the economic stability component of the dual mandate numerically outlook, and gives the record of the vote on the action .8 precise by indicating that Federal Reserve policymakers Further information about Committee decisions is interpret it as corresponding to a 2 percent longer- provided via FOMC meeting minutes, released three run infl ation rate (in the personal consumption weeks after each FOMC meeting (a shorter lag than expenditures price index) . Also in the area of strategy, that prevailing until the mid-2000s) . After fi ve years, in 2018 the Federal Reserve launched the practice of transcripts of the FOMC meetings are made public . having a review of monetary policy strategy, tools, and communication practices roughly every fi ve years . The 6 . See the FOMC’s Statement on Longer-Run Goals and fi rst such framework review took place from 2019 to Monetary Policy Strategy, in box note 3 (quoted text in 2020 . An innovation of this review was the holding, paragraph 1) . 7 . For further details, see Board of Governors of the around the country, of Fed Listens events, consisting Federal Reserve System (2019), “Review of Monetary Policy of a dialogue between Federal Reserve policymakers Strategy, Tools, and Communications,” webpage, https://www . and community members on monetary policy and federalreserve .gov/monetarypolicy/review-of-monetary-policy- economic issues . The Federal Reserve has continued strategy-tools-and-communications-fed-listens-timelines .htm; and Jerome H . Powell (2024), “Opening Remarks,” speech to hold Fed Listens events between the periods of delivered at the Stanford Business, Government, and Society framework review . Forum, Stanford Graduate School of Business, Stanford, Calif ., The framework review process also included April 3, https://www .federalreserve .gov/newsevents/speech/ powell20240403a .htm . internal FOMC deliberations . These deliberations took 8 . In the past 15 years, information about the Committee’s place at Committee meetings and were detailed in balance sheet policy has been an important part of the the publicly released FOMC meeting minutes . The postmeeting statement and related FOMC statements . Federal Reserve staff memos that served as an input A detailed account of key communications on balance sheet policy that the Committee has issued in recent years into these deliberations were released publicly after the is provided in Board of Governors of the Federal Reserve completion of the 2019–20 review . The next framework System (2024), “FOMC Communications Related to Policy review is scheduled to begin later this year . Normalization,” webpage, https://www .federalreserve .gov/ monetarypolicy/policy-normalization .htm . A longer-term Along with the transparency-enhancing activities, chronology, covering developments over the past decade, documents, and statements described earlier, further is available at Board of Governors of the Federal Reserve information on monetary policy decisions is provided System (2024), “History of the FOMC’s Policy Normalization in the frequent speeches, interviews, and testimony Discussions and Communications,” webpage, https://www . federalreserve .gov/monetarypolicy/policy-normalization- given by FOMC meeting participants . discussions-communications-history .htm . MONETARy POLICy REPORT: JULy 2024 45 . . . and has continued the process of in excess of the agency debt and agency significantly reducing its holdings of MBS cap would be reinvested into Treasury Treasury and agency securities securities, consistent with the Committee’s intention to hold primarily Treasury securities The FOMC began reducing its securities in the longer run. The decision to slow the holdings in June 2022 and, since then, pace of balance sheet runoff does not have has continued to implement its plan for implications for the stance of monetary significantly reducing the size of the Federal policy and does not mean that the balance Reserve’s balance sheet in a predictable sheet will ultimately shrink by less than it manner.9 For some time, principal payments would otherwise. Rather, a slower pace of from securities held in the System Open balance sheet runoff helps facilitate a smooth Market Account (SOMA) had been reinvested transition from abundant to ample reserve only to the extent that they exceeded monthly balances and gives the Committee more time caps of $60 billion per month for Treasury to assess market conditions as the balance securities and $35 billion per month for agency sheet continues to shrink. It will also allow debt and agency mortgage-backed securities banks, and short-term funding markets more (MBS). On June 1, the Committee slowed generally, additional time to adjust to the lower the pace of decline of its securities holdings, level of reserves, thus reducing the probability consistent with its Plans for Reducing the that money markets experience undue stress Size of the Federal Reserve’s Balance Sheet. that could require an early end to runoff. Specifically, the Committee reduced the redemption cap on Treasury securities to The SOMA holdings of Treasury and agency $25 billion per month and maintained the securities have declined about $1.7 trillion redemption cap on agency debt and agency since the start of the balance sheet reduction MBS at $35 billion per month. Any proceeds and about $260 billion since February 2024 to around $6.8 trillion, a level equivalent to 9. See the May 4, 2022, press release regarding the 24 percent of U.S. nominal gross domestic Plans for Reducing the Size of the Federal Reserve’s product, down from its peak of 35 percent Balance Sheet, available on the Board’s website at https:// reached at the end of 2021 (figure 47). Also, www.federalreserve.gov/newsevents/pressreleases/ monetary20220504b.htm. since February 2024, reserve balances— 47. 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 (reserves) 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 June 19, 2024. SOURCE: Federal Reserve Board, Statistical Release H.4.1, “Factors Affecting Reserve Balances.” 46 PART 2: MONETARy POLICy the largest liability item on the Federal 2 percent objective, and, in considering any Reserve’s balance sheet—have declined about adjustments to the target range for the federal $180 billion to a level of around $3.4 trillion. funds rate, the Committee will carefully assess The smaller decline of reserve balances incoming data, the evolving outlook, and compared with the decline in SOMA holdings the balance of risks. Its assessments will take reflects decreases in nonreserve liabilities such into account a wide range of information, as balances at the overnight reverse repurchase including readings on labor market conditions, agreement facility. (See the box “Developments inflation pressures and inflation expectations, in the Federal Reserve’s Balance Sheet and and financial and international developments. Money Markets.”) The Committee has noted that it is also prepared to adjust its approach to reducing the The FOMC has stated that it intends to size of the balance sheet in light of economic maintain securities holdings at amounts and financial developments. consistent with implementing monetary policy efficiently and effectively in its ample- In addition to considering a wide range of reserves regime—that is, a regime in which an economic and financial data, the FOMC ample supply of reserves ensures that control gathers information from business contacts over the level of the federal funds rate and and other informed parties around the other short-term interest rates is exercised country, as summarized in the Beige Book. primarily through the setting of the Federal The Federal Reserve has regular arrangements Reserve’s administered rates and in which under which it hears from a broad range of active management of the supply of reserves participants in the U.S. economy about how is not required. To ensure a smooth transition monetary policy affects people’s daily lives to ample reserve balances, the FOMC slowed and livelihoods. In particular, the Federal the pace of decline of its securities holdings Reserve has continued to gather insights into in June 2024 and intends to stop reductions in these matters through the Fed Listens initiative its securities holdings when reserve balances and the Federal Reserve System’s community are somewhat above the level that the FOMC development outreach. judges to be consistent with ample reserves. Once balance sheet runoff has ceased, reserve Policymakers also routinely consult balances will likely continue to decline at prescriptions for the policy interest rate a slower pace—reflecting growth in other provided by various monetary policy rules. Federal Reserve liabilities—until the FOMC These rule prescriptions can provide useful judges that reserve balances are at an ample benchmarks for the conduct of monetary level. Thereafter, the FOMC will manage policy. However, simple rules cannot capture securities holdings as needed to maintain all of the complex considerations that go ample reserves over time. into the formation of appropriate monetary policy, and many practical considerations The FOMC will continue to monitor the make it undesirable for the FOMC to adhere implications of incoming information for strictly to the prescriptions of any specific the economic outlook and the balance rule. Nevertheless, some principles of good of risks monetary policy are embedded in these simple As already indicated, the FOMC is strongly rules. (See the box “Monetary Policy Rules in committed to returning inflation to its the Current Environment.”) MONETARy POLICy REPORT: JULy 2024 47 Developments in the Federal Reserve’s Balance Sheet and Money Markets The Federal Open Market Committee (FOMC) announced that beginning in June, the Committee continued to reduce the size of the Federal Reserve’s would slow the pace of decline of its securities System Open Market Account (SOMA) portfolio . Since holdings, consistent with its Plans for Reducing the Size the previous report, total Federal Reserve assets have of the Federal Reserve’s Balance Sheet .2 decreased $315 billion, leaving the total size of the (continued on next page) balance sheet at $7 .3 trillion, $1 .7 trillion smaller since the reduction in the size of the SOMA portfolio began dated February 29, 2024 . As a result, this discussion refers in June 2022 (fi gures A and B) .1 On May 1, the FOMC to changes in the Federal Reserve’s balance sheet since late February . 2 . See the May 4, 2022, press release regarding the Plans 1 . The last Federal Reserve Board statistical release H .4 .1 for Reducing the Size of the Federal Reserve’s Balance Sheet, (“Factors Affecting Reserve Balances”) before the publication available on the Board’s website at https://www .federalreserve . of the previous Monetary Policy Report on March 1 was gov/newsevents/pressreleases/monetary20220504b .htm . A. Balance sheet comparison Billions of dollars Memo: Change Change (since June 19, 2024 February 28, 2024 (since February Fed’s balance sheet 2024) reduction began on June 1, 2022) Assets Total securities Treasury securities 4,453 4,661 −208 −1,318 Agency debt and MBS 2,357 2,406 −49 −353 Unamortized premiums 265 274 −8 −72 Repurchase agreements 0 0 0 0 Loans and lending facilities PPPLF 3 3 0 −17 Discount window 7 2 5 6 BTFP 107 163 −56 107 Other loans and lending facilities 11 15 −4 −23 Central bank liquidity swaps 0 0 0 0 Other assets 49 44 6 7 Total assets 7,253 7,568 −315 −1,663 Liabilities Federal Reserve notes 2,301 2,282 18 70 Reserves held by depository institutions 3,366 3,541 −175 9 Reverse repurchase agreements Foreign offi cial and international accounts 389 339 50 124 Others 376 570 −194 −1,589 U.S. Treasury General Account 782 768 14 2 Other deposits 158 162 −4 −90 Other liabilities and capital −120 −94 −25 −188 Total liabilities and capital 7,253 7,568 −315 −1,663 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.” 48 PART 2: MONETARy POLICy Federal Reserve’s Balance Sheet and Money Markets (continued) B. Federal Reserve assets reserve-draining effect of balance sheet runoff was more than offset by a $1 .6 trillion decline in balances at Weekly Trillions of dollars the overnight reverse repurchase agreement (ON RRP) Other assets 13 facility . Since February 2024, usage of the ON RRP Loans 12 facility has continued to decline, albeit at a slower pace Central bank liquidity swaps 11 than that seen over the second half of 2023 . Usage Repurchase agreements 10 Agency debt and MBS of the facility has averaged around $450 billion since 9 Treasury securities 8 the end of February (fi gure C) . Reduced usage of the held outright 7 ON RRP facility largely refl ects money market mutual 6 funds shifting their portfolios toward higher-yielding 5 investments, including Treasury bills and private-market 4 3 repurchase agreements . 2 Conditions in overnight money markets remained 1 stable . The ON RRP facility continued to serve its 2019 2020 2021 2022 2023 2024 intended purpose of supporting the control of the effective federal funds rate (EFFR), and the Federal NOTE: MBS is mortgage-backed securities. The key identifies shaded areas in order from top to bottom. The data extend through June 19, 2024. Reserve’s administered rates—the interest rate on SOURCE: Federal Reserve Board, Statistical Release H.4.1, “Factors reserve balances and the ON RRP offering rate— Affecting Reserve Balances.” remained highly effective at maintaining the EFFR within the target range . The Federal Reserve’s expenses have continued to Reserves, the largest liability item on the Federal exceed its income over recent months . The Federal Reserve’s balance sheet, have declined $175 billion Reserve’s deferred asset has increased $23 billion since late February 2024 to a level of about since late February to a level of around $175 billion .4 $3 .4 trillion .3 Since the beginning of balance sheet Negative net income and the associated deferred asset runoff, reserves have been little changed because the (continued) 3 . Reserve balances consist of deposits held at the 4 . The deferred asset is equal to the cumulative shortfall of Federal Reserve Banks by depository institutions (DIs), such net income and represents the amount of future net income as commercial banks, savings banks, credit unions, thrift that will need to be realized before remittances to the Treasury institutions, and U .S . branches and agencies of foreign banks . resume . Although remittances are suspended at the time of this MONETARy POLICy REPORT: JULy 2024 49 C. Federal Reserve liabilities While the reduction in the size of the SOMA portfolio has continued as planned, amid the banking- Weekly Trillions of dollars sector developments of spring 2023, the Federal Overnight reverse repurchase (ON RRP) agreements 13 Reserve provided liquidity to help ensure the stability Deposits of depository institutions (reserves) 12 of the banking system and the ongoing provision of U.S. Treasury General Account 11 Other deposits 10 money and credit to the economy . Loans extended Capital and other liabilities 9 under the Bank Term Funding Program (BTFP)—which Federal Reserve notes 8 made longer-term funding and liquidity available to 7 eligible depository institutions to support American 6 households and businesses and ceased making 5 4 new loans as scheduled on March 11, 2024—have 3 decreased $56 billion to a level of $107 billion since 2 February 2024 .6 1 2019 2020 2021 2022 2023 2024 NOTE: “Capital and other liabilities” includes the liability for earnings remittances due to the U.S. Treasury and contributions from the U.S. Treasury. The current sum is negative on June 19, 2024, because of the deferred asset that the Federal Reserve reports. The key identifies shaded areas in order from top to bottom. The data extend through June 19, 2024. SOURCE: Federal Reserve Board, Statistical Release H.4.1, “Factors Affecting Reserve Balances.” expenses will fall over time in line with the decline in the Federal Reserve’s liabilities . do not affect the Federal Reserve’s conduct of monetary 6 . The BTFP was established under section 13(3) of the policy or its ability to meet its fi nancial obligations .5 Federal Reserve Act with the approval of the Secretary of the Treasury . The BTFP offered loans of up to one year to banks, savings associations, credit unions, and other eligible DIs report, over the past decade and a half, the Federal Reserve against collateral such as U .S . Treasury securities, U .S . agency has remitted over $1 trillion to the Treasury . securities, and U .S . agency mortgage-backed securities . For 5 . Net income is expected to turn positive again as interest more details, see Board of Governors of the Federal Reserve expenses fall, and remittances will resume once the temporary System (2024), “Bank Term Funding Program,” webpage, deferred asset falls to zero . As a result of the ongoing reduction June 11, https://www .federalreserve .gov/fi nancial-stability/ in the size of the Federal Reserve’s balance sheet, interest bank-term-funding-program .htm . 50 PART 2: MONETARy POLICy Monetary Policy Rules in the Current Environment As part of their monetary policy deliberations, reduce its holdings of Treasury securities and agency policymakers regularly consult the prescriptions debt and agency mortgage-backed securities . of a variety of simple interest rate rules without mechanically following the prescriptions of any Selected Policy Rules: Descriptions particular rule . Simple interest rate rules relate a policy interest rate, such as the federal funds rate, to a In many economic models, desirable economic small number of other economic variables—typically outcomes can be achieved over time if monetary including the current deviation of infl ation from its policy responds to changes in economic conditions target value and a measure of resource slack in in a manner that is predictable and adheres to some the economy . key design principles . In recognition of this idea, Since 2021, infl ation has run above the Federal economists have analyzed many monetary policy Open Market Committee’s (FOMC) 2 percent longer- rules, including the well-known Taylor (1993) rule, run objective, and labor market conditions have been the “balanced approach” rule, the “adjusted Taylor tight . Although infl ation remains elevated, it has eased (1993)” rule, and the “fi rst difference” rule .1 Figure A over the past year, and labor supply and demand shows these rules, along with a “balanced approach have come into better balance . Against this backdrop, (continued) the simple monetary policy rules considered in this discussion have called for levels of the policy interest 1 . The Taylor (1993) rule was introduced in John rate over 2021, 2022, and the fi rst half of 2023 that B . Taylor (1993), “Discretion versus Policy Rules in Practice,” were elevated relative to the FOMC’s target range for Carnegie-Rochester Conference Series on Public Policy, vol . 39 the federal funds rate . However, the rates prescribed (December), pp . 195–214 . The balanced-approach rule was analyzed in John B . Taylor (1999), “A Historical Analysis of by these rules for the fi rst quarter of 2024, the most Monetary Policy Rules,” in John B . Taylor, ed ., Monetary Policy recent quarter for which data are available, are close Rules (Chicago: University of Chicago Press), pp . 319–41 . The to or below the current target range for the federal adjusted Taylor (1993) rule was studied in David Reifschneider funds rate at 5¼ to 5½ percent . In support of its and John C . Williams (2000), “Three Lessons for Monetary goals of maximum employment and infl ation at the Policy in a Low-Infl ation Era,” Journal of Money, Credit and Banking, vol . 32 (November), pp . 936–66 . The fi rst-difference rate of 2 percent over the longer run, the FOMC has rule is based on a rule suggested by Athanasios Orphanides maintained the target range for the federal funds rate (2003), “Historical Monetary Policy Analysis and the Taylor at 5¼ to 5½ percent since last July while continuing to Rule,” Journal of Monetary Economics, vol . 50 (July), A. Monetary policy rules Taylor (1993) rule Rt T93 = rt LR + πt + 0.5(πt − πLR) + (ut LR − ut) Balanced-approach rule Rt BA = rt LR + πt + 0.5(πt − πLR) + 2(ut LR − ut) Balanced-approach (shortfalls) rule Rt BAS = rt LR + πt + 0.5(πt − πLR) + 2min{(ut LR − ut), 0} Adjusted Taylor (1993) rule Rt T93adj = max{Rt T93 − Zt, ELB} First-difference rule Rt FD = Rt−1 + 0.5(πt − πLR) + (ut LR − ut) − (ut L − R 4 − ut−4) Note: RtT93, RtBA, RtBAS, RtT93adj, and RtFD represent the values of the nominal federal funds rate prescribed by the Taylor (1993), balanced-approach, balanced-approach (shortfalls), adjusted Taylor (1993), and first-difference rules, respectively. Rt−1 denotes the midpoint of the target range for the federal funds rate for quarter t−1, ut is the unemployment rate in quarter t, and rtLR is the level of the neutral real federal funds rate in the longer run that is expected to be consistent with sustaining maximum employment and keeping inflation at the Federal Open Market Committee’s 2 percent longer-run objective, represented by πLR. πt denotes the realized 4-quarter price inflation for quarter t. In addition, utLR is the rate of unemployment expected in the longer run. Zt is the cumulative sum of past deviations of the federal funds rate from the prescriptions of the Taylor (1993) rule when that rule prescribes setting the federal funds rate below an effective lower bound (ELB) of 12.5 basis points. The Taylor (1993) rule and other policy rules generally respond to the deviation of real output from its full capacity level. In these equations, the output gap has been replaced with the gap between the rate of unemployment in the longer run and its actual level (using a relationship known as Okun’s law) to represent the rules in terms of the unemployment rate. The rules are implemented as responding to core 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. MONETARy POLICy REPORT: JULy 2024 51 (shortfalls)” rule, which responds to the unemployment Unlike the other simple rules featured here, the rate only when it is higher than its estimated longer- adjusted Taylor (1993) rule recognizes that the federal run level .2 All of the simple rules shown embody key funds rate cannot be reduced materially below the design principles of good monetary policy, including effective lower bound (ELB) . By contrast, the standard the requirement that the policy rate should be adjusted Taylor (1993) rule prescribed policy rates that, during by enough over time to ensure a return of infl ation to the pandemic-induced recession, were far below the central bank’s longer-run objective and to anchor zero . To make up for the cumulative shortfall in policy longer-term infl ation expectations at levels consistent accommodation following a recession during which the with that objective . federal funds rate is constrained by its ELB, the adjusted All fi ve rules feature the difference between infl ation Taylor (1993) rule prescribes delaying the return of the and the FOMC’s longer-run objective of 2 percent . The policy rate to the (positive) levels prescribed by the fi ve rules use the unemployment rate gap, measured standard Taylor (1993) rule . as the difference between an estimate of the rate of unemployment in the longer run (uLR) and the current t Policy Rules: Limitations unemployment rate; the fi rst-difference rule includes the change in the unemployment rate gap rather than As benchmarks for monetary policy, simple its level .3 All but the fi rst-difference rule include an policy rules have important limitations . One of these estimate of the neutral real interest rate in the longer limitations is that the simple policy rules mechanically run (rLR) .4 respond to only a small set of economic variables and t thus necessarily abstract from many of the factors that the FOMC considers when it assesses the appropriate setting of the policy rate . In addition, the structure of pp . 983–1022 . A review of policy rules is provided in John the economy and current economic conditions differ B . Taylor and John C . Williams (2011), “Simple and Robust in important respects from those prevailing when Rules for Monetary Policy,” in Benjamin M . Friedman and the simple policy rules were originally devised and Michael Woodford, eds ., Handbook of Monetary Economics, vol . 3B (Amsterdam: North-Holland), pp . 829–59 . The same proposed . As a result, most simple policy rules do not volume of the Handbook of Monetary Economics also take into account the ELB on interest rates, which limits discusses approaches to deriving policy rate prescriptions the extent to which the policy rate can be lowered to other than through the use of simple rules . support the economy . This constraint was particularly 2 . The balanced-approach (shortfalls) rule responds asymmetrically to unemployment rates above or below their evident during the pandemic-driven recession, when estimated longer-run value: When unemployment is above the lower bound on the policy rate motivated the that value, the policy rates are identical to those prescribed by FOMC’s other policy actions to support the economy . the balanced-approach rule, whereas when unemployment Relatedly, another limitation is that simple policy rules is below that value, policy rates do not rise because of do not explicitly take into account other important tools further declines in the unemployment rate . As a result, the prescription of the balanced-approach (shortfalls) rule has of monetary policy, such as balance sheet policies . been less restrictive than that of the balanced-approach rule Finally, simple policy rules are not forward looking since the fi rst quarter of 2022 . and do not allow for important risk-management 3 . Implementations of simple rules often use the output considerations, associated with uncertainty about gap as a measure of resource slack in the economy . The rules described in fi gure A instead use the unemployment rate gap economic relationships and the evolution of the because that gap better captures the FOMC’s statutory goal economy, that factor into FOMC decisions . to promote maximum employment . Movements in these alternative measures of resource utilization tend to be highly correlated . For more information, see the note associated with Selected Policy Rules: Prescriptions fi gure A . 4 . The neutral real interest rate in the longer run (r tLR) is Figure B shows historical prescriptions for the federal the level of the real federal funds rate that is expected to be funds rate under the fi ve simple rules considered . For consistent, in the longer run, with maximum employment each quarterly period, the fi gure reports the policy rates and stable infl ation . Like u tLR, r tLR is determined largely by prescribed by the rules, taking as given the prevailing nonmonetary factors . The fi rst-difference rule shown in fi gure A does not require an estimate of r tLR, a feature that is economic conditions and survey-based estimates of u t LR touted by proponents of such rules as providing an element of and rLR at the time . All of the rules considered called for t robustness . However, this rule has its own shortcomings . For a highly accommodative stance of monetary policy in example, research suggests that this sort of rule often results response to the pandemic-driven recession, followed by in greater volatility in employment and infl ation than what would be obtained under the Taylor (1993) and balanced- (continued on next page) approach rules . 52 PART 2: MONETARy POLICy Monetary Policy Rules (continued) B. Historical federal funds rate prescriptions from simple policy rules Percent 9 6 3 + _0 Federal funds rate 3 Taylor (1993) rule 6 Adjusted Taylor (1993) rule Balanced-approach rule 9 Balanced-approach (shortfalls) rule 12 First-difference rule 15 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 June 2024. SOURCE: Federal Reserve Bank of New York, Survey of Primary Dealers; Federal Reserve Bank of St. Louis, Federal Reserve Economic Data, DFEDTARL and DFEDTARU; Federal Reserve Board staff estimates. positive values as infl ation picked up and labor market the federal funds rate were well above the prescriptions conditions strengthened .5 In 2022 and during the fi rst observed before the pandemic, refl ecting, in large half of 2023, the prescriptions of the simple rules for part, elevated infl ation readings . Because infl ation has recently run notably below levels observed at its peak in 2022, the policy rates prescribed by these rules have now declined . The current prescriptions from these 5 . For the adjusted Taylor (1993) rule, z t—the cumulative rules are close to or below the current target range sum of past deviations of the federal funds rate from the for the federal funds rate, though higher than survey- prescriptions of the Taylor (1993) rule when that rule based estimates of the longer-run value of the federal prescribes setting the federal funds rate below an ELB of funds rate . 12 .5 basis points—is positive in the third quarter of 2020, one quarter after the prescription of the Taylor (1993) rule falls below the ELB, through to the fi rst quarter of 2022 . This discussion in the Monetary Policy Report, where z t cumulated approach is a slight adjustment from previous editions of this from the fourth quarter of 2020 . 53 P 3 art s e P ummary of conomic rojections The following material was released after the conclusion of the June 11–12, 2024, 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 June 11–12, 2024, 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 2024 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, June 2024 Percent Median1 Central tendency2 Range3 Variable Longer Longer Longer 2024 2025 2026 2024 2025 2026 2024 2025 2026 run run run Change in real GDP ..... 2.1 2.0 2.0 1.8 1.9–2.3 1.8–2.2 1.8–2.1 1.7–2.0 1.4–2.7 1.5–2.5 1.7–2.5 1.6–2.5 March projection ..... 2.1 2.0 2.0 1.8 2.0–2.4 1.9–2.3 1.8–2.1 1.7–2.0 1.3–2.7 1.7–2.5 1.7–2.5 1.6–2.5 Unemployment rate ..... 4.0 4.2 4.1 4.2 4.0–4.1 3.9–4.2 3.9–4.3 3.9–4.3 3.8–4.4 3.8–4.3 3.8–4.3 3.5–4.5 March projection ..... 4.0 4.1 4.0 4.1 3.9–4.1 3.9–4.2 3.9–4.3 3.8–4.3 3.8–4.5 3.7–4.3 3.7–4.3 3.5–4.3 PCE inflation .......... 2.6 2.3 2.0 2.0 2.5–2.9 2.2–2.4 2.0–2.1 2.0 2.5–3.0 2.2–2.5 2.0–2.3 2.0 March projection ..... 2.4 2.2 2.0 2.0 2.3–2.7 2.1–2.2 2.0–2.1 2.0 2.2–2.9 2.0–2.5 2.0–2.3 2.0 Core PCE inflation4 ..... 2.8 2.3 2.0 2.8–3.0 2.3–2.4 2.0–2.1 2.7–3.2 2.2–2.6 2.0–2.3 March projection ..... 2.6 2.2 2.0 2.5–2.8 2.1–2.3 2.0–2.1 2.4–3.0 2.0–2.6 2.0–2.3 Memo: Projected appropriate policy path Federal funds rate ....... 5.1 4.1 3.1 2.8 4.9–5.4 3.9–4.4 2.9–3.6 2.5–3.5 4.9–5.4 2.9–5.4 2.4–4.9 2.4–3.8 March projection ..... 4.6 3.9 3.1 2.6 4.6–5.1 3.4–4.1 2.6–3.4 2.5–3.1 4.4–5.4 2.6–5.4 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 specified calendar year or over the longer run. The March projections were made in conjunction with the meeting of the Federal Open Market Committee on March 19–20, 2024. One participant did not submit longer-run projections for the change in real GDP, the unemployment rate, or the federal funds rate in conjunction with the March 19–20, 2024, 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. 54 PART 3: SUMMARy OF ECONOMIC PROJECTIONS Figure 1. Medians, central tendencies, and ranges of economic projections, 2024–26 and over the longer run Percent Change in real GDP 6 Actual 5 4 3 2 1 0 −1 Median of projections Central tendency of projections −2 Range of projections −3 2019 2020 2021 2022 2023 2024 2025 2026 Longer run Percent Unemployment rate 7 6 5 4 3 2 1 2019 2020 2021 2022 2023 2024 2025 2026 Longer run Percent PCE inflation 7 6 5 4 3 2 1 2019 2020 2021 2022 2023 2024 2025 2026 Longer run Percent Core PCE inflation 7 6 5 4 3 2 1 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: JULy 2024 55 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 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. 56 PART 3: SUMMARy OF ECONOMIC PROJECTIONS Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2024–26 and over the longer run Number of participants 2024 20 June projections 18 March projections 16 14 12 10 8 6 4 2 1.0− 1.2− 1.4− 1.6− 1.8− 2.0− 2.2− 2.4− 2.6− 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 1.0− 1.2− 1.4− 1.6− 1.8− 2.0− 2.2− 2.4− 2.6− 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 1.0− 1.2− 1.4− 1.6− 1.8− 2.0− 2.2− 2.4− 2.6− 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 1.0− 1.2− 1.4− 1.6− 1.8− 2.0− 2.2− 2.4− 2.6− 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: JULy 2024 57 Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2024–26 and over the longer run Number of participants 2024 20 June projections 18 March projections 16 14 12 10 8 6 4 2 3.2− 3.4− 3.6− 3.8− 4.0− 4.2− 4.4− 3.3 3.5 3.7 3.9 4.1 4.3 4.5 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− 3.3 3.5 3.7 3.9 4.1 4.3 4.5 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− 3.3 3.5 3.7 3.9 4.1 4.3 4.5 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− 3.3 3.5 3.7 3.9 4.1 4.3 4.5 Percent range Note: Definitions of variables and other explanations are in the notes to table 1. 58 PART 3: SUMMARy OF ECONOMIC PROJECTIONS Figure 3.C. Distribution of participants’ projections for PCE inflation, 2024–26 and over the longer run Number of participants 2024 20 June projections 18 March projections 16 14 12 10 8 6 4 2 1.7− 1.9− 2.1− 2.3− 2.5− 2.7− 2.9− 1.8 2.0 2.2 2.4 2.6 2.8 3.0 Percent range Number of participants 2025 20 18 16 14 12 10 8 6 4 2 1.7− 1.9− 2.1− 2.3− 2.5− 2.7− 2.9− 1.8 2.0 2.2 2.4 2.6 2.8 3.0 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− 1.8 2.0 2.2 2.4 2.6 2.8 3.0 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− 1.8 2.0 2.2 2.4 2.6 2.8 3.0 Percent range Note: Definitions of variables and other explanations are in the notes to table 1. MONETARy POLICy REPORT: JULy 2024 59 Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2024–26 Number of participants 2024 20 June projections 18 March 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− 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 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− 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 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− 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 Percent range Note: Definitions of variables and other explanations are in the notes to table 1. 60 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, 2024–26 and over the longer run Number of participants 2024 20 June projections 18 March 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− 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 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− 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 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− 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 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− 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 Percent range Note: Definitions of variables and other explanations are in the notes to table 1. MONETARy POLICy REPORT: JULy 2024 61 Figure 4.A. Uncertainty and risks in projections of GDP growth Medianprojectionandconfidenceintervalbasedonhistoricalforecasterrors Percent Change in real GDP 6 Median of projections 70% confidence interval 5 4 3 2 1 Actual 0 −1 −2 −3 2019 2020 2021 2022 2023 2024 2025 2026 FOMCparticipants’assessmentsofuncertaintyandrisksaroundtheireconomicprojections Number of participants Number of participants Uncertainty about GDP growth Risks to GDP growth June projections June projections 20 20 March projections March 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.” 62 PART 3: SUMMARy OF ECONOMIC PROJECTIONS Figure 4.B. Uncertainty and risks in projections of the unemployment rate Medianprojectionandconfidenceintervalbasedonhistoricalforecasterrors Percent Unemployment rate Median of projections 7 70% confidence interval 6 Actual 5 4 3 2 1 2019 2020 2021 2022 2023 2024 2025 2026 FOMCparticipants’assessmentsofuncertaintyandrisksaroundtheireconomicprojections Number of participants Number of participants Uncertainty about the unemployment rate Risks to the unemployment rate June projections June projections 20 20 March projections March projections 18 18 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 Lower Broadly Higher Weighted to Broadly Weighted to similar downside balanced upside Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the average civilian unemployment rate in the fourth quarter of the year indicated. The confidence interval around the median projected values is assumed to be symmetric and is based on root mean squared errors of various private and government forecasts made over the previous 20 years; more information about these data is available in table 2. Because current conditions may differ from those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty and risks around their projections; these current assessments are summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as “broadly similar” to the average levels of the past 20 years would view the width of the confidence interval shown in the historical fan chart as largely consistent with their assessments of the uncertainty about their projections. Likewise, participants who judge the risks to their projections as “broadly balanced” would view the confidence interval around their projections as approximately symmetric. For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.” MONETARy POLICy REPORT: JULy 2024 63 Figure 4.C. Uncertainty and risks in projections of PCE inflation Medianprojectionandconfidenceintervalbasedonhistoricalforecasterrors Percent PCE inflation Median of projections 7 70% confidence interval 6 5 4 3 2 1 Actual 0 2019 2020 2021 2022 2023 2024 2025 2026 FOMCparticipants’assessmentsofuncertaintyandrisksaroundtheireconomicprojections Number of participants Number of participants Uncertainty about PCE inflation Risks to PCE inflation June projections June projections 20 20 March projections March 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 June projections June projections 20 20 March projections March 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.” 64 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 2024 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 2024 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 2024 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 2024 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: JULy 2024 65 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 2024 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 2024 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 2024 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 2024 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. 66 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 3 Actual 2 1 0 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: JULy 2024 67 Table 2. Average historical projection error ranges Percentage points Variable 2024 2025 2026 Change in real GDP1 ......... ± 1.7 ± 1.9 ± 2.2 Unemployment rate1 ......... ± 0.9 ± 1.4 ± 1.9 Total consumer prices2 ....... ± 1.0 ± 1.7 ± 1.4 Short-term interest rates3 .... ± 0.7 ± 1.9 ± 2.3 Note: Error ranges shown are measured as plus or minus the root mean squared error of projections for 2004 through 2023 that were released in the summer 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 calculat- ed using average levels, in percent, in the fourth quarter. 68 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 1 .3 to 4 .7 percent in the current year, 1 .1 to monetary policy among policymakers and can aid 4 .9 percent in the second year, and 0 .8 to 5 .2 percent public understanding of the basis for policy actions . in the third year . The corresponding 70 percent Considerable uncertainty attends these projections, confi dence intervals for overall infl ation would be 1 .0 however . The economic and statistical models and to 3 .0 percent in the current year, 0 .3 to 3 .7 percent relationships used to help produce economic forecasts in the second year, and 0 .6 to 3 .4 percent in the third are necessarily imperfect descriptions of the real world, year . Figures 4 .A through 4 .C illustrate these confi dence and the future path of the economy can be affected bounds in “fan charts” that are symmetric and centered by myriad unforeseen developments and events . Thus, on the medians of FOMC participants’ projections for in setting the stance of monetary policy, participants GDP growth, the unemployment rate, and infl ation . consider not only what appears to be the most likely However, in some instances, the risks around the economic outcome as embodied in their projections, projections may not be symmetric . In particular, the but also the range of alternative possibilities, the unemployment rate cannot be negative; furthermore, likelihood of their occurring, and the potential costs to the risks around a particular projection might be tilted the economy should they occur . to either the upside or the downside, in which case Table 2 summarizes the average historical accuracy the corresponding fan chart would be asymmetrically of a range of forecasts, including those reported in positioned around the median projection . past Monetary Policy Reports and those prepared Because current conditions may differ from those by the Federal Reserve Board’s staff in advance of that prevailed, on average, over history, participants meetings of the Federal Open Market Committee provide judgments as to whether the uncertainty (FOMC) . The projection error ranges shown in the attached to their projections of each economic variable table illustrate the considerable uncertainty associated is greater than, smaller than, or broadly similar to with economic forecasts . For example, suppose a typical levels of forecast uncertainty seen in the past participant projects that real gross domestic product 20 years, as presented in table 2 and refl ected in the (GDP) and total consumer prices will rise steadily at widths of the confi dence intervals shown in the top annual rates of, respectively, 3 percent and 2 percent . panels of fi gures 4 .A through 4 .C . Participants’ current If the uncertainty attending those projections is similar assessments of the uncertainty surrounding their to that experienced in the past and the risks around projections are summarized in the bottom-left panels the projections are broadly balanced, the numbers (continued) MONETARy POLICy REPORT: JULy 2024 69 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 uncertainty about the macroeconomic variables as fi gures 4 .A through 4 .C imply that the risks to well as additional adjustments to monetary policy that participants’ projections are balanced, participants may would be appropriate to offset the effects of shocks to judge that there is a greater risk that a given variable the economy . will be above rather than below their projections . These If at some point in the future the confi dence interval judgments are summarized in the lower-right panels of around the federal funds rate were to extend below fi gures 4 .A 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 . 71 a bbreviations AFE advanced foreign economy AI artificial intelligence BOJ Bank of Japan BTFP Bank Term Funding Program CBO Congressional Budget Office CES Current Employment Statistics COVID-19 coronavirus disease 2019 CPI consumer price index CRE commercial real estate DI depository institution EFFR effective federal funds rate ELB effective lower bound EME emerging market economy EPOP ratio employment-to-population ratio FOMC Federal Open Market Committee; also, the Committee GDI gross domestic income GDP gross domestic product JOLTS Job Openings and Labor Turnover Survey LFPR labor force participation rate MBS mortgage-backed securities MMF money market fund NFIB National Federation of Independent Business OER owners’ equivalent rent ON RRP overnight reverse repurchase agreement OPEC Organization of the Petroleum Exporting Countries PCE personal consumption expenditures QCEW Quarterly Census of Employment and Wages SEP Summary of Economic Projections SLOOS Senior Loan Officer Opinion Survey on Bank Lending Practices 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. EDT July 5, 2024 M P r onetary olicy ePort July 5, 2024 Board of Governors of the Federal Reserve System

Federal Reserve (2024, July 4). Monetary Policy Report. Monetary Policy Reports, Federal Reserve. https://whenthefedspeaks.com/doc/monetary_policy_report_20240705

@misc{wtfs_monetary_policy_report_20240705,
  author = {Federal Reserve},
  title = {Monetary Policy Report},
  year = {2024},
  month = {Jul},
  howpublished = {Monetary Policy Reports, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/monetary_policy_report_20240705},
  note = {Retrieved via When the Fed Speaks corpus}
}