Monetary Policy Report, July 5, 2019

For use at 11:00 a.m. EDT

July 5, 2019

Monetary Policy rePort

July 5, 2019

Board of Governors of the Federal Reserve System

Letter of transmittaL

B  G  

F R S

Washington, D.C., July 5, 2019

T P   S

T S   H  R

The Board of Governors is pleased to submit its Monetary Policy Report pursuant to

section 2B of the Federal Reserve Act.

Sincerely,

Jerome H. Powell, Chairman

Adopted effective January24, 2012; as amended effective January29, 2019

The Federal Open Market Committee (FOMC) is rmly committed to fullling 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 nancial uncertainty, increases the eectiveness of monetary

policy, and enhances transparency and accountability, which are essential in a democratic society.

Ination, employment, and long-term interest rates uctuate over time in response to economic and

nancial disturbances. Moreover, monetary policy actions tend to inuence economic activity and

prices with a lag. Therefore, the Committee’s policy decisions reect its longer-run goals, its medium-

term outlook, and its assessments of the balance of risks, including risks to the nancial system that

could impede the attainment of the Committee’s goals.

The ination 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 ination. The Committee rearms its

judgment that ination at the rate of 2percent, as measured by the annual change in the price

index for personal consumption expenditures, is most consistent over the longer run with the

Federal Reserve’s statutory mandate. The Committee would be concerned if ination were running

persistently above or below this objective. Communicating this symmetric ination goal clearly to the

public helps keep longer-term ination expectations rmly anchored, thereby fostering price stability

and moderate long-term interest rates and enhancing the Committee’s ability to promote maximum

employment in the face of signicant economic disturbances. The maximum level of employment

is largely determined by nonmonetary factors that aect the structure and dynamics of the labor

market.

These factors may change over time and may not be directly measurable. Consequently,

it would not be appropriate to specify a xed goal for employment; rather, the Committee’s policy

decisions must be informed by assessments of the maximum level of employment, recognizing that

such assessments are necessarily uncertain and subject to revision. The Committee considers a

wide range of indicators in making these assessments. Information about Committee participants’

estimates of the longer-run normal rates of output growth and unemployment is published four

times per year in the FOMC’s Summary of Economic Projections. For example, in the most

recent projections, the median of FOMC participants’ estimates of the longer-run normal rate of

unemployment was 4.4percent.

In setting monetary policy, the Committee seeks to mitigate deviations of ination from its

longer-run goal and deviations of employment from the Committee’s assessments of its maximum

level. These objectives are generally complementary. However, under circumstances in which the

Committee judges that the objectives are not complementary, it follows a balanced approach in

promoting them, taking into account the magnitude of the deviations and the potentially dierent

time horizons over which employment and ination are projected to return to levels judged

consistent with its mandate.

The Committee intends to rearm these principles and to make adjustments as appropriate at its

annual organizational meeting each January.

Statement on Longer-run goaLS and monetary PoLicy Strategy

Contents

note: This report reects information that was publicly available as of noon EDT on July2, 2019.

Unless otherwise stated, the time series in the gures extend through, for daily data, July1, 2019; for monthly data,

May2019; and, for quarterly data, 2019:Q1. In bar charts, except as noted, the change for a given period is measured to

its nal quarter from the nal quarter of the preceding period.

For gures 20 and 34, note that the S&P 500 Index and the Dow Jones Bank Index are products of S&P Dow Jones Indices LLC and/or its afliates

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 afliates 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 afliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data

included therein.

Summary ................................................................. 1

Economic and Financial Developments ......................................... 1

Monetary Policy

........................................................... 2

Special Topics

............................................................. 3

Part 1: Recent Economic and Financial Developments ..................... 5

Domestic Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Financial Developments

.................................................... 20

International Developments

................................................. 26

Part 2: Monetary Policy ................................................. 33

Part 3

: Summary of Economic Projections ............................... 45

Abbreviations

...........................................................49

List of Boxes

How Have Lower-Educated Workers Fared since the Great Recession? .................. 8

Developments Related to Financial Stability

..................................... 24

The Persistent Slowdown in Global Trade and Manufacturing

........................ 30

Monetary Policy Rules and Their Interactions with the Economy

...................... 37

Framework for Monetary Policy Implementation and

Normalization of the Federal Reserve’s Balance Sheet

............................ 42

summary

Economic activity increased at a solid pace

in the early part of 2019, and the labor

market has continued to strengthen. However,

ination has been running below the Federal

Open Market Committee’s (FOMC) longer-

run objective of 2percent. At its meeting in

June, the FOMC judged that current and

prospective economic conditions called for

maintaining the target range for the federal

funds rate at 2¼ to 2½percent. Nonetheless,

in light of increased uncertainties around

the economic outlook and muted ination

pressures, the Committee indicated that it will

closely monitor the implications of incoming

information for the economic outlook and will

act as appropriate to sustain the expansion,

with a strong labor market and ination near

the Committee’s symmetric 2percent objective.

Economic and Financial

Developments

The labor market. The labor market has

continued to strengthen. Over the rst ve

months of 2019, payrolls increased an average

of 165,000 per month. This rate is down

from the average pace of 223,000 in 2018,

but it is faster than what is needed to provide

jobs for new entrants into the labor force.

The unemployment rate moved down from

3.9percent in December to 3.6percent in

May; meanwhile, wage gains have remained

moderate.

Ination. Consumer price ination, as

measured by the 12-month change in the price

index for personal consumption expenditures,

moved down from a little above the FOMC’s

objective of 2percent in the middle of last year

to a rate of 1.5percent in May. The 12-month

measure of ination that excludes food and

energy items (so-called core ination), which

historically has been a better indicator than the

overall gure of where ination will be in the

future, was 1.6percent in May—down from

a rate of 2percent from a year ago. However,

these year-over-year declines mainly reect

soft readings in the monthly price data earlier

this year, which appear to reect transitory

inuences. Survey-based measures of longer-

run ination expectations are little changed,

while market-based measures of ination

compensation have declined recently to levels

close to or below the low levels seen late

lastyear.

Economic growth. In the rst quarter, real gross

domestic product (GDP) is reported to have

increased at an annual rate of 3.1percent,

bolstered by a sizable contribution from net

exports and business inventories. By contrast,

consumer spending in the rst quarter was

lackluster but appears to have picked up in

recent months. Meanwhile, following robust

gains last year, business xed investment

slowed in the rst quarter, and indicators

suggest that investment decelerated further

in the spring. All told, incoming data for the

second quarter suggest a moderation in GDP

growth—despite a pickup in consumption—

as the contributions from net exports and

inventories reverse and the impetus from

business investment wanes further.

Financial conditions. Nominal Treasury yields

moved signicantly lower over the rst half

of 2019, largely reecting investors’ concerns

about trade tensions and the global economic

outlook, as well as expectations of a more

accommodative path for the federal funds

rate than had been anticipated earlier. On net,

since the end of 2018, spreads of yields on

corporate bonds over those on comparable-

maturity Treasury securities have narrowed,

and stock prices have increased. Moreover,

loans remained widely available for most

households, and credit provided by commercial

banks continued to expand at a moderate

pace. Overall, domestic nancial conditions

for businesses and households continued to be

supportive of economic growth over the rst

half of 2019.

2 SUMMARY

Financial stability. The U.S. nancial system

continues to be substantially more resilient

than in the period leading up to the nancial

crisis. Asset valuations remain somewhat

elevated in a number of markets, with

investors continuing to exhibit high appetite

for risk. Borrowing by businesses continues to

outpace GDP, with the most rapid increases

in debt concentrated among the riskiest rms.

In contrast, household borrowing remains

modest relative to income, and the debt

growth is concentrated among borrowers with

high credit scores. Key nancial institutions,

including the largest banks, continue to be well

capitalized and hold large quantities of liquid

assets. Funding risks in the nancial system

remain low relative to the period leading up to

the crisis.

International developments. After slowing in

2018, foreign economic growth appears to

have stabilized in the rst half of the year,

but at a restrained pace. While aggregate

activity in the advanced foreign economies

(AFEs) increased slowly from the soft patch

of late last year, activity in emerging Asia

generally struggled to gain a solid footing, and

several Latin American economies continued

to underperform. Growth abroad has been

held down in part by a slowdown in the

manufacturing sector against the backdrop

of softening global trade ows. With both

ination and activity in the AFEs remaining

subdued, AFE central banks took a more

accommodative policy stance.

Despite

trade tensions that weighed onnancial

markets, nancial conditions abroad generally

eased in the rst half of the year, supported

by accommodative communications by major

central banks. On balance, global equity prices

moved higher, sovereign yields in major foreign

economies declined, and sovereign bond

spreads in the emerging market economies

were little changed. Market-implied paths of

policy rates in AFEs generally declined.

Monetary Policy

Interest rate policy. In its meetings over the

rst half of 2019, the FOMC judged that the

stance of monetary policy was appropriate

to achieve the Committee’s objectives

of maximum employment and 2percent

ination, and it decided to maintain the target

range for the federal funds rate at 2¼ to

2½percent. These decisions reected incoming

information showing the solid fundamentals

of the U.S. economy supporting continued

growth and strong employment. For most of

this period, the Committee indicated that,

in light of global economic and nancial

developments and muted ination pressures, it

would be patient as it determines what future

adjustments to the target range for the federal

funds rate may be appropriate. At the June

FOMC meeting, however, the Committee

noted that uncertainties about the global and

domestic economic outlook had increased. In

light of these uncertainties and muted ination

pressures, the Committee indicated that it will

act as appropriate to sustain the expansion,

with a strong labor market and ination near

its symmetric 2percent objective.

In the most recent Summary of Economic

Projections, which was compiled at the time

of the June FOMC meeting, participants

generally revised down their individual

assessments of the appropriate path for

monetary policy relative to their assessments

at the time of the March meeting. (The

participants’ most recent economic

projections—released after the June FOMC

meeting—are discussed in more detail in Part3

of this report.) However, as the Committee

has continued to emphasize, the timing and

size of future adjustments to the target range

for the federal funds rate will depend on

the Committee’s assessment of realized and

expected economic conditions relative to its

objectives of maximum employment and

2percent ination.

MONETARY POLICY REPORT: JULY 2019 3

Balance sheet policy. Over the rst half of the

year, the FOMC made two announcements

regarding the longer-run policy implementa-

tion framework and its plans for normalizing

the balance sheet. Following its January

meeting, the Committee noted that it decided

to continue to implement monetary policy

in a regime with ample reserves. Consistent

with that decision, in March, the Committee

announced plans to conclude the reduction

of its aggregate securities holdings at the end

of September2019. (See the box “Framework

for Monetary Policy Implementation and

Normalization of the Federal Reserve’s

Balance Sheet” in Part 2.) The Committee is

prepared to adjust the details for completing

balance sheet normalization in light of

economic and nancial developments,

consistent with its policy objectives of

maximum employment and price stability.

Special Topics

Labor market conditions for lower- and

higher-educated workers. The labor market

has strengthened since the end of the last

recession, but the pattern of recovery has

varied across workers with dierent levels

of education. Workers with a college degree

or more experienced a swifter recovery in

employment, while those with a high school

degree or less had a much more delayed

recovery in employment. This pattern is

typical of business cycles, and recent research

sheds light on mechanisms that may lead to

dierences in the timing of recovery for lower-

and higher-educated workers. (See the box

“How Have Lower-Educated Workers Fared

since the Great Recession?” in Part 1.)

Global manufacturing and trade. Growth in

global trade and manufacturing has

weakened signicantly since 2017 even as

growth in services has held up. Trade policy

developments appear to have lowered trade

ows to some extent, while uncertainty

surrounding trade policy may be weighing

on investment. The global tech cycle and a

general slowdown in global demand, reecting

idiosyncratic factors specic to dierent

economies, have also likely weighed on

demand for traded goods. (See the box “The

Persistent Slowdown in Global Trade and

Manufacturing” in Part 1.)

Monetary policy rules. Monetary policy rules

are mathematical formulas that relate a policy

interest rate, such as the federal funds rate, to

a small number of other economic variables,

typically including the deviation of ination

from its target value and a measure of resource

slack in the economy. The prescriptions for

the policy interest rate from these rules can

provide helpful guidance for the FOMC.

This discussion presents ve policy rules—

illustrative of the many rules that have received

attention in the research literature—and

provides examples of two ways to compute

historical prescriptions of policy rules. (See

the box “Monetary Policy Rules and Their

Interactions with the Economy” in Part 2.)

Monetary policy implementation and balance

sheet normalization. Since the beginning of

this year, the FOMC has made important

decisions regarding its framework for

monetary policy implementation and the

process of normalizing the size of its balance

sheet. The Committee decided to continue to

implement monetary policy in a regime with

an ample supply of reserves and announced

that it intends to conclude the reduction

of its aggregate securities holdings in the

System Open Market Account at the end of

September2019. (See the box “Framework

for Monetary Policy Implementation and

Normalization of the Federal Reserve’s

Balance Sheet” in Part 2.)

Part 1

reCent eConomiC and finanCiaL deveLoPments

Total nonfarm (3-month)

100

150

200

250

300

Thousands of jobs

2019201720152013

1. Net change in payroll employment

Monthly

Total nonfarm (12-month)

OTE: The data are 3-month and 12-month moving averages.

OURCE: Bureau of Labor Statistics via Haver Analytics.

Domestic Developments

The labor market strengthened further

during the rst half of 2019 but at a

slower pace than last year . . .

Labor market conditions have continued

to strengthen so far this year but at a pace

slower than last year. Total nonfarm payroll

employment has averaged gains of about

165,000 per month over the rst ve months

of 2019, according to the Bureau of Labor

Statistics. This pace is slower than the average

monthly gains in 2018, but it is faster than

what is needed to provide jobs for net new

entrants into the labor force as the working-

age population grows (gure1).

In April and May of this year, the

unemployment rate stood at 3.6percent,

¼percentage point lower than its level in

December2018 and its lowest level since 1969

(gure2). In addition, the unemployment rate

is ½percentage point below the median of

Federal Open Market Committee (FOMC)

participants’ estimates of its longer-run

normal level.

In May, the labor force participation rate

(LFPR) for individuals 16 and over—that is,

the share of the population either working or

actively seeking work—was 62.8percent, and

it has changed little, on net, since late 2013.

The aging of the population is an important

contributor to an underlying downward trend

Owing to population growth, roughly 115,000 to

145,000 jobs per month need to be created, on average, to

keep the unemployment rate constant with an unchanged

labor force participation rate. However, the participation

rate fell over the December to May period, reducing

the number of job gains that would have been needed.

There is considerable uncertainty around these estimates,

as the dierence between monthly payroll gains and

employment changes from the Current Population Survey

(the source of the unemployment and participation rates)

can be quite volatile over short periods.

See the most recent economic projections that were

released after the June FOMC meeting in

Part 3

of this report.

6 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

in the overall participation rate. In particular,

members of the baby-boom cohort are

increasingly moving into their retirement years,

ages when labor force participation typically

falls. The at trajectory in the overall LFPR

is therefore consistent with strengthening

labor market conditions; indeed, the LFPR

for prime-age individuals (between 25 and

54years old), which is much less sensitive

to the eects of population aging, has been

rising over the past few years (gure3).

Combining both the unemployment rate and

the LFPR, the employment-to-population

ratio (EPOP) for individuals 16 and over—the

share of that segment of the population who

are working—was 60.6percent in May and

has been gradually increasing throughout the

expansion. The increase has been considerably

larger for those with at least some college

education than for those with no more than

a high school diploma. (The box “How Have

Lower-Educated Workers Fared since the

Employment-to-population ratio

Prime-age labor force

participation rate

Percent

20192016201320102007

3. Labor force participation rates and

employment-to-population ratio

Percent

Labor force participation rate

NOTE: The data are monthly. The prime-age labor force participation

rate is a percentage of the population aged 25 to 54. The labor force

participation rate and the employment-to-population ratio are

percentages of the population aged 16 and over.

OURCE: Bureau of Labor Statistics via Haver Analytics.

U-5

U-4

U-6

Percent

2019201720152013201120092007

2. Measures of labor underutilization

Monthly

Unemployment rate

OTE: Unemployment rate measures total unemployed as a percentage of the labor force. U-4 measures total unemployed plus discouraged workers,

as a percentage of the labor force plus discouraged workers. Discouraged workers are a subset of marginally attached workers who are not currently

looking for work because they believe no jobs are available for them. U-5 measures total unemployed plus all marginally attached to the labor force, as a

percentage of the labor force plus persons marginally attached to the labor force. Marginally attached workers are not in the labor force, want and are

available for work, and have looked for a job in the past 12 months. U-6 measures total unemployed plus all marginally attached workers plus total

employed part time for economic reasons, as a percentage of the labor force plus all marginally attached workers. The shaded bar indicates a period of

business recession as dened by the National Bureau of Economic Research.

OURCE: Bureau of Labor Statistics via Haver Analytics.

MONETARY POLICY REPORT: JULY 2019 7

Great Recession?” discusses movements in the

EPOP by educational level over the current

expansion.)

Other indicators are also consistent with

strong labor market conditions. As reported in

the Job Openings and Labor Turnover Survey

(JOLTS), the average of the private-sector job

openings rate over the rst four months of the

year was near its historical high, consistent

with surveys indicating that businesses see

vacancies as hard to ll. Similarly, the quits

rate in the JOLTS is also near the top of its

historical range, an indication that workers

are being bid away from their current jobs or

have become more condent that they can

successfully switch jobs if they wish to. This

interpretation accords well with surveys of

consumers that indicate households perceive

jobs as plentiful. The JOLTS layo rate and

the number of people ling initial claims for

unemployment insurance benets have both

remained quite low.

. . . and unemployment rates have fallen

for all major demographic groups over

the past several years

Dierences in unemployment rates across

ethnic and racial groups have narrowed in

recent years, as they typically do during

economic expansions, after having widened

during the recession (gure4). However,

unemployment rates for African Americans

and Hispanics remain substantially above

those for whites and Asians. The rise in LFPRs

for prime-age individuals over the past few

years has also been apparent in each of these

racial and ethnic groups (gure5).

Increases in labor compensation have

picked up but remain moderate by

historical standards . . .

Despite strong labor market conditions, the

available indicators generally suggest that

increases in hourly labor compensation have

remained moderate. The employment cost

index—a measure of both wages and the

cost to employers of providing benets—was

8 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

The relative underperformance of employment and

wage growth for lower-educated workers has been

a characteristic of all business cycles since at least

1980. This pattern is likely due, at least in part, to a

long-term downward trend in the demand for lower-

educated workers that is unrelated to the business cycle

and caused, perhaps, by changes in technology and

globalization.

To focus on the effects of business cycles

distinct from these longer-term trends, we examine

business cycles at the state level to estimate the

of Atlanta’s Wage Growth Tracker (WGT), which calculates

the median, year-over-year percent change in nominal

wages of individuals employed 12 months apart. The WGT

measure shows that median wage growth for workers with

a high school degree was lower than median wage growth

for workers with a college degree through 2015. Since then,

median wage growth for both groups has been similar.

3. The EPOP for lower-educated, prime-age individuals has

been trending lower for men since 1950 and for women since

2000, largely reecting the trends in those groups’ labor force

participation rates (LFPRs). For an overview of factors affecting

the LFPRs of prime-age individuals, see the box “The Labor

Force Participation Rate for Prime-Age Individuals” in Board

of Governors of the Federal Reserve System (2018), Monetary

Policy Report (Washington: Board of Governors, July),

pp.8–10, https://www.federalreserve.gov/monetarypolicy/

les/20180713_mprfullreport.pdf; and Congressional Budget

Ofce (2018), Factors Affecting the Labor Force Participation

of People Ages 25 to 54 (Washington: CBO, February, https://

www.cbo.gov/system/les/115th-congress-2017-2018/

reports/53452-lfpr.pdf).

The U.S. labor market has been strengthening since

the end of the Great Recession. Over this period, the

unemployment rate has fallen roughly 6percentage

points, and the employment-to-population ratio (EPOP)

for individuals between 25 and 54years old (prime

age) has increased about 4¼percentage points. How-

ever, labor market outcomes during the expansion have

been quite different for lower- and higher-educated

individuals. The EPOP for prime-age college graduates

declined about 2.5percentage points during the

recession, but it began a steady and sustained recovery

in 2010 and was nearly at its pre-recession level by

2018 (left panel of gure A). In contrast, the EPOP

for prime-age individuals with a high school degree

or less fell much more sharply during the recession

and lingered near its trough for several years before

it began to recover in 2014.

As of 2018, the EPOP

for lower-educated workers remained well below

its pre-recession level. In addition, real (or ination-

adjusted) hourly wages for lower-educated workers

fell more over the 2007–13 period than real wages for

college graduates (right panel of gure A). Real wages

subsequently picked up for both groups, but cumulative

real wage gains for lower-educated workers have only

recently caught up, in percentage terms, to those for

workers with college degrees.

1. The analysis excludes those with some college education

but not a four-year degree. The labor market experience of

such individuals, though, is similar to that of individuals with a

high school degree or less.

2. Another measure of wage growth using the same Current

Population Survey data source is the Federal Reserve Bank

How Have Lower-Educated Workers Fared since the Great Recession?

(continued)

A. Prime-age employment and wages by education, 2007–18

Real wages Employment-to-population ratios

Sta calculations using the Current Population Survey. SOURCE:

Percent change from 2007AnnualPercentage point change from 2007Annual

High school or less

201820162014201220102008

College plus

High school or less

201820162014201220102008

College plus

MONETARY POLICY REPORT: JULY 2019 9

rate.

Indeed, real wages for lower-educated workers

rose faster over the past few years as the labor market

tightened, and total wage growth for those workers

since 2007 is now close to wage growth for more-

educated workers (as shown in the right panel of

gure A). Hotchkiss and Moore (2018) nd that

exposure to a low-unemployment economy is

particularly benecial for individuals who entered the

labor market during periods of high unemployment and

would otherwise face persistently worse labor market

outcomes.

Thus, periods of low unemployment may

particularly improve labor market outcomes of lower-

educated workers.

7. See Stephanie R. Aaronson, Mary C. Daly, William

Wascher, and David W. Wilcox (2019), “Okun Revisited: Who

Benets Most from a Strong Economy?” paper presented at

the Brookings Papers on Economic Activity Conference, held

at the Brookings Institution, Washington, March7–8, https://

www.brookings.edu/wp-content/uploads/2019/03/Okun-

Revisited-Who-Benets-Most-From-a-Strong-Economy.pdf.

8. See Julie L. Hotchkiss and Robert E. Moore (2018),

“Some Like It Hot: Assessing Longer-Term Labor Market

Benets from a High-Pressure Economy,” Andrew Young

School of Policy Studies Research Paper Series 18-01 (Atlanta:

Georgia State University, February), https://aysps.gsu.edu/

les/2018/03/18-01-HotchkissMoore-SomelikeitHot.pdf.

“typical” cyclical decline and recovery of employment

for both education groups.

The typical state-level business cycle shows a starkly

different evolution of employment for lower-educated

workers compared with that for workers with college

degrees. Typically in a recession, the EPOP declines

immediately for both groups, but the decline is deeper

and longer lasting for those with a high school degree

or less (gure B).

Once that group’s EPOP begins a

sustained recovery, though, it increases at a more rapid

pace than the EPOP for those with a college degree.

These results indicate that the EPOP for lower-educated

workers may not fully recover for at least eight years,

on average, following the end of a recession.

The differences in labor market outcomes over

the business cycle for different education groups may

in part be due to employers changing their hiring

standards. Some research shows that employers raise

skill requirements for new hires in a recession and then

gradually lower skill requirements as the labor market

recovers.

Other research suggests that when high-

skilled workers lose their jobs during recessions, they

take jobs that require fewer skills, making these jobs

less likely to be lled by low-skilled individuals.

This

pattern could at least in part explain the differences in

labor market outcomes for lower- and higher-educated

workers since the most recent recession.

As the unemployment rate falls and employers relax

their hiring standards, more opportunities are likely to

open for lower-educated workers. Aaronson and others

(2019) present some evidence that disadvantaged

groups, such as nonwhite individuals and those with

less education, benet more from further improvement

in the labor market relative to more advantaged groups

when the unemployment rate is below its natural

4. For ease of interpretation, we dene a typical recession

as a state experiencing a temporary 1percent decline in state

output growth in a given year, returning to normal growth

in the following year. To get the estimated effect of a larger

or smaller recession, simply multiply the estimates by the

specied decline in output growth.

5. See Brad Hershbein and Lisa B. Kahn (2018), “Do

Recessions Accelerate Routine-Biased Technological Change?

Evidence from Vacancy Postings,” American Economic Review,

vol. 108 (July), pp. 1737–72; and Alicia Sasser Modestino,

Daniel Shoag, and Joshua Ballance (2016), “Downskilling:

Changes in Employer Skill Requirements over the Business

Cycle,” Labour Economics, vol. 41 (August), pp. 333–47.

6. See Regis Barnichon and Yanos Zylberberg (2019),

“Underemployment and the Trickle-Down of Unemployment,”

American Economic Journal: Macroeconomics, vol. 11 (April),

pp. 40–78.

High school or less 1.0

Percentage points

B. Response of EPOP by education to state-level

recessions

College plus

0246810

Year relative to shock

N: EPOP refers to the employment-to-population ratio. Shaded

areas are 95 percent condence bands. Data extend from 1978 through

2018.

S: Tomaz Cajner, John Coglianese, and Joshua Montes (2019),

“Cyclical Dynamics of the U.S. Labor Market,” unpublished paper,

Board of Governors of the Federal Reserve System, Division of

Research and Statistics, March.

10 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

2¾percent higher in March of 2019 relative to

its year-earlier level (gure6). Compensation

per hour in the business sector—a broad-

based but volatile measure of wages, salaries,

and benets—rose 1½percent over the four

quarters ending in 2019:Q1, less than the

annual increases over the preceding couple of

years. Among measures that do not account

for benets, average hourly earnings rose

3.1percent in May relative to 12 months

earlier, a slightly faster rate of increase

than during the same period of a year ago.

According to the Federal Reserve Bank of

Atlanta, the median 12-month wage growth

of individuals reporting to the Current

Population Survey increased about 3¾percent

in May, near the upper portion of its range

over the past couple of years.

3. The Atlanta Fed’s measure diers from others in

that it measures the wage growth only of workers who

were employed both in the current survey month and

12months earlier.

Black or African American

Asian

Hispanic or Latino

Percent

2019201720152013201120092007

4. Unemployment rate by race and ethnicity

Monthly

White

OTE

:Unemployment rate measures total unemployed as a percentage of the labor force. Persons whose ethnicity is identied as Hispanic or Latino

may be of any race. The shaded bar indicates a period of business recession as dened by the National Bureau of Economic Research.

OURCE

: Bureau of Labor Statistics via Haver Analytics.

Black or African American

Asian

Hispanic or Latino

Percent

2019201720152013201120092007

5. Prime-age labor force participation rate by race and

ethnicity

Monthly

White

OTE: The prime-age labor force participation rate is a percentage of

the population aged 25 to 54. Persons whose ethnicity is identied as

Hispanic or Latino may be of any race. The data are seasonally adjusted

by Board sta and are 3-month moving averages. The shaded bar

indicates a period of business recession as dened by the National

Bureau of Economic Research.

OURCE: Bureau of Labor Statistics via Haver Analytics.

MONETARY POLICY REPORT: JULY 2019 11

. . . and likely have been restrained by

slow growth in labor productivity over

much of the expansion

These moderate rates of hourly compensation

gains likely reect the osetting inuences of

a strengthening labor market and productivity

growth that has been weak through much

of the expansion. From 2008 to 2017, labor

productivity increased a little more than

1percent per year, on average, well below

the average pace from 1996 to 2007 of nearly

3percent and also below the average gain

in the 1974–95 period (gure7). Although

considerable debate remains about the reasons

for the slowdown in productivity growth

over this period, the weakness may be partly

attributable to the sharp pullback in capital

investment during the most recent recession

and the relatively slow recovery that followed.

More recently, however, labor productivity

rose 1¾percent in 2018 and picked up

further in the rst quarter of 2019.

While it

is uncertain whether this faster rate of growth

will persist, a sustained pickup in productivity

growth, as well as additional labor market

strengthening, would support stronger gains in

labor compensation.

Price ination has dipped below

2percent this year

Consumer price ination has moved down

below the FOMC’s objective of 2percent this

year.

As measured by the 12-month change

in the price index for personal consumption

expenditures (PCE), ination is estimated to

have been 1.5percent in May after being at or

4. In the rst quarter, labor productivity surged

3½percent at an annual rate, bringing the four-quarter

change to 2½percent, reecting a strong pickup in

business-sector output and unusual weakness in hours

relative to measured gains in payroll employment. This

weakness is attributable to a steep decline in a volatile

component of hours that is not directly measured in the

Bureau of Labor Statistics’ establishment survey.

5. The increases in taris on imported goods last year

likely provided only a small boost to ination in 2018 and

in the rst half of this year.

Percent, annual rate

7. Change in business-sector output per hour

1948–

1974–

1996–

2000

2001–

2008–

2018 2019

OTE

: Changes are measured from Q4 of the year immediately

preceding the period through Q4 of the nal year of the period except

2019 changes, which are calculated from 2018:Q1 to 2019:Q1.

OURCE

: Bureau of Labor Statistics via Haver Analytics.

Employment

cost index,

private sector

Atlanta Fed’s

Wage Growth Tracker

Average hourly earnings,

private sector

Percent change from year earlier

201920172015201320112009200720052003

6. Measures of change in hourly compensation

Compensation per hour,

business sector

OTE: Business-sector compensation is on a 4-quarter percent change

basis. For the private-sector employment cost index, change is over the

12 months ending in the last month of each quarter; for private-sector

average hourly earnings, the data are 12-month percent changes and

begin in March 2007; for the Atlanta Fed’s Wage Growth Tracker, the

data are shown as a 3-month moving average of the 12-month percent

change.

OURCE: Bureau of Labor Statistics; Federal Reserve Bank of Atlanta,

Wage Growth Tracker; all via Haver Analytics.

12 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

above 2percent for much of 2018 (gure8).

Core PCE ination—which excludes consumer

food and energy prices that are often quite

volatile, and which therefore typically provides

a better indication than the total measure of

where overall ination will be in the future—

also moved lower in recent months and is

estimated to have been 1.6percent over the

12 months ending in May. The slowing in

core ination to date reects particularly low

readings in the rst three months of the year

that appear due to idiosyncratic price declines

in a number of specic categories such as

apparel, used cars, and banking services and

portfolio management services. Indeed, in

April and May, core ination accelerated,

posting larger average monthly gains than in

the rst quarter.

The trimmed mean PCE price index,

produced by the Federal Reserve Bank of

Dallas, provides an alternative way to purge

ination of transitory inuences, and it is less

sensitive than the core index to idiosyncratic

price movements such as those noted earlier.

The 12-month change in this measure was

2percent in May.

Oil prices rebounded through the spring

but have moved down recently . . .

After dropping sharply late last year, the

Brent price of crude oil moved up to almost

$75per barrel in mid-April, partly reecting

declines in production in Iran and Venezuela

and voluntary supply cuts by other OPEC

members and partner countries (gure9).

More recently, however, prices have fallen back

to around $65 per barrel because of concerns

about global growth. The changes in oil prices

have contributed to similar movements in

retail gasoline prices, which rose through early

spring but have also fallen back recently.

6. The trimmed mean index excludes whichever prices

showed the largest increases or decreases in a given

month. Note that, since 1995, changes in the trimmed

mean index have averaged about 0.3percentage point

above core PCE ination and 0.2percentage point above

total PCE ination.

Brent spot price

100

110

120

130

Dollars per barrel

2014 2015 2016 2017 2018 2019

9. Spot and futures prices for crude oil

Weekly

24-month-ahead

futures contracts

OTE: The data are weekly averages of daily data. The weekly data

begin on Thursdays and extend through July 1, 2019.

OURCE: ICE Brent Futures via Bloomberg.

Excluding food

and energy

Trimmed mean

1.0

1.5

2.0

2.5

3.0

12-month percent change

20192018201720162015201420132012

8. Change in the price index for personal consumption

expenditures

Monthly

Total

SOURCE: For trimmed mean, Federal Reserve Bank of Dallas; for all

else, Bureau of Economic Analysis; all via Haver Analytics.

MONETARY POLICY REPORT: JULY 2019 13

. . . and prices of imports other than

energy fell

Nonfuel import prices, before accounting

for the eects of taris on the price of

imported goods, have continued to decline

from their mid-2018 peak, responding to

dollar appreciation, lower foreign ination,

and declines in non-oil commodity prices

(gure10).

In particular, prices of industrial

metals have fallen in recent months, partly on

concerns about weak global demand.

Survey-based measures of ination

expectations have been stable . . .

Expectations of ination likely inuence actual

ination by aecting wage- and price-setting

decisions. Survey-based measures of ination

expectations at medium- and longer-term

horizons have remained generally stable over

the past year. In the Survey of Professional

Forecasters, conducted by the Federal

Reserve Bank of Philadelphia, the median

expectation for the annual rate of increase in

the PCE price index over the next 10years

has been very close to 2percent for the past

several years (gure11). In the University

of Michigan Surveys of Consumers, the

median value for ination expectations over

the next 5 to 10years has uctuated around

2½percent since the end of 2016, though this

level is about ¼percentage point lower than

had prevailed through 2014. In the Survey

of Consumer Expectations, conducted by

the Federal Reserve Bank of New York, the

median of respondents’ expected ination

rate three years hence has uctuated between

2½percent and 3percent over the past

veyears.

. . . while market-based measures of

ination compensation have come down

since the rst half of 2018

Ination expectations can also be gauged

by market-based measures of ination

7. Published import price indexes exclude taris.

However, taris add to the prices that purchasers of

imports actually pay.

Nonfuel import prices

100

102

January 2014 = 100

100

110

120

201920182017201620152014

10. Nonfuel import prices and industrial metals indexes

January 2014 = 100

Industrial metals

OTE: The data for nonfuel import prices are monthly. The data for

industrial metals are a monthly average of daily data and extend through

June 28, 2019.

OURCE: For nonfuel import prices, Bureau of Labor Statistics; for

industrial metals, S&P GSCI Industrial Metals Spot Index via Haver

Analytics.

Michigan survey expectations

for next 5 to 10 years

Percent

20192017201520132011200920072005

SPF expectations

for next 10 years

11. Median ination expectations

NOTE: The Michigan survey data are monthly and extend through

June 2019. The SPF data for ination expectations for personal

consumption expenditures are quarterly and extend from 2007:Q1

through 2019:Q2.

SOURCE: University of Michigan Surveys of Consumers; Federal

Reserve Bank of Philadelphia, Survey of Professional Forecasters (SPF).

14 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

compensation. However, the inference

is not straightforward, because market-

based measures can be importantly aected

by changes in premiums that provide

compensation for bearing ination and

liquidity risks. Measures of longer-term

ination compensation—derived either from

dierences between yields on nominal Treasury

securities and those on comparable-maturity

Treasury Ination-Protected Securities

(TIPS) or from ination swaps—tend to fall

when markets are volatile because of the

incorporation of liquidity risks. Such declines

occurred around the turn of the year and

again in May and June, when market volatility

picked up again. Despite the uctuations this

year, these measures of ination compensation

remain notably below levels that prevailed in

the summer of 2018 (gure12).

The TIPS-

based measure of 5-to-10-year-forward

ination compensation and the analogous

measure from ination swaps are now about

1¾percent and 2percent, respectively, with

both measures below their respective ranges

that prevailed for most of the 10years before

the start of the notable declines in mid-2014.

Real gross domestic product growth was

strong in the rst quarter, but there are

recent signs of slowing

Real gross domestic product (GDP) rose at an

annual rate of 3percent in 2018 (gure13).

In the rst quarter, real GDP again moved

up at an annual rate of around 3percent.

8. Ination compensation implied by the TIPS

breakeven ination rate is based on the dierence, at

comparable maturities, between yields on nominal

Treasury securities and yields on TIPS, which are indexed

to the total consumer price index (CPI). Ination swaps

are contracts in which one party makes payments of

certain xed nominal amounts in exchange for cash ows

that are indexed to cumulative CPI ination over some

horizon. Ination compensation derived from ination

swaps typically exceeds TIPS-based compensation, but

week-to-week movements in the two measures are highly

correlated.

9. As these measures are based on the CPI ination

index, one should probably subtract about ¼percentage

point—the average dierential with PCE ination

and CPI ination over the past two decades—to infer

ination compensation on a PCE price basis.

Percent, annual rate

20192018201720162015201420132012

13. Change in real gross domestic product and gross

domestic income

OURCE: Bureau of Economic Analysis via Haver Analytics.

Gross domestic product

Gross domestic income

Private domestic nal purchases

Ination swaps

1.0

1.5

2.0

2.5

3.0

3.5

Percent

20192017201520132011

12. 5-to-10-year-forward ination compensation

Weekly

TIPS breakeven rates

OTE

:The data are weekly averages of daily data and extend through

June 28, 2019. TIPS is Treasury Ination-Protected Securities.

OURCE

: Federal Reserve Bank of New York; Barclays; Federal Reserve

Board sta estimates.

MONETARY POLICY REPORT: JULY 2019 15

However, there are indications that growth will

moderate in the second quarter.

Net exports

and business inventories provided a sizable

boost to rst-quarter GDP growth, but their

contributions appear to have reversed in the

months following. Notably, private domestic

nal purchases—that is, nal purchases by

households and businesses, which tend to

provide a better indication of future GDP

growth than most other components of overall

spending—posted only a modest increase in

the rst quarter. The slowing that occurred

in consumer spending appears to have been

temporary, but the slowing in business xed

investment appears to be more persistent.

Manufacturing output fell in the rst quarter,

and it moved down further in April before

posting a small gain in May. Although lower

production levels of motor vehicles and

aircraft were important contributors to the

weakness, the recent declines in manufacturing

were broad based.

Nevertheless, the economic

expansion continues to be abetted by steady

job gains, increases in household wealth,

expansionary scal policy, and still-supportive

domestic nancial conditions, including

moderate borrowing costs and easy access to

credit for many households and businesses.

Growth in business xed investment has

softened after strong gains in 2018

Investment spending by businesses rose

rapidly in 2018 but appears to have decelerated

sharply this year. In the rst quarter, growth

slowed to an annual rate of 4½percent, while

new orders for nondefense capital goods,

excluding the volatile aircraft category, have

declined modestly, on balance, in recent

months (gure14). In addition, forward-

10. It is worth noting that gross domestic income

(GDI) has been notably weaker than GDP. GDI is

reported to have risen only 1.7percent in the rst quarter

relative to the same period of a year ago, 1½percentage

points less than measured GDP growth. GDP and GDI

measure the same economic concept, and any dierence

between the two gures reects measurement error.

11. Recently, a large aircraft manufacturer slowed

its production and temporarily halted deliveries of

an aircraft model. This production slowdown lowers

manufacturing output and generates a small drag on real

GDP growth in the rst half of the year.

Percent, annual rate

20192018201720162015201420132012

14. Change in real private nonresidential xed

investment

SOURCE: Bureau of Economic Analysis via Haver Analytics.

Structures

Equipment and intangible capital

16 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

looking indicators of business spending such

as capital spending plans have deteriorated

amid downbeat business sentiment and prot

expectations from industry analysts, reportedly

reecting trade tensions and concerns about

global growth.

By contrast, activity in the housing sector

had been declining but recently shows

signs of stabilizing

Residential investment fell in 2018 and

declined further in the rst quarter. More

recently, the pace of construction activity

appears to have stabilized as housing starts for

single-family and multifamily housing units

rose, on average, in April and May (gure15).

Existing home sales moved higher as well

over the same period, while new home sales

moved down a bit following a sizable increase

in the rst quarter (gure16). Consumers’

perceptions of homebuying conditions and

housing aordability have improved, which is

consistent with the declines in mortgage rates

this year and the slowing in growth of home

prices (gure17).

Ongoing improvements in the labor

market and gains in wealth continue to

support household income and consumer

spending . . .

After increasing at a moderate pace of

2½percent in 2018 as a whole, real consumer

spending slowed considerably in the rst

quarter (gure18). However, incoming data

suggest that consumer spending picked up

in recent months, with PCE in May up at

an annual rate of 2½percent relative to the

average level in the fourth quarter.

Real disposable personal income (DPI), a

measure of households’ after-tax purchasing

power, increased at a solid annual rate of

3percent in 2018; however, so far this year,

growth in real DPI has been more moderate

despite strong gains in wage and salary income.

With consumer spending rising more than

disposable income so far this year, the personal

saving rate moved down from an average of

Multifamily starts

Single-family

permits

1.0

1.2

Millions of units, annual rate

2019201720152013201120092007

15. Private housing starts and permits

Monthly

Single-family starts

OURCE: U.S. Census Bureau via Haver Analytics.

Existing home sales

1.0

1.2

Millions, annual rate

3.0

3.5

4.0

4.5

5.0

5.5

6.0

2019201720152013201120092007

16. New and existing home sales

Millions, annual rate

New home sales

OTE: Data are monthly. New home sales includes only single-family

sales. Existing home sales includes single-family, condo, townhome, and

co-op sales.

OURCE: For new home sales, U.S. Census Bureau; for existing home

sales, National Association of Realtors; all via Haver Analytics.

Mortgage rates

115

130

145

160

175

190

205

Index

20192017201520132011

17. Mortgage rates and housing aordability

Percent

Housing aordability index

OTE: The housing aordability index data are monthly through

April 2019, and the mortgage rate data are weekly through June 27, 2019.

At an index value of 100, a median-income family has exactly enough

income to qualify for a median-priced home mortgage. Housing

aordability is seasonally adjusted by Board sta.

OURCE: For housing aordability index, National Association of

Realtors via Haver Analytics; for mortgage rates, Freddie Mac Primary

Mortgage Market Survey.

MONETARY POLICY REPORT: JULY 2019 17

6½percent in the fourth quarter to around

6percent in May (gure19).

Ongoing gains in household wealth have likely

continued to support consumer spending.

House prices, which are of particular

importance for the balance sheet positions

of a large portion of households, continued

to increase through May, although at a more

moderate pace than in recent years (gure20).

In addition, U.S. equity prices, which fell

sharply at the end of 2018, have rebounded

this year. Buoyed by increases in home and

equity prices, aggregate household net worth

moved up to 6.8 times household income in

the rst quarter (gure21).

. . . and consumer sentiment remains

strong

Consumers have remained upbeat. Although

the Michigan index of consumer sentiment

dipped at the turn of the year, it has since

rallied, and the sentiment measure from the

Conference Board survey also climbed in the

second quarter from its rst-quarter level

(gure22). In June, both the Michigan and

the Conference Board indexes of consumer

sentiment were about in the middle of their

ranges over the past few years.

Borrowing conditions for households

remain generally favorable . . .

Despite increases in interest rates for consumer

loans and some reported further tightening

in credit card lending standards, nancing

conditions for consumers largely remain

supportive of growth in household spending.

Consumer credit expanded at a moderate

pace in the rst quarter, rising faster than

disposable income (gure23). Mortgage

credit has continued to be readily available

for households with solid credit proles but

remains noticeably tighter than before the

most recent recession for borrowers with

low credit scores. Standards for automotive

loans have been generally stable, and

overall delinquency rates for these loans

were little changed in the rst quarter at a

Percent, annual rate

2019201820172016201520142013

18. Change in real personal consumption expenditures

and disposable personal income

NOTE: The values for 2019:H1 are the annualized May/Q4 changes.

OURCE: Department of Commerce, Bureau of Economic Analysis via

Haver Analytics.

Personal consumption expenditures

Disposable personal income

CoreLogic

price index

S&P/Case-Shiller

national index

Percent change from year earlier

201920172015201320112009

20. Prices of existing single-family houses

Monthly

Zillow index

OTE: The data for the S&P/Case-Shiller index extend through April

2019.

OURCE: CoreLogic Home Price Index; Zillow; S&P/Case-Shiller U.S.

National Home Price Index. The S&P/Case-Shiller Index is a product of

S&P Dow Jones Indices LLC and/or its aliates. (For Dow Jones

Indices licensing information, see the note on the Contents page.)

PercentMonthly

2019201720152013201120092007

19. Personal saving rate

SOURCE: Bureau of Economic Analysis via Haver Analytics.

18 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

moderate level.

Financing

conditions in the

student loan market remain rm, with over

90percent of such credit being extended by

the federal government. After peaking in 2013,

delinquencies on such loans have been gradually

declining, reecting in part the continued

improvements in the labor market.

. . . while corporate nancing conditions

tightened somewhat relative to last year

but remained accommodative overall

Aggregate ows of credit to large nonnancial

rms remained strong in the rst quarter,

supported in part by relatively low interest

rates and accommodative nancing conditions

(gure24). The gross issuance of corporate

bonds, which had fallen substantially in

December, rebounded in the rst quarter as

market volatility receded. After increasing

notably in late 2018, spreads on both

investment- and speculative-grade corporate

bonds over comparable-maturity Treasury

securities have both declined, on net, this

year as investors’ risk appetite seems to

have recovered. In April, respondents to the

Senior Loan Ocer Opinion Survey on Bank

Lending Practices, or SLOOS, reported that

demand for commercial and industrial loans

weakened in the rst quarter even as lending

standards remained unchanged and terms for

such loans eased.

However, banks reported

tightening lending standards on all categories

of commercial real estate loans. Meanwhile,

nancing conditions for small businesses have

remained generally accommodative, but credit

growth has been subdued.

Net exports supported GDP growth in

the rst quarter

After being a small drag on U.S. real GDP

growth last year, net exports, which can have

sizable swings from quarter to quarter, added

about 1percentage point to the rate of growth

in the rst quarter. Real U.S. exports increased

at an annual rate of about 5½percent, as

12. The SLOOS is available on the Board’s website at

https://www.federalreserve.gov/data/sloos/sloos.htm.

Michigan survey

100

110

120

Index

110

130

150

170

2019201620132010200720042001

Index

22. Indexes of consumer sentiment

Conference Board

OTE: The data are monthly and extend through June 2019. The

Conference Board data are indexed to 100 in 1985; the Michigan survey

data are indexed to 100 in 1966.

OURCE: University of Michigan Surveys of Consumers; Conference

Board.

Consumer credit

Mortgages

Sum

Percent change from year earlier

2019201720152013201120092007

23. Changes in household debt

Quarterly

SOURCE: Federal Reserve Board, Statistical Release Z.1, “Financial

Accounts of the United States.”

5.0

5.5

6.0

6.5

7.0

Ratio

2019201620132010200720042001

21. Wealth-to-income ratio

Quarterly

NOTE: The series is the ratio of household net worth to disposable

personal income.

OURCE: For net worth, Federal Reserve Board, Statistical Release

Z.1, “Financial Accounts of the United States”; for income, Bureau of

Economic Analysis via Haver Analytics.

MONETARY POLICY REPORT: JULY 2019 19

exports of agricultural products and auto-

mobiles expanded robustly. Real imports fell

2percent following solid increases in 2018

(gure25). Nominal goods trade data through

May suggest that exports edged down in the

second quarter, while imports were about at.

The available data suggest that the trade decit

and the current account in the rst half of the

year were little changed as a percent of GDP

from 2018 (gure26).

Federal scal policy actions boosted

economic growth in 2018 but had a

smaller effect on rst-quarter real GDP

because of the partial government

shutdown . . .

Fiscal policy at the federal level boosted GDP

growth in 2018 because of lower personal and

business income taxes from the Tax Cuts and

Jobs Act of 2017 and because of an increase in

federal purchases due to the Bipartisan Budget

Act of 2018.

After increasing 2¾percent in

2018, federal government purchases were at in

the rst quarter of 2019, reecting the eects

of the partial federal government shutdown

(gure27). The government shutdown, which

was in eect from December22 through

January25, held down GDP growth in the rst

quarter, largely because of the lost work of

furloughed federal government workers and

aected federal contractors. That said, federal

purchases are expected to rebound in the

second quarter.

The federal unied budget decit widened in

scal year 2018 to around 4percent of nominal

GDP from 3½percent of GDP in 2017

because receipts moved lower, to 16percent of

GDP (gure28). Expenditures are currently

around 21percent of GDP, slightly above

the level that prevailed in the decade before

the start of the 2007–09 recession. The ratio

13. The Joint Committee on Taxation estimated

that the Tax Cuts and Jobs Act would reduce average

annual tax revenue by a little more than 1percent of

GDP starting in 2018 and for several years thereafter.

This revenue estimate does not account for the potential

macroeconomic eects of the legislation.

Billions of dollars, monthly rate

2019201720152013201120092007

24. Selected components of net debt nancing for

nonnancial businesses

Sum

Commercial paper

Bonds

Bank loans

SOURCE: Federal Reserve Board, Statistical Release Z.1, “Financial

Accounts of the United States.”

Percent, annual rate

20192018201720162015

25. Change in real imports and exports of goods

and services

OURCE: Bureau of Economic Analysis via Haver Analytics.

Imports

Exports

Current account

Percent of nominal GDP

2019201720152013201120092007200520032001

26. U.S. trade and current account balances

Annual

Trade

OTE: GDP is gross domestic product. The dots refer to the current

account and trade balances in the rst quarter of 2019.

OURCE: Bureau of Economic Analysis via Haver Analytics.

20 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

Percent of nominal GDPQuarterly

29. Federal government debt held by the public

1969 1979 1989 1999 2009 2019

OTE: The data for gross domestic product (GDP) are at an annual

rate. Federal debt held by the public equals federal debt less Treasury

securities held in federal employee dened benet retirement accounts,

evaluated at the end of the quarter.

OURCE: For GDP, Bureau of Economic Analysis via Haver

Analytics; for federal debt, Federal Reserve Board, Statistical Release

Z.1, “Financial Accounts of the United States.”

of federal debt held by the public to nominal

GDP rose to around 77percent in scal 2018

and was quite elevated relative to historical

norms (gure29). The Congressional Budget

Oce projects that this ratio will rise further

over the next several years.

. . . and the scal position of most state

and local governments is stable

The scal position of most state and local

governments is stable, although there is a

range of experiences across these governments.

The revenue of state governments has grown

moderately in recent quarters, as the economic

expansion continues to push up income and

sales tax collections. At the local level, property

tax collections continue to rise, pushed higher

by past house price gains. Real state and local

government purchases grew modestly last

year; however, outlays have surged so far this

year, driven largely by a boost in construction

spending. State and local infrastructure

spending was weak for many years, and there

appears to be demand for higher expenditures

in this area. State and local government

payrolls expanded slowly last year and over

the rst ve months of 2019, and employment

by these governments remains below its peak

before the current expansion.

Financial Developments

The expected path of the federal funds

rate over the next several years has

moved down

Market-based measures of the expected

path for the federal funds rate over the next

several years have declined substantially since

the end of 2018 (gure30). Various factors

contributed to this shift, including increased

investor concerns about downside risks to

the global economic outlook and rising trade

tensions. In addition, investors reportedly

interpreted FOMC communications over

the rst half of 2019 as signaling the Federal

Reserve is likely to lower the target range

for the federal funds rate in light of muted

Percent, annual rate

20192018201720162015201420132012

27. Change in real government expenditures on

consumption and investment

OTE: The federal value for 2019:Q1 is -0.05.

OURCE: Bureau of Economic Analysis via Haver Analytics.

Federal

State and local

Expenditures

Percent of nominal GDP

20192016201320102007200420011998

Annual

28. Federal receipts and expenditures

Receipts

OTE: Through 2018, receipts and expenditures are for scal years

(October to September); gross domestic product (GDP) is for the four

quarters ending in Q3. For 2019, receipts and expenditures are for the

12 months ending in May; GDP is the average of 2018:Q4 and 2019:Q1.

Receipts and expenditures are on a unied-budget basis.

OURCE: Oce of Management and Budget via Haver Analytics.

MONETARY POLICY REPORT: JULY 2019 21

ination pressures and uncertainties about the

global economic outlook.

Survey-based measures of the expected path

of the policy rate also shifted down relative

to the levels observed at the end of 2018.

According to the results of the most recent

Survey of Primary Dealers and Survey of

Market Participants, both conducted by

the Federal Reserve Bank of New York just

before the June FOMC meeting, the median

of respondents’ modal projections implies a

declining trajectory for the target range of

the federal funds rate for 2019, which attens

out in 2020. Relative to the December survey,

the median of these projections moved down

50 basis points for July2019 and 100 basis

points for December2019.

Additionally,

market-based measures of uncertainty about

the policy rate approximately one to two years

ahead increased, on balance, from their levels

at the end of last December.

The nominal Treasury yield curve has

moved down and continued to atten

Since the end of 2018, the nominal Treasury

yield curve shifted down and attened

further, with the 2-, 5-, and 10-year nominal

Treasury yields all declining about 70 basis

points on net (gure31). The decrease in

Treasury yields, which is consistent with the

revision in market participants’ expectations

for the path of policy rates, largely reects

FOMC communications as well as investors’

concerns about the global economic outlook

and the escalation of trade disputes. Option-

implied volatility on swap rates—an indicator

of uncertainty about Treasury yields—has

increased notably, on net, since the beginning

of the year. In particular, measures of near-

14. The results of the Survey of Primary Dealers and

the Survey of Market Participants are available on the

Federal Reserve Bank of New York’s website at https://

www.newyorkfed.org/markets/primarydealer_survey_

questions.html and https://www.newyorkfed.org/

markets/survey_market_participants, respectively.

2-year

5-year

Percent

20192017201520132011200920072005

31. Yields on nominal Treasury securities

Daily

10-year

OURCE: Department of the Treasury via Haver Analytics.

July 1, 2019

1.25

1.50

1.75

2.00

2.25

2.50

Percent

20232022202120202019

30. Market-implied federal funds rate path

Quarterly

Dec. 28, 2018

OTE: The federal funds rate path is implied by quotes on overnight

index swaps—a derivative contract tied to the eective federal funds rate.

The implied path as of July 1, 2019, is compared with that as o

December 28, 2018. The path is estimated with a spline approach,

assuming a term premium of 0 basis points. The July 1, 2019, path

extends through March 2023 and the December 28, 2018, path through

December 2022.

OURCE: Bloomberg; Federal Reserve Board sta estimates.

22 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

High-yield

Percentage points

20192017201520132011200920072005

33. Corporate bond yields, by securities rating

Daily

Investment-grade

OTE: Investment-grade is the 10-year triple-B, which reects the

eective yield of the ICE BofAML 7-to-10-year triple-B U.S. Corporate

Index (C4A4). High-yield is the 10-year high-yield and reects the

eective yield of the ICE BofAML 7-to-10-year U.S. Cash Pay High

Yield Index (J4A0). Data extend through June 26, 2019.

OURCE: ICE Bank of America Merrill Lynch Indices, used with

permission.

term interest rate uncertainty have reached the

levels seen at the end of 2018.

Yields on 30-year agency mortgage-backed

securities (MBS)—an important factor

inuencing mortgage interest rates—decreased

in line with the decline in the 10-year nominal

Treasury yield and remained low by historical

standards (gure32). Likewise, yields on both

investment-grade and high-yield corporate

debt declined signicantly from the levels

in late 2018 and stayed very low (gure33).

Despite widening in May, the spreads on

corporate bond yields over comparable-

maturity Treasury yields have narrowed, on

net, over the rst half of 2019 and are close to

their historical medians.

Broad equity price indexes increased on net

After declining sharply at the end of 2018,

broad U.S. stock market indexes have

recovered, on net, over the rst half of 2019

(gure34). The broad rebound in stock

prices—which included all major economic

sectors—was reportedly supported by Federal

Reserve communications that were perceived

as more accommodative than previously

anticipated. Stocks uctuated in May and

June as downside risks and trade tensions

were oset by further expectations of easier

monetary policy.

Measures of implied and realized stock price

volatility for the S&P 500 index declined

notably on net. Following the highs seen at the

end of 2018, these volatility measures declined

until late April, with the VIX—a measure

of implied volatility—returning to near the

10th percentile of its historical distribution

and with realized volatility close to the 30th

percentile of its historical range (gure35). At

the beginning of May, following the escalation

of trade tensions, these volatility measures

increased and have remained elevated since

then, but they have stayed well below the high

levels of December and now stand close to

their historical medians. Several measures of

nancial conditions that aggregate large sets

Yield

100

150

200

250

300

Basis points

20192017201520132011200920072005

32. Yield and spread on agency mortgage-backed

securities

Percent

Spread

OTE: The data are daily. Yield shown is for the Fannie Mae 30-year

current coupon, the coupon rate at which new mortgage-backed

securities would be priced at par, or face, value. Spread shown is to the

average of the 5- and 10-year nominal Treasury yields. Data extend

through June 26, 2019.

OURCE: Department of the Treasury; Barclays Live.

MONETARY POLICY REPORT: JULY 2019 23

of nancial data into summary indexes eased

considerably since the end of 2018 but have

tightened a bit since the beginning of May, in

line with the decline in stock prices over that

month, and have remained relatively elevated

since then. (For a discussion of nancial

stability issues, see the box “Developments

Related to Financial Stability.”)

Markets for Treasury securities, mortgage-

backed securities, and municipal bonds

have functioned well

Available indicators of Treasury market

functioning have generally remained stable

since the beginning of 2019, with a variety of

measures—including bid-ask spreads, bid sizes,

and estimates of transaction costs—displaying

few signs of liquidity pressures. Liquidity

conditions in the agency MBS market were

also generally stable. Credit conditions in

municipal bond markets remained stable as

well, with yield spreads on 20-year general

obligation municipal bonds over comparable-

maturity Treasury securities declining

somewhat on net.

Money market rates were little changed

Rates across money markets were little

changed, on balance, in the rst half of 2019.

Conditions in domestic short-term funding

markets continued to be broadly stable since

the end of 2018. Overnight secured and

unsecured rates declined in line with the

technical adjustment announced after the May

FOMC meeting, which lowered the interests

paid on required and excess reserve balances

by 5 basis points. Other short-term interest

rates, including those on commercial paper

and negotiable certicates of deposit, were also

little changed since the beginning of the year.

Bank credit continued to expand, and

bank protability remained robust

Credit provided by commercial banks to

fund businesses as well as commercial and

residential real estate continued to grow in

2019, albeit at a slower pace than in the second

S&P 500 index

100

125

150

175

200

December 31, 1999 = 100

20192017201520132011200920072005

34. Equity prices

Daily

Dow Jones bank index

OURCE: Standard & Poor’s Dow Jones Indices via Bloomberg. (For

Dow Jones Indices licensing information, see the note on the Contents

page.)

VIX

Percent

20192017201520132011200920072005

35. S&P 500 volatility

Daily

Realized volatility

OTE: The VIX is a measure of implied volatility that represents the

expected annualized change in the S&P 500 index over the following 30

days. For realized volatility, ve-minute S&P 500 returns are used in an

exponentially weighted moving average with 75 percent of weight

distributed over the past 20 days.

OURCE: Cboe Volatility Index® (VIX®) accessed via Bloomberg;

Federal Reserve Board sta estimates.

24 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

(gure B). Rapid debt growth, while broad based across

different parts of the business sector, is concentrated

among the riskiest rms, and there are signs that credit

standards for new leveraged loans are weak and have

deteriorated further over the past six months. In the

corporate bond market, the distribution of credit ratings

among investment-grade bonds has worsened, with

the share of bonds rated Baa (or triple-B) reaching

near-record levels. While broader corporate credit

performance remains solid amid a growing economy

and debt-service costs are relatively low, a broader

repricing of risk or a slowdown in economic activity

could pose notable risks to borrowing rms and their

creditors. Such developments could increase the

downside risk to economic activity more generally.

In contrast, in the household sector, debt growth is

concentrated among borrowers with high credit scores,

and the debt-to-GDP ratio continues to trend down

(gure B).

Vulnerabilities stemming from leverage at nancial

institutions remain low. Capital relative to risk-weighted

The framework used by the Federal Reserve Board

for assessing the resilience of the U.S. nancial system

focuses on nancial vulnerabilities in four broad

areas: asset valuations, household and business debt,

leverage in the nancial sector, and funding risks.

The Financial Stability Report published on May6,

2019, presents the most recent, detailed assessment

of these vulnerabilities.

This discussion summarizes

its key ndings, updated, where appropriate, to reect

developments since its publication.

Asset valuations remain somewhat elevated in a

number of markets. Treasury term premiums are near

record lows. Forward-looking measures of Treasury

market volatility have recently increased, especially

for shorter-dated Treasury securities. Equity prices

appear to be somewhat elevated relative to earnings,

with the forward equity price-to-earnings ratio for

the S&P500 remaining above the median value of its

historical distribution since the mid-1980s (gureA).

In commercial real estate markets, capitalization

rates remain at historically low levels. Residential real

estate prices are also somewhat high relative to rents

(accounting for borrowing costs and long-run trends),

although house price growth slowed materially in the

past year. Valuation pressures in the leveraged loan

market eased somewhat in recent months, and the

spreads on lower-rated leveraged loans are now above

the median value over the past 20years. In corporate

bond markets, spreads of 10-year corporate bonds

over benchmark rates are close to the median of their

historical distributions.

Vulnerabilities associated with total private-sector

credit remain at a moderate level relative to the past

several decades, and total debt has advanced roughly

in line with economic activity over the past ve years.

Leverage in the business sector remains near its highest

level in the past 20years, and business debt has grown

faster than gross domestic product (GDP) since 2012

1. See Board of Governors of the Federal Reserve

System (2019), Financial Stability Report (Washington:

Board of Governors, May), https://www.federalreserve.gov/

publications/2019-may-nancial-stability-report-purpose.htm.

Developments Related to Financial Stability

(continued)

Ratio

2019201420092004199919941989

A. Forward price-to-earnings ratio of S&P 500 rms

Monthly

Historical median

OTE: Aggregate forward price-to-earnings ratio of S&P 500 rms.

Data are based on expected earnings for 12 months ahead and extend

through June 2019. The plus sign shows daily data corresponding to July

1, 2019.

OURCE: Federal Reserve Board sta calculations using Renitiv

(formerly Thomson Reuters), IBES Estimates.

MONETARY POLICY REPORT: JULY 2019 25

funding is near its historical lows. Although assets

under management at prime money market funds—

which are more susceptible to runs than government

funds—have increased since the U.S. Securities and

Exchange Commission (SEC) reforms went into place

in 2016, they remain well below their pre-reform

levels. Holdings of U.S. corporate bonds by mutual

funds increased substantially over the past decade,

raising concerns about the mismatch between daily

redemptions allowed by these funds and the time

required to sell their assets. Rules adopted in 2016 by

the SEC to strengthen mutual funds’ and exchange-

traded funds’ liquidity risk management have started

going into effect in the past year.

Downside risks to U.S. nancial stability from

abroad remain moderate, but several near-term risk

events could generate meaningful spillovers to the

United States. Two prominent European risks are a

“no deal” Brexit, which remains a possible outcome

later in the year, and Italian scal challenges. Also,

an escalation of the trade tensions between the

United States and its major trading partners, along

with nancial market reactions, could exacerbate

uncertainty and increase the downside risk to global

economic activity. In China, high levels of nonnancial-

sector debt expose the nancial sector to a slowdown

in economic growth. The effects of any of these events

on global nancial markets could be amplied if they

deepen the stresses in already vulnerable emerging

market economies. These dynamics could tighten

nancial conditions in the United States and negatively

affect the creditworthiness of U.S. rms.

The countercyclical capital buffer (CCyB) is a

macroprudential tool that the Federal Reserve can use

to increase the resilience of the nancial system by

raising capital requirements on internationally active

banking organizations when nancial vulnerabilities

are meaningfully above normal. On March6, 2019, the

Board voted to maintain the CCyB at 0percent.

2. See Securities and Exchange Commission (2016),

“Investment Company Liquidity Risk Management Programs,”

nal rule, 17 C.F.R. pts. 210, 270, and 274, October 13,

https://www.sec.gov/rules/nal/2016/33-10233.pdf.

assets at the largest banks has remained largely stable

over the past few years. Results of the annual Dodd-

Frank Act Stress Tests, released on June21, 2019,

indicate that participating banks are sufciently resilient

to continue lending to creditworthy borrowers even

in a severe macroeconomic scenario. The exposure

of banks to nonbank nancial institutions—such as

nance companies, asset managers, securitization

vehicles, and mortgage real estate investment trusts—

continued to increase in the rst quarter of 2019. Some

of those rms are signicant business lenders, adding

to banks’ exposure to elevated losses in the corporate

sector. Leverage of broker-dealers increased slightly in

2018 but remains near historically low levels. Leverage

has also stayed low at life insurance companies and at

property and casualty insurance rms. At hedge funds,

leverage increased in the rst quarter of 2019 to levels

slightly below its 2018 peak.

Vulnerabilities stemming from liquidity and maturity

mismatches remain low. Banks hold large quantities of

liquid assets, and their reliance on short-term wholesale

Household

.45

.50

.55

.60

.65

.70

.75

Ratio

1.0

1.1

2019201520112007200319991995199119871983

Ratio

B. Business- and household-sector credit-to-GDP ratio

Business

NOTE: Data are quarterly. The shaded bars indicate periods of

business recession as dened by the National Bureau of Economic

Research. GDP is gross domestic product.

OURCE: Federal Reserve Board, Statistical Release Z.1, “Financial

Accounts of the United States”; Bureau of Economic Analysis via Haver

Analytics, national income and product accounts, Table 1.1.5: Gross

Domestic Product; Board sta calculations.

26 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

Percent, annual rate

20192018201720162015

38. Real gross domestic product growth in selected

advanced foreign economies

OURCE: For the United Kingdom, Oce for National Statistics; for

Japan, Cabinet Oce, Government of Japan; for the euro area, Eurostat;

for Canada, Statistics Canada; all via Haver Analytics.

United Kingdom

Japan

Euro area

Canada

half of 2018. By contrast, consumer loan

growth accelerated since the beginning of the

year. In the rst quarter of 2019, the pace of

total bank credit expansion was about in line

with that of nominal GDP, leaving the ratio of

total commercial bank credit to current-dollar

GDP little changed relative to last December

(gure36). Overall, measures of bank

protability remained solid in the rst quarter

of 2019, supported by wider net interest

margins and steady loan growth (gure37).

International Developments

Advanced foreign economies have been

slowly emerging from the recent soft

patch

After a signicant slowdown in the second

half of last year, growth picked up in many

advanced foreign economies (AFEs) at the

start of 2019, but at a still restrained pace

(gure38). Notwithstanding continued

weakness in the manufacturing sector and

softening external demand, domestic demand

in the AFEs generally improved amid rising

employment and wages as well as easier

nancial conditions. The pickup in growth

also reected temporary factors. Economic

activity in the euro area was boosted by the

fading eects of car production disruptions

in Germany and protests in France in 2018.

Growth in the United Kingdom surged as

expectations of trade disruptions surrounding

the original date of the United Kingdom’s

exit from the European Union, or Brexit,

led to stockpiling by households and rms.

Economic activity in Canada, by contrast,

remained depressed by oil production cuts, but

recent indicators point to a rebound in growth

in the second quarter.

Core ination remained low in advanced

foreign economies

The rebound in energy prices earlier in the year

pushed up consumer price ination in many

AFEs (gure39). However, despite further

Percent

20192017201520132011200920072005

36. Ratio of total commercial bank credit to nominal

gross domestic product

Quarterly

SOURCE: Federal Reserve Board, Statistical Release H.8, “Assets and

Liabilities of Commercial Banks in the United States”; Bureau of

Economic Analysis via Haver Analytics.

Return on assets

Percent, annual rate

2.0

1.5

1.0

1.5

2.0

20192017201520132011200920072005

37. Protability of bank holding companies

Percent, annual rate

Return on equity

OTE: The data are quarterly and are seasonally adjusted.

OURCE: Federal Reserve Board, Form FR Y-9C, Consolidated

Financial Statements for Bank Holding Companies.

MONETARY POLICY REPORT: JULY 2019 27

improvement in labor market conditions,

inationary pressures remained contained,

with core ination readings notably muted in

the euro area and Japan. In Canada and the

United Kingdom, by contrast, core ination

rates moved close to 2percent.

AFE central banks took a more

accommodative policy stance

With activity only slowly picking up and core

ination persistently low, European Central

Bank (ECB) communications took a more

accommodative tone. In March, the ECB

indicated that it would keep its policy rate in

negative territory through at least the middle

of next year and rolled out a new round of

loans for euro-area banks to reduce the risk

of renewed funding pressures. In June, ECB

President Mario Draghi added that the ECB

would introduce new stimulus measures if

the economic outlook did not improve. The

Bank of Canada and Bank of England

signaled more-gradual increases in interest

rates, given a moderation in the pace of global

economic activity. The Reserve Bank of

Australia in June and July cut its policy rate

in response to below-target ination and weak

economic growth.

Central banks’ more accommodative

policy stances supported AFE asset prices

The more accommodative policy stance in

major AFEs contributed to an overall easing

of nancial conditions in the rst half of the

year. Market-implied paths of policy rates

and long-term interest rates on sovereign

bonds have generally fallen sharply, as in

the United States (gure40). Broad stock

market indexes across AFEs are up, on net,

since January (gure41). However, concerns

about global growth and rising trade tensions

weighed on risky asset prices over the course

of May and June. Sovereign bond spreads in

Italy uctuated amid uncertainty about the

country’s scal outlook.

United Kingdom

Japan

Euro area

12-month percent change

2015 2016 2017 2018 2019

39. Consumer price ination in selected advanced

foreign economies

Monthly

Canada

OTE: The data for the euro area incorporate the ash estimate for

June 2019.

OURCE: For the United Kingdom, Oce for National Statistics; for

Japan, Ministry of International Aairs and Communications; for the

euro area, Statistical Oce of the European Communities; for Canada,

Statistics Canada; all via Haver Analytics.

United Kingdom

Japan

Germany

1.0

1.5

2.0

2.5

3.0

3.5

Percent

2015 2016 2017 2018 2019

40. Nominal 10-year government bond yields in

selected advanced economies

Weekly

United States

OTE: The data are weekly averages of daily benchmark yields. The

weekly data begin on Thursdays and extend through July 1, 2019.

OURCE: Bloomberg.

United Kingdom

Euro area

100

110

120

130

140

Week ending January 9, 2015 = 100

2015 2016 2017 2018 2019

41. Equity indexes for selected foreign economies

Weekly

Japan

OTE: The data are weekly averages of daily data. The weekly data

begin on Thursdays and extend through July 1, 2019.

OURCE: For euro area, DJ Euro Stoxx Index; for Japan, TOPIX

Stock Index; for United Kingdom, FTSE 100 Stock Index; all via

Bloomberg.

28 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

Economic activity in emerging Asia

struggled to gain a solid footing

In China, real GDP growth picked up in the

rst quarter, supported in part by scal and

monetary policy measures that targeted smaller

businesses and infrastructure spending, as well

as by the more favorable nancial conditions

amid investor optimism on a U.S.–China trade

deal (gure42). Recent activity indicators,

however, suggest that the underlying

momentum in the economy remains relatively

subdued against the backdrop of reemerging

trade tensions, global weakness in trade and

manufacturing, and the Chinese authorities’

continued caution about providing substantial

further credit stimulus. Amid moderating

global trade and activity, real GDP growth

in other Asian economies in the rst quarter

generally remained below their 2018 pace, with

growth in Korea turning negative (see the box

“The Persistent Slowdown in Global Trade

and Manufacturing”).

Latin American economies continued to

underperform

In Mexico, real GDP contracted in the rst

quarter following generally weak performance

in the past two years. Tighter scal policy

and disruptions from labor unrest weighed

on activity amid a backdrop of softening

U.S. manufacturing demand and persistent

declines in petroleum production. Recent

indicators suggest some improvement in

the second quarter, although uncertainty

regarding trade relations with the United

States appears to have increased. In Brazil,

real GDP also contracted in the rst quarter,

as a mining disaster and ongoing weakness in

the Argentine economy weighed on Brazilian

economic activity. Investment continued to

decline, held down by uncertainty over whether

Brazil’s government would enact major scal

and other economic reforms.

Percent, annual rate

20192018201720162015

42. Real gross domestic product growth in selected

emerging market economies

OTE: The data for China are seasonally adjusted by Board sta. The

data for Korea, Mexico, and Brazil are seasonally adjusted by their

respective government agencies.

OURCE: For China, China National Bureau of Statistics; for Korea,

Bank of Korea; for Mexico, Instituto Nacional de Estadistica y

Geograa; for Brazil, Instituto Brasileiro de Geograa e Estatistica; all

via Haver Analytics.

China

Korea

Mexico

Brazil

MONETARY POLICY REPORT: JULY 2019 29

Financial conditions in many emerging

market economies improved, on net,

despite the reemergence of trade tensions

Financial conditions in many emerging market

economies (EMEs) eased earlier in the year

in response to the more accommodative

policy stance of the Federal Reserve and

major AFE central banks. However, in

recent months, political uncertainties in

some EMEs and renewed trade tensions

between the United States and major trading

partners have weighed on EME asset prices.

On net, broad measures of EME sovereign

bond spreads over U.S. Treasury rates are

down a little, while benchmark EME equity

indexes are a bit higher since the beginning

of the year. Flows to dedicated EME mutual

funds increased earlier in the year but turned

negative in the second quarter (gure43).

While deteriorations in asset prices and capital

ows have been sizable for some economies,

particularly Turkey and Argentina, broad

indicators of nancial stress in EMEs are

below those seen during other periods of

signicant stress in recent years.

The dollar depreciated a little

Over the rst half of the year, the foreign

exchange value of the U.S. dollar uctuated

but was, on net, a little lower (gure44).

Increased investor optimism about prospects

for trade negotiations early this year as well

as downward-revised expectations for U.S.

interest rates led to a depreciation of the

dollar. But the more accommodative tone of

communications from major foreign central

banks and safe-haven ows—in part in

response to trade tensions and concerns about

global growth—helped push the dollar up.

In addition, the Chinese renminbi has come

under some downward pressure since trade

tensions escalated in recent months.

EMBI+ (left axis)

Billions of dollars

200

250

300

350

400

450

500

2015 2016 2017 2018 2019

43. Emerging market mutual fund ows and spreads

Basis points

NOTE: The bond and equity fund ows data are quarterly sums of

weekly data from January 1, 2015, to June 26, 2019. The fund ows data

exclude funds located in China. The J.P. Morgan Emerging Markets

Bond Index Plus (EMBI+) data are weekly averages of daily data. The

weekly data begin on Thursdays and extend through June 28, 2019.

OURCE: For bond and equity fund ows, EPFR Global; for EMBI+,

J.P. Morgan Emerging Markets Bond Index Plus via Bloomberg.

Bond fund ows (right axis)

Equity fund ows (right axis)

Chinese renminbi

British pound

Broad dollar

100

110

120

130

140

Week ending January 9, 2015 = 100

2015 2016 2017 2018 2019

44. U.S. dollar exchange rate indexes

Weekly

Dollar appreciation

Euro

OTE: The data, which are in foreign currency units per dollar, are

weekly averages of daily data. The weekly data begin on Thursdays and

extend through July 1, 2019. As indicated by the arrow, increases in the

data represent U.S. dollar appreciation, and decreases represent U.S

dollar depreciation.

OURCE: Federal Reserve Board, Statistical Release H.10, “Foreign

Exchange Rates.”

30 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

of higher tariffs imposed by foreign countries as well,

these estimates suggest that the overall direct effects of

higher tariffs on global trade ows are, to date, likely

to be material but modest relative to the observed step-

down from 5.7percent growth in 2017 to 1.5percent

growth in 2018.

In addition to the direct effect of the tariffs, however,

rising uncertainty about the prospects for trade policy

may also be weighing on trade and manufacturing.

Measures of trade policy uncertainty spiked last

year, largely reecting concerns about current and

prospective tariff hikes along with renegotiations of

trade agreements (gure B). Higher uncertainty may

lead businesses to delay investment purchases as they

wait for the policy uncertainties to be resolved. Indeed,

Terms of Trade: The J-Curve?” American Economic Review,

vol.84 (March), pp. 84–103.

After expanding briskly in 2017, the growth of

global goods trade and manufacturing, as indicated

by industrial production, has slowed signicantly

(gure A). Even so, other aspects of economic activity,

importantly services, have held up. A number of factors

are likely contributing to the recent slowdown in trade

and manufacturing growth, and disentangling them

is difcult. First, new tariffs appear to have lowered

imports and exports in the United States and else where,

while uncertainty surrounding trade policy could be

leading rms to delay investment decisions and reduce

capital expenditures. Second, a downturn in global

sales for technology goods has restrained trade and

manufacturing activity, especially in emerging Asia.

Finally, a general slowdown in global demand, reecting

idiosyncratic factors specic to different economies, has

likely weighed on demand for traded goods.

Regarding the rst of these factors, global trade

tensions have risen sharply since early 2018, fueled by

both higher tariffs and uncertainty about the prospects

for future trade policy. The United States has increased

tariffs on over $250 billion in imports by an average of

nearly 25percentage points, and U.S. trading partners

have retaliated. Several studies indicate that most of

the cost of these higher tariffs has been passed through

to U.S. importers.

If we assume a commonly used

elasticity of1.5 for the response of imports to changes

in prices, it implies that tariffs may have lowered U.S.

imports by about $70 billion, or about 0.5 percent of

world goods imports.

Taking into account the effect

1. For two recent working papers that analyze the effects

of the tariff changes on trade volumes and import prices,

see Mary Amiti, Stephen J. Redding, and David E. Weinstein

(2019), “The Impact of the 2018 Trade War on U.S. Prices

and Welfare,” CEPR Discussion Paper DP13564 (London:

Centre for Economic Policy Research, March), https://cepr.

org/sites/default/les/news/FreeDP_Mar05.pdf; and Pablo D.

Fajgelbaum, Pinelopi K. Goldberg, Patrick J. Kennedy, and

Amit K. Khandelwal (2019), “The Return to Protectionism,”

NBER Working Paper Series 25638 (Cambridge, Mass.:

National Bureau of Economic Research, March).

2. See David K. Backus, Patrick J. Kehoe, and Finn E.

Kydland (1994), “Dynamics of the Trade Balance and the

The Persistent Slowdown in Global Trade and Manufacturing

(continued)

Global IP

G-20 GDP

Percent change from year earlier

2019201720152013201120092007200520032001

A. Change in global trade, industrial production,

and GDP

Quarterly

Global imports

OTE: Imports and industrial production (IP) are quarterly averages

of monthly data. G-20 GDP is seasonally adjusted gross domestic

product (GDP) volume estimates at 2010 purchasing power parities

(PPPs) for the Group of 20 economies.

OURCE: Netherlands Bureau for Economic Policy Analysis via Haver

Analytics; Organisation for Economic Co-operation and Development,

OECD.Stat.

MONETARY POLICY REPORT: JULY 2019 31

investment spending growth has slowed in many areas

of the global economy since 2017. Although this

slowdown may reect a number of factors, concerns

about trade policy have been agged in many recent

surveys of business attitudes and intentions, including

the Beige Book.

The global tech cycle—a synchronized pattern of

production and trade in electronics and software across

economies—has also contributed to the decline in

global trade and manufacturing growth. This cycle is

particularly important for emerging Asia, where about

one-third of exports are technology related. Global

semiconductor sales surged in 2017 but fell sharply in

the last months of 2018 (gure C). The fall in large part

reected a contraction in demand in China, particularly

evident in mobile phone purchases. Recent data,

however, suggest that this cycle may have bottomed

out, as Chinese mobile phone production picked up in

100

150

200

250

300

Index

2019201820172016201520142013

B. Trade policy uncertainty

Monthly

NOTE: The data extend through June 2019. At an index value of 100,

1 percent of news articles contain references to trade policy uncertainty.

OURCE:Dario Caldara, Matteo Iacoviello, Patrick Molligo, Andrea

Prestipino, and Andrea Rao (2019), “The Economic Eects of Trade

Policy Uncertainty,” manuscript presented at the 91st meeting of the

Carnegie-Rochester-NYU Conference on Public Policy, held at New

York University, New York, April 12–13.

Billions of dollars

201920172015201320112009

C. Global semiconductor sales

Monthly

NOTE: The semiconductor data are 3-month moving averages.

OURCE: Semiconductor Industry Association via Haver Analytics.

April along with exports of electronics in emerging Asia

through May.

Finally, a regular feature of the data is that trade

and manufacturing production move with overall gross

domestic product (GDP) growth but with considerably

more cyclical volatility (a pattern that can be seen in

gureA). Trade and manufacturing production largely

consist of durable goods, the purchase of which tends

to be especially sensitive to economic conditions.

Thus, although global trade and manufacturing slowed

much more sharply than GDP last year, part of their

sharp slowing likely just reected a response to a more

general slowing in global economic growth. A number

of factors have contributed to the step-down in global

activity. A deleveraging campaign by China’s authorities

was an important factor in the slowdown of the Chinese

economy. Growth in Europe has been restrained by

complications with meeting tighter emissions standards

for new motor vehicles in Germany, protests in France,

and the ongoing uncertainties associated with Brexit.

And nancial stresses have weighed on some emerging

market economies, especially Argentina and Turkey.

The FOMC maintained its target range for

the federal funds rate

From late 2015 through the end of 2018, the

Federal Open Market Committee (FOMC)

gradually increased its target range for the

federal funds rate as the economy continued

to make progress toward the Committee’s

congressionally mandated objectives of

maximum employment and price stability.

In its meetings over the rst half of 2019,

the Committee judged that the stance of

monetary policy was appropriate to achieve

its dual mandate, and it decided to maintain

the target range for the federal funds rate at

2¼ to 2½percent (gure45). These decisions

reected incoming information showing the

solid fundamentals of the U.S. economy

supporting continued growth and strong

employment.

Looking ahead, the FOMC will act as

appropriate to sustain the expansion,

with a strong labor market and ination

near its 2percent objective

At its meetings since the beginning of the year,

the Committee stated that it continued to view

a sustained expansion of economic activity,

strong labor market conditions, and ination

near the Committee’s symmetric 2percent

objective as the most likely outcomes. For

much of this period, the Committee indicated

that, in light of global economic and nancial

developments and muted ination pressures, it

would be patient as it determines what future

adjustments to the target range for the federal

funds rate may be appropriate to support these

outcomes.

At the June meeting, however, the Committee

noted that uncertainties about the outlook

had increased.

Since the beginning of

May, the tenor of incoming information on

economic activity, on balance, has become

somewhat more downbeat, and uncertainties

about the economic outlook have increased.

Growth indicators from around the world

have disappointed, on net, raising concerns

about the strength of the global economy.

Meanwhile, contacts in business and

agriculture have reported heightened concerns

over trade developments. In light of these

uncertainties and muted ination pressures,

15. See the FOMC statement issued after the

June meeting, which is available on the Monetary

Policy portion of the Board’s website at https://www.

federalreserve.gov/monetarypolicy.htm.

Part 2

monetary PoLiCy

Target federal funds rate

2-year Treasury rate

Percent

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

45. Selected interest rates

Daily

10-year Treasury rate

OTE: The 2-year and 10-year Treasury rates are the constant-maturity yields based on the most actively traded securities.

OURCE: Department of the Treasury; Federal Reserve Board.

34 PART 2: MONETARY POLICY

the Committee indicated that it will act as

appropriate to sustain the expansion, with

a strong labor market and ination near its

objective. The Committee is rmly committed

to its symmetric 2percent ination objective.

In the Committee’s economic projections

released after the June meeting, participants

generally revised down their individual

assessments of the appropriate path for the

policy rate from their assessments at the time

of the March meeting (see Part 3 of this report

for more details).

Future changes in the federal funds rate

will depend on the economic outlook

and risks to the outlook as informed by

incoming data

The FOMC has continued to emphasize

that the actual path of monetary policy will

depend on the evolution of the economic

outlook and risks to the outlook as informed

by incoming data. Specically, in deciding on

the timing and size of future adjustments to

the target range for the federal funds rate, the

Committee will assess realized and expected

economic conditions relative to its objectives

of maximum employment and symmetric

2percent ination. This assessment will take

into account a wide range of information,

including measures of labor market conditions,

indicators of ination pressures and ination

expectations, and readings on nancial and

international developments.

In addition to weighing a wide range of

economic and nancial data and information

received from business contacts and other

informed parties around the country,

policymakers regularly consult prescriptions

for the interest rate arising from various

monetary policy rules. These rule prescriptions

can serve as useful guidelines to the FOMC

in the course of arriving at its policy

decisions. Nonetheless, numerous practical

considerations make clear that the FOMC

cannot mechanically set the policy rate by

following the prescriptions of any specic

rule. The FOMC’s framework for conducting

monetary policy involves a systematic

approach in keeping with key principles of

good monetary policy but allows for more

exibility than is implied by simple policy rules

(see the box “Monetary Policy Rules and Their

Interactions with the Economy”).

Since the beginning of the year, the

FOMC has issued two statements

regarding monetary policy

implementation and balance sheet

normalization

At its January meeting, the Committee

indicated that it intends to continue to

implement monetary policy in a regime in

which the provision of an ample supply of

reserves ensures that control over the level of

the federal funds rate and other short-term

interest rates is exercised primarily through the

setting of the Federal Reserve’s administered

rates, and in which active management of the

supply of reserves is not required.

After the

March FOMC meeting, the Committee issued

a statement indicating that it plans to conclude

the reduction of the Federal Reserve’s

securities holdings at the end of September.

(The box “Framework for Monetary Policy

Implementation and Normalization of the

Federal Reserve’s Balance Sheet” details the

recent decision about policy implementation

and balance sheet normalization.)

The Committee is prepared to adjust

the details for completing balance sheet

normalization in light of economic and

nancial developments, consistent with its

congressionally mandated objectives of

maximum employment and price stability.

16. See the Statement Regarding Monetary Policy

Implementation and Balance Sheet Normalization,

which is available on the Board’s website at https://

www.federalreserve.gov/monetarypolicy/policy-

normalization.htm.

17. See the Balance Sheet Normalization Principles

and Plans, which can be found on the Board’s website at

https://www.federalreserve.gov/monetarypolicy/policy-

normalization.htm.

MONETARY POLICY REPORT: JULY 2019 35

The Federal Reserve’s total assets have

continued to decline from about $4.1trillion

last December to about $3.8trillion at

present, with holdings of Treasury securities

at approximately $2.1trillion and holdings

of agency debt and agency mortgage-backed

securities at approximately $1.5trillion

(gure46).

As the Federal Reserve has continued to

gradually reduce its securities holdings, the

level of reserve balances in the banking system

has declined. In particular, the level of reserve

balances has decreased by about $150billion

since the end of last year and by about

$1.3trillion since its peak in 2014.

Meanwhile, interest income on the Federal

Reserve’s securities holdings has continued

to result in sizable remittances to the U.S.

Treasury. Preliminary data indicate that the

Federal Reserve remitted about $27billion in

the rst half of2019.

18. Since the start of the normalization program,

reserve balances have dropped by approximately

$700billion.

The Federal Reserve’s implementation of

monetary policy has continued smoothly

Since the middle of March, the eective

federal funds rate has traded slightly above

the interest rate paid on reserve balances. At

the May meeting, the Federal Reserve made a

third small technical adjustment to lower the

setting of the interest rate on excess reserves

by 5 basis points to a level 15 basis points

below the top of the target range for the

federal funds rate; this adjustment successfully

fostered trading in the federal funds market at

rates well within the FOMC’s target range.*

Overall, rates across money markets were

broadly stable since the beginning of 2019, and

the usage of the overnight reverse repurchase

agreement facility has remained low.

The Federal Reserve has started the

review of its strategic framework for

monetary policy

With labor market conditions close to

maximum employment and ination near

Trillions of dollars

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

46. Federal Reserve assets and liabilities

Weekly

Assets

Liabilities and capital

Other assets

Credit and liquidity

facilities

Agency debt and mortgage-backed securities holdings

Treasury securities held outright

Federal Reserve notes in circulation

Deposits of depository institutions

Capital and other liabilities

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

OTE: “Credit and liquidity facilities” consists of primary, secondary, and seasonal credit; term auction credit; central bank liquidity swaps;

support

for Maiden Lane, Bear Stearns, and AIG; and other credit facilities, including the Primary Dealer Credit Facility, the Asset-Backed

Commercial

Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, and the Term Asset-Backed Securities

Loan

Facility. “Other assets” includes unamortized premiums and discounts on securities held outright. “Capital and other liabilities” includes

reverse

repurchase agreements, the U.S. Treasury General Account, and the U.S. Treasury Supplementary Financing Account. The data extend

through June 26, 2019.

OURCE: Federal Reserve Board, Statistical Release H.4.1, “Factors Aecting Reserve Balances.”

* On July 8, 2019, the sentence was corrected to replace

“the Committee” with “the Federal Reserve.”

36 PART 2: MONETARY POLICY

the Committee’s 2percent objective, the

FOMC judged it an appropriate time for the

Federal Reserve to conduct a public review

of its strategic framework for monetary

policy—including the policy strategy, tools,

and communication practices. The goal of

this assessment is to identify possible ways

to improve the Committee’s current policy

framework in order to ensure that the Federal

Reserve is best positioned going forward to

achieve its statutory mandate of maximum

employment and price stability.

The review includes outreach to and

consultation with a broad range of people and

groups interested in the U.S. economy. The

Federal Reserve System is currently conducting

a series of Fed Listens events around the

country, typically with a town hall format,

to hear perspectives from representatives

of business and industry, labor leaders,

community and economic development

ocials, academics, nonprot organization

executives, and others. Policymakers plan to

report their ndings to the public during the

rst half of 2020.

MONETARY POLICY REPORT: JULY 2019 37

Monetary Policy Rules and Their Interactions with the Economy

Economists have analyzed many monetary policy

rules, including the well-known Taylor (1993) rule.

Other rules include the “balanced approach” rule, the

“adjusted Taylor (1993)” rule, the “price level” rule, and

the “rst difference” rule (gure A).

These policy rules

embody the three key principles of good monetary

policy and take into account estimates of how far the

economy is from the Federal Reserve’s dual-mandate

goals of maximum employment and price stability. Four

of the ve rules include the difference between the rate

of unemployment that is sustainable in the longer run

and the current unemployment rate (the unemployment

rate gap); the rst-difference rule includes the change

in the unemployment gap rather than its level.

(continued on next page)

Monetary policy rules are mathematical formulas

that relate a policy interest rate, such as the federal

funds rate, to a small number of other economic

variables—typically including the deviation of ination

from its target value and a measure of resource slack in

the economy. The prescriptions for the policy interest

rate from these rules can provide helpful guidance for

the Federal Open Market Committee (FOMC). This

discussion presents ve policy rules—illustrative of the

many rules that have received attention in the research

literature—and provides examples of two ways to

compute historical prescriptions of policy rules. The

two ways differ in terms of whether the implications

of the rule prescriptions feed through to the

macroeconomy and potentially back to the policy rule

prescriptions themselves. The presentation highlights

the uses and limitations of each way for informing the

FOMC’s systematic conduct of monetary policy.

Historical Prescriptions of Policy Rules

The effectiveness of monetary policy is enhanced

when it is well understood by the public.

In simple

models of the economy, good economic performance

can be achieved by following a monetary policy rule

that fosters public understanding and that incorporates

key principles of good monetary policy.

One such

principle is that monetary policy should respond in a

predictable way to changes in economic conditions.

A second principle is that monetary policy should be

accommodative when ination is below policymakers’

longer-run ination objective and employment is below

its maximum sustainable level; conversely, monetary

policy should be restrictive when the opposite holds. A

third principle is that, to stabilize ination, the policy

rate should be adjusted over time by more than one-for-

one in response to persistent increases or decreases in

ination.

1. For a discussion of how the public’s understanding of

monetary policy matters for the effectiveness of monetary

policy, see Janet L. Yellen (2012), “Revolution and Evolution

in Central Bank Communications,” speech delivered at the

Haas School of Business, University of California at Berkeley,

Berkeley, Calif., November13, https://www.federalreserve.gov/

newsevents/speech/yellen20121113a.htm.

2. For a discussion regarding principles for the conduct

of monetary policy, see Board of Governors of the Federal

Reserve System (2018), “Monetary Policy Principles and

Practice,” Board of Governors, https://www.federalreserve.gov/

monetarypolicy/monetary-policy-principles-and-practice.htm.

3. The Taylor (1993) rule was suggested in John B. Taylor

(1993), “Discretion versus Policy Rules in Practice,” Carnegie-

Rochester Conference Series on Public Policy, vol. 39

(December), pp. 195–214. The balanced-approach rule was

analyzed in John B. Taylor (1999), “A Historical Analysis of

Monetary Policy Rules,” in John B. Taylor, ed., Monetary Policy

Rules (Chicago: University of Chicago Press), pp. 319–41. The

adjusted Taylor (1993) rule was studied in David Reifschneider

and John C. Williams (2000), “Three Lessons for Monetary

Policy in a Low-Ination Era,” Journal of Money, Credit and

Banking, vol. 32 (November), pp. 936–66. A price-level rule

was discussed in Robert E. Hall (1984), “Monetary Strategy

with an Elastic Price Standard,” in Price Stability and Public

Policy, proceedings of a symposium sponsored by the Federal

Reserve Bank of Kansas City, held in Jackson Hole, Wyo.,

August2–3 (Kansas City: Federal Reserve Bank of Kansas

City), pp. 137–59, https://www.kansascityfed.org/publicat/

sympos/1984/s84.pdf. Finally, the rst-difference rule is

based on a rule suggested by Athanasios Orphanides (2003),

“Historical Monetary Policy Analysis and the Taylor Rule,”

Journal of Monetary Economics, vol. 50 (July), pp. 983–1022.

A comprehensive review of policy rules is in John B. Taylor

and John C. Williams (2011), “Simple and Robust Rules for

Monetary Policy,” in Benjamin M. Friedman and Michael

Woodford, eds., Handbook of Monetary Economics, vol. 3B

(Amsterdam: North-Holland), pp. 829–59. The same volume

of the Handbook of Monetary Economics also discusses

approaches other than policy rules for deriving policy rate

prescriptions.

4. The Taylor (1993) rule represented slack in resource

utilization using an output gap (the difference between the

current level of real gross domestic product (GDP) and the

level that GDP would be if the economy were operating at

maximum employment, measured in percent of the latter.

The rules in gure A represent slack in resource utilization

using the unemployment gap instead, because that gap better

captures the FOMC’s statutory goal to promote maximum

employment. However, movements in these alternative

measures of resource utilization are highly correlated. For

more information, see the note below gure A.

38 PART 2: MONETARY POLICY

standard Taylor (1993) rule after a recession during

which the federal funds rate has fallen to its lower

bound may therefore not provide enough policy

accommodation. To make up for the cumulative

shortfall in accommodation, the adjusted rule

prescribes only a gradual return of the policy rate to

the (positive) levels prescribed by the standard Taylor

(1993) rule after the economy begins to recover.

Similarly, the price-level rule specied in gureA

recognizes that the federal funds rate cannot be

reduced materially below zero. If ination runs below

the 2percent objective during periods when the

price-level rule prescribes setting the federal funds

rate well below zero, the rule will, over time, call for

more accommodation to make up for the past ination

shortfall.

Policymakers regularly examine the historical

prescriptions of different policy rules to help understand

the past stance of monetary policy and to inform their

current policy decisions. The most straightforward

way to compute such prescriptions is to use historical

values for the unemployment rate and ination, as well

addition, four of the ve rules include the difference

between recent ination and the FOMC’s longer-

run objective (2 percent as measured by the annual

change in the price index for personal consumption

expenditures (PCE)), while the price-level rule includes

the gap between the level of prices today and the level

of prices that would have been realized if ination had

been constant at 2 percent from a specied starting

year.

The price-level rule thereby takes account of the

deviation of ination from the long-run objective in

earlier periods as well as the current period, whereas

the other rules do not make up past misses of the

ination objective.

The adjusted Taylor (1993) rule recognizes that

the federal funds rate cannot be reduced materially

below zero, and that following the prescriptions of the

5. Calculating the prescriptions of the price-level rule

requires selecting a starting year for the price level from

which to cumulate the 2percent annual rate of ination.

Figure B uses 1998 as the starting year. Around that time,

the underlying trend of ination and longer-term ination

expectations stabilized at a level consistent with PCE price

ination being close to 2percent. (continued)

Taylor (1993) rule

= + +0.5

(

−

)

− )

= + +0.5

(

−

)

+2(

− )

Taylor (1993) rule, adjusted

= {

− , 0}

= { + +

(

−

)

+0.5

( ), 0}

−1

+0.5

(

−

)

(

−

)

−(

−4

−

−4

)

A. Monetary policy rules

Balanced-approach rule

Price-level rule

First-dierence rule

N: R

T93

, R

T93adj

, R

, and R

represent the values of the nominal federal funds rate prescribed by the Taylor (1993),

balanced-approach, adjusted Taylor (1993), price-level, and rst-dierence rules, respectively.

denotes the actual nominal federal funds rate for quarter t, π

is four-quarter price ination for quarter t, u

is the

unemployment rate in quarter t, and r

is the level of the neutral real federal funds rate in the longer run that, on average, is

expected to be consistent with sustaining maximum employment and ination at the FOMC’s 2 percent longer-run objective,

. In addition, u

is the rate of unemployment in the longer run. Z

is the cumulative sum of past deviations of the federal

funds rate from the prescriptions of the Taylor (1993) rule when that rule prescribes setting the federal funds rate below zero.

PLgap

is the percent deviation of the actual level of prices from a price level that rises 2 percent per year from its level in a

specied starting period.

The Taylor (1993) rule and other policy rules are generally written in terms of the deviation of real output from its full

capacity level. In these equations, the output gap has been replaced with the gap between the rate of unemployment in the

longer run and its actual level (using a relationship known as Okun’s law) in order to represent the rules in terms of the

FOMC’s statutory goals. Historically, movements in the output and unemployment gaps have been highly correlated. Box

note 3 provides references for the policy rules.

Monetary Policy Rules (continued)

MONETARY POLICY REPORT: JULY 2019 39

Historical Prescription of the Taylor (1993)

Rule with Feedback

One key consideration in evaluating monetary

policy rules based solely on historical data is that the

policy prescriptions from the rules do not take into

account the fact that the economy would have evolved

differently if the federal funds rate had followed the

alternative paths prescribed by the rules. For example,

if the FOMC had followed a policy rule in the past that

prescribed higher values for the federal funds rate than

actually occurred, the unemployment rate would likely

have been higher and ination lower than they actually

turned out to be. In turn, these different outcomes for

unemployment and ination would have fed back

into the policy rule, resulting in policy prescriptions

that differ from those based on the historical data

and shown in gure B. Proper consideration of these

feedback effects requires using an economic model,

which is a mathematical representation of how

economic activity, ination, the policy interest rate, and

other variables interact over time. With such a model,

one can assess how ination and the unemployment

rate might have evolved if a particular policy rule had

been followed over some historical period in a way that

incorporates these feedback effects. Federal Reserve

staff regularly use models of the U.S. economy to

study how economic outcomes could have differed if

monetary policy had followed various rules.

as estimates of the longer-run value of the interest rate

and the longer-run value of the unemployment rate,

in each policy rule.

The policy prescriptions from the

various rules based on this approach provide different

prescriptions for the federal funds rate, as shown in

gure B. Presented in this way, each point on the lines

in the gure is a snapshot of what the policy rules

would have prescribed, given the economic conditions

of that time. Because there is no denitive standard for

favoring one rule over another, consulting a range of

rules is generally preferable to relying on any particular

rule. Although almost all of the simple policy rules

would have called for values for the federal funds rate

that were increasing in recent years, the prescribed

values vary widely across rules.

6. The Taylor (1993), balanced-approach, adjusted Taylor

(1993), and price-level rules all require an estimate of the

neutral interest rate in the longer run. In addition, all of the

rules use an estimate of the rate of unemployment in the

longer run. Both of these objects are determined by structural

features in the economy and are not directly observable.

The box “Complexities of Monetary Policy Rules” in the

July2018 Monetary Policy Report describes the complications

in assessing simple policy rules that arise from uncertainty

about the neutral interest rate in the longer run. See Board of

Governors of the Federal Reserve System (2018), Monetary

Policy Report (Washington: Board of Governors, July),

pp.37–41, https://www.federalreserve.gov/monetarypolicy/

les/20180713_mprfullreport.pdf. The current discussion uses

estimates of these objects from survey data.

First-dierence rule

Price-level rule

Target federal funds rate

Balanced-approach rule

Taylor (1993) rule, adjusted

Percent

2019201720152013201120092007200520032001

B. Historical federal funds rate prescriptions from simple policy rules

Quarterly

Taylor (1993) rule

OTE: The rules use historical values of ination, the federal funds rate, and the unemployment rate. Ination is measured as the 4-quarter percent

change in the price index for personal consumption expenditures (PCE) excluding food and energy. Quarterly projections of long-run values for the

federal funds rate and the unemployment rate are derived through interpolations of biannual projections from Blue Chip Economic Indicators. The

long-run value for ination is taken as 2 percent. The target value of the price level is the average level of the price index for PCE excluding food and

energy in 1998 extrapolated at 2 percent per year. The target federal funds rate data extend through 2019:Q2.

OURCE: Federal Reserve Bank of Philadelphia; Wolters Kluwer, Blue Chip Economic Indicators; Federal Reserve Board sta estimates.

(continued on next page)

40 PART 2: MONETARY POLICY

Monetary Policy Rules (continued)

Figure C provides one illustrative example of how

accounting for feedback effects can alter the

prescriptions from a particular rule over a given period.

The gure compares the historical prescriptions of the

Taylor (1993) rule calculated without feedback—as in

the earlier section—with the prescriptions from the

same rule incorporating feedback effects. The rule

prescriptions with feedback effects result from an

empirical simulation of the FRB/US model.

The

simulation begins in the rst quarter of 2001, a period

when the prescription of the Taylor (1993) rule without

feedback roughly coincides with the historical value of

the federal funds rate. The three panels in the gure

display the paths for the federal funds rate (top panel),

the unemployment rate (middle panel), and four-quarter

PCE ination (bottom panel). The historical data are

shown by the black lines. The gray dashed line in the

top panel shows the historical prescription of the Taylor

(1993) rule without any feedback, the same as the gray

dashed line shown in gure B, and the blue dashed-

and-dotted line shows the prescriptions with feedback

effects. Because monetary policy affects the economy

only with a delay, the paths of the unemployment rate

and the ination rate are not much different from their

historical values over the rst year of the simulation,

despite the fact that the Taylor (1993) rule calls for

much higher interest rates than actually observed over

that period. By 2002, however, the higher rate path

under the Taylor (1993) rule causes the economy to

slow, resulting in a higher unemployment rate and

lower ination—the blue dashed-and-dotted lines in

the middle and bottom panels of gure C,

respectively—compared with the historical values.

Consequently, the policy rate path in the simulation

diverges from the rate path prescribed when feedback

effects are not included. Indeed, by the middle of 2003,

the value of the federal funds rate is substantially higher

in the calculation without feedback effects than it is in

the FRB/US model simulation that incorporates

feedback from the economy. This difference highlights

FRB/US is a large-scale macroeconomic model developed

by the Board’s staff for forecasting, constructing alternative

scenarios, and evaluating monetary policy strategies. The

model and related information are available on the Board’s

website at https://www.federalreserve.gov/econres/us-models-

about.htm. An example of the use of FRB/US for monetary

policy analysis can be found in Janet L. Yellen (2012),

“Perspectives on Monetary Policy,” speech delivered at the

Boston Economic Club Dinner, Boston, June6, https://www.

federalreserve.gov/newsevents/speech/yellen20120606a.htm.

the limitations in assessing policy rules over history if

the prescriptions from the rules are notably different

from the historical policy rate path and the effects of

the prescriptions of such rules for the economy are not

taken into account.

While model simulations can capture the effects of

policy rules on the economy and what those economic

effects imply for the settings of the policy rate, there are

important limitations to such exercises. Each simulation

is tied to a particular economic model, and changes in

the model can change the prescriptions from the given

policy rule. Models are necessarily simplications

of reality, and there is no agreed-upon “best” model

representation of the U.S. economy. Indeed, there is

substantial diversity among the models favored by

economists for this kind of analysis. Finally, in the real

world, the structure of the economy changes over time,

so an economic model used for studying a historical

episode such as the one featured here may not be

relevant for future policy considerations.

Model-based simulations with feedback add an

important dimension to our understanding of the

effects of policy rules. However, it is important to

stress that the usefulness of such rules for obtaining

and communicating current and future policy rate

prescriptions is still limited by a range of practical

considerations, even beyond the concerns about which

specic model to use. Monetary policy rules feature

only a small number of variables and thus exclude

many important indicators that are consulted by

policymakers. The policy rules here, for example, do

not include measures of nancial and credit market

conditions, indicators of consumer and business

sentiment, and data on expectations; these factors

are often very informative for the future course of the

economy. Moreover, simple policy rules do not take

into account possible risks to the economic outlook,

which may justify a policy response over and above

what would be implied by the most likely outcomes for

the economy.

8. The box “Monetary Policy Rules and Their Role in

the Federal Reserve’s Policy Process” in the February2018

Monetary Policy Report details the limitations of

monetary policy rules in accounting for a broad set of risk

considerations. See Board of Governors of the Federal Reserve

System (2018), Monetary Policy Report (Washington: Board of

Governors, February), pp. 35–38, https://www.federalreserve.

gov/monetarypolicy/les/20180223_mprfullreport.pdf.

(continued)

MONETARY POLICY REPORT: JULY 2019 41

Simulation without feedback

Simulation with feedback

Percent

2006200520042003200220012000

Federal funds rate

Quarterly

Federal funds rate

C. Simple policy rule simulations—Taylor (1993)

Rate of unemployment in the longer run

Simulation with feedback

Percent

2006200520042003200220012000

Unemployment rate

Quarterly

Unemployment rate

Simulation with feedback

1.0

1.5

2.0

2.5

3.0

3.5

4-quarter change

2006200520042003200220012000

PCE ination

Quarterly

PCE ination

2% PCE ination

OTE: Data start in 2000:Q1 and extend through 2006:Q4.

OURCE: Federal Reserve Bank of Philadelphia; Wolters Kluwer, Blue Chip Economic Indicators; Federal Reserve Board sta estimates.

42 PART 2: MONETARY POLICY

sheet normalization in light of economic and nancial

developments. Moreover, the Committee would

be prepared to use its full range of tools, including

altering the size and composition of its balance sheet,

if future economic conditions were to warrant a more

accommodative monetary policy than can be achieved

solely by reducing the federal funds rate.

Following the March FOMC meeting, the Committee

announced that it intends to conclude the reduction

of its aggregate securities holdings in the System

Open Market Account at the end of September2019.

Consistent with its decision at the March FOMC

meeting, the Committee slowed balance sheet runoff

in May by reducing the cap for monthly redemptions

of Treasury securities from $30billion to $15billion

(left panel of gure A). In connection with its intention

to cease balance sheet runoff entirely at the end of

September2019 and consistent with its aim of holding

primarily Treasury securities in the longer run, the

Committee also stated that it intends to continue to

allow its holdings of agency securities to decline.

Therefore, beginning in October2019, principal

payments received from holdings of agency debt and

agency mortgage-backed securities (MBS) will be

reinvested in Treasury securities through secondary-

market purchases subject to a maximum amount of

$20billion per month. Purchases of Treasury securities

will initially be conducted across a range of maturities

to roughly match the maturity composition of Treasury

securities outstanding.

Any principal payments from

At its meetings in January and March of this year,

the Federal Open Market Committee (FOMC) made

important decisions regarding its framework for

monetary policy implementation and the process of

normalizing the size of its balance sheet. The issues

associated with these decisions have been discussed

over several FOMC meetings and have been part of an

ongoing process of the Committee’s deliberations.

After indicating in previous communications that,

in the longer run, the Committee intends to operate

in a regime in which it holds no more securities than

necessary to implement monetary policy efciently and

effectively, the FOMC decided at its January meeting

to continue to implement monetary policy in a regime

with an ample supply of reserves.

Such a system,

which has been in place since late 2008, does not

require active management of reserves through frequent

open market operations. Instead, with ample reserves in

the banking system, the federal funds rate is expected to

settle near the rate of interest paid on excess reserves.

This system has proven to be an efcient means of

controlling the policy rate and effectively transmitting

the stance of policy to a wide array of other money

market rates and to broader nancial conditions. In the

statement released after its January meeting, the FOMC

also indicated that it continues to view the target range

for the federal funds rate as its primary tool to adjust the

stance of monetary policy. Nonetheless, the Committee

is prepared to adjust the details of its plans for balance

1. For summaries of these discussions, see the minutes

from the FOMC meetings in November and December of last

year as well as the minutes of this year’s January and March

meetings, which are available on the Board’s website at https://

www.federalreserve.gov/monetarypolicy/fomccalendars.htm.

2. See the Statement Regarding Monetary Policy

Implementation and Balance Sheet Normalization, which is

available on the Board’s website at https://www.federalreserve.

gov/monetarypolicy/policy-normalization.htm.

Framework for Monetary Policy Implementation and

Normalization of the Federal Reserve’s Balance Sheet

3. See the Balance Sheet Normalization Principles and Plans,

which can be found on the Board’s website at https://www.

federalreserve.gov/monetarypolicy/policy-normalization.htm.

4. Details on the reinvestment of principal payments from

the Federal Reserve’s holdings of agency securities, including

information on the distribution of Treasury purchases, are

available on the Federal Reserve Bank of New York’s website at

(continued)

MONETARY POLICY REPORT: JULY 2019 43

constant for a while. During this period, reserve

balances will continue to decline gradually as currency

and other nonreserve liabilities increase. Once the

Committee judges that reserve balances have declined

to the level consistent with the efcient and effective

implementation of monetary policy, the FOMC

plans to resume periodic open market operations to

accommodate the normal trend growth in the demand

for the Federal Reserve’s liabilities.

agency securities holdings in excess of the monthly

$20billion maximum will continue to be reinvested

into agency MBS (right panel of gure A).

When the process of normalizing the size of the

Federal Reserve’s balance sheet concludes at the

end of September, reserves will likely be somewhat

above the level necessary for an efcient and

effective implementation of monetary policy. If so,

the Committee plans after September to keep the size

of the Federal Reserve’s securities holdings roughly

5. In contrast to the Federal Reserve’s large-scale asset

purchases conducted over recent years, these periodic

technical open market operations would not have any

implication for the stance of monetary policy; rather, such

operations would be aimed at maintaining a level of reserve

balances in the banking system consistent with efcient and

effective policy implementation.

A. Principal payments on SOMA securities

Treasury securities Agency debt and mortgage-backed securities

Billions of dollars

2020201920182017

Monthly

Monthly cap

Redemptions

Reinvestments

OTE

: Reinvestment and redemption amounts of Treasury securities

are projections starting in June 2019. The data extend through

February 2020.

OURCE

: Federal Reserve Bank of New York; Federal Reserve

Board sta calculations.

Billions of dollars

2020201920182017

Monthly

Monthly cap

OTE: Reinvestment and redemption amounts of agency debt and

mortgage-backed securities are projections starting in June 2019. Starting

in October 2019, principal payments from holdings of agency securities

below $20 billion per month are reinvested into Treasury securities, while

those above are reinvested into agency mortgage-backed securities. The

data extend through February 2020.

OURCE: Federal Reserve Bank of New York; Federal Reserve Board

sta calculations.

Redemptions

Reinvestments into mortgage-backed securities

Reinvestments into Treasury securities

https://www.newyorkfed.org/markets/treasury-reinvestments-

purchases-faq.html. The FOMC will revisit the reinvestment

plan in connection with its deliberations regarding the

longer-run composition of the System Open Market Account

portfolio.

In conjunction with the Federal Open

Market Committee (FOMC) meeting held

on June18–19, 2019, meeting participants

submitted their projections of the most likely

outcomes for real gross domestic product

(GDP) growth, the unemployment rate, and

ination for each year from 2019 to 2021

and over the longer run. Each participant’s

projections were based on information

available at the time of the meeting, together

with his or her assessment of appropriate

monetary policy—including a path for the

federal funds rate and its longer-run value—

and assumptions about other factors likely

to aect economic outcomes.

The longer-

run projections represent each participant’s

assessment of the value to which each variable

would be expected to converge, over time,

under appropriate monetary policy and in the

absence of further shocks to the economy.

“Appropriate monetary policy” is dened as

the future path of policy that each participant

deems most likely to foster outcomes for

economic activity and ination that best

satisfy his or her individual interpretation of

the statutory mandate to promote maximum

employment and price stability.

Participants who submitted longer-run

projections generally expected that, under

appropriate monetary policy, growth of real

GDP in 2019 would run at or somewhat above

their individual estimates of its longer-run rate.

Thereafter, almost all participants expected

19. Five members of the Board of Governors were in

oce at the time of the June FOMC meeting.

20. One participant did not submit longer-run

projections for real GDP growth, the unemployment rate,

or the federal funds rate.

real GDP growth to edge down, with the vast

majority of participants projecting growth

in 2021 to be at or below their estimates

of its longer-run rate. All participants who

submitted longer-run projections continued

to expect that the unemployment rate would

run at or below their estimates of its longer-

run level through 2021. Compared with the

Summary of Economic Projections (SEP) from

March2019, most participants revised down

slightly their projections for the unemployment

rate from 2019 through 2021. All participants

marked down somewhat their projections for

2019 for total ination, as measured by the

four-quarter percent change in the price index

for personal consumption expenditures (PCE),

and almost all did so for their projections

for core ination. All participants projected

that ination would increase in 2020 from

2019, and a majority expected another

slight increase in 2021. The vast majority of

participants expected that ination would be

at or slightly above the Committee’s 2percent

objective in 2021. Core PCE price ination was

also projected to increase over the projection

period, rising to 2.0percent in 2021. Table1

and gure1 provide summary statistics for the

projections.

As shown in gure2, about half of

participants expected that the evolution

of the economy, relative to their objectives

of maximum employment and 2percent

ination, would likely warrant keeping the

federal funds rate at its current level through

the end of 2019; the same number projected

that a lower level for the federal funds rate

would be appropriate by year-end. The

medians of participants’ assessments of the

appropriate level of the federal funds rate in

Part 3

summary of eConomiC ProjeCtions

46 PART 3: SUMMARY OF ECONOMIC PROJECTIONS

Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their

individual assessments of projected appropriate monetary policy, June 2019

Percent

Variable

Median

Central tendency

Range

2019 2020 2021

Longer

run

2019 2020 2021

Longer

run

2019 2020 2021

Longer

run

Change in real GDP .....

2.1 2.0

1.8 1.9

2.0–2.2 1.8–2.2

1.8–2.0 1.8–2.0

2.0–2.4 1.5–2.3

1.5–2.1

1.7–2.1

March projection ..... 2.1 1.9 1.8 1.9 1.9–2.2 1.8–2.0 1.7–2.0 1.8–2.0 1.6–2.4 1.7–2.2 1.5–2.2 1.7–2.2

Unemployment rate .....

3.6 3.7

3.8 4.2

3.6–3.7 3.5–3.9

3.6–4.0 4.0–4.4

3.5–3.8 3.3–4.0

3.3–4.2

3.6–4.5

March projection ..... 3.7 3.8 3.9 4.3 3.6–3.8 3.6–3.9 3.7–4.1 4.1–4.5 3.5–4.0 3.4–4.1 3.4–4.2 4.0–4.6

PCE ination ..........

1.5 1.9

2.0 2.0

1.5–1.6 1.9–2.0

2.0–2.1 2.0

1.4–1.7 1.8–2.1

1.9–2.2

2.0

March projection ..... 1.8 2.0 2.0 2.0 1.8–1.9 2.0–2.1 2.0–2.1 2.0 1.6–2.1 1.9–2.2 2.0–2.2 2.0

Core PCE ination

.....

1.8 1.9

2.0

1.7–1.8 1.9–2.0

2.0–2.1

1.4–1.8 1.8–2.1

1.8–2.2

March projection .....

2.0 2.0

2.0

1.9–2.0 2.0–2.1

2.0–2.1

1.8–2.2 1.8–2.2

1.9–2.2

Memo: Projected

appropriate policy path

Federal funds rate .......

2.4 2.1

2.4

2.5

1.9–2.4 1.9–2.4

1.9–2.6

2.5–3.0

1.9–2.6 1.9–3.1

1.9–3.1

2.4–3.3

March projection ..... 2.4 2.6 2.6 2.8 2.4–2.6 2.4–2.9 2.4–2.9 2.5–3.0 2.4–2.9 2.4–3.4 2.4–3.6 2.5–3.5

N: Projections of change in real gross domestic product (GDP) and projections for both measures of ination are percent changes from the fourth quarter of the previous year to

the fourth quarter of the year indicated. PCE ination and core PCE ination are the percentage rates of change in, respectively, the price index for personal consumption expenditures

(PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year

indicated. Each participant’s projections are based on his or her assessment of appropriate monetary policy. Longer-run projections represent each participant’s assessment of the rate

to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy. The projections for the federal funds

rate are the value of the midpoint of the projected appropriate target range for the federal funds rate or the projected appropriate target level for the federal funds rate at the end of the

specied calendar year or over the longer run. The March projections were made in conjunction with the meeting of the Federal Open Market Committee on March19–20, 2019. One

participant did not submit longer-run projections for the change in real GDP, the unemployment rate, or the federal funds rate in conjunction with the March19–20, 2019, meeting, and

one participant did not submit such projections in conjunction with the June18–19, 2019, meeting.

1. For each period, the median is the middle projection when the projections are arranged from lowest to highest. When the number of projections is even, the median is the average

of the two middle projections.

2. The central tendency excludes the three highest and three lowest projections for each variable in each year.

3. The range for a variable in a given year includes all participants’ projections, from lowest to highest, for that variable in that year.

4. Longer-run projections for core PCE ination are not collected.

2020 and 2021 were close to the median of

their assessments of the longer-run federal

funds rate level. Nearly all participants lowered

their projections for the appropriate level of

the federal funds rate, relative to March, at

some point in the forecast period. Although

nearly half of the participants revised their

projections for 2019 to levels 25 basis points

or 50 basis points below the current level, the

median projection for the federal funds rate for

the end of 2019 was unchanged. The medians

for the federal funds rate for 2020 and 2021

were 50basis points and 25 basis points lower

than in March, respectively.

Most participants regarded the uncertainties

around their forecasts for GDP growth, total

ination, and core ination as broadly similar

to the average of the past 20years. About

half of the participants viewed the level of

uncertainty around their unemployment rate

projections as being similar to the average of

the past 20years, and about the same number

viewed uncertainty as higher. Participants’

assessments of risks to their outlooks for

output growth and the unemployment rate

shifted notably relative to their assessments in

March. As a result, most participants viewed

the risks for GDP growth as weighted to the

downside and the risks for the unemployment

rate as weighted to the upside. About half of

participants viewed the risks to ination as

being broadly balanced, with a similar number

viewing ination risks as being weighted to the

downside.

A more complete description of the SEP will

be released with the minutes of the June18–19,

2019, FOMC meeting on July10.

MONETARY POLICY REPORT: JULY 2019 47

Figure 1. Medians, central tendencies, and ranges of economic projections, 2019–21 and over the longer run

Change in real GDP

Percent

Median of projections

Central tendency of projections

Range of projections

Actual

Unemployment rate

Percent

PCE ination

Percent

2014 2015 2016 2017 2018 2019 2020 2021 Longer

run

2014 2015 2016 2017 2018 2019 2020 2021 Longer

run

2014 2015 2016 2017 2018 2019 2020 2021 Longer

run

N: Denitions of variables and other explanations are in the notes to the projections table. The data for the actual

values of the variables are annual.

48 PART 3: SUMMARY OF ECONOMIC PROJECTIONS

Percent

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Figure 2. FOMC participants’ assessments of appropriate monetary policy: Midpoint of target range or target level

for the federal funds rate

2019 2020 2021 Longer run

N: Each shaded circle indicates the value (rounded to the nearest ⅛ percentage point) of an individual participant’s

judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal

funds rate at the end of the specied calendar year or over the longer run. One participant did not submit longer-run projections

for the federal funds rate.

AFE advanced foreign economy

CCyB countercyclical capital buer

DPI disposable personal income

ECB European Central Bank

EME emerging market economy

EPOP employment-to-population ratio

FOMC Federal Open Market Committee; also, the Committee

FRB/US a large-scale macroeconometric model of the U.S. economy

GDP gross domestic product

IP industrial production

JOLTS Job Openings and Labor Turnover Survey

LFPR labor force participation rate

MBS mortgage-backed securities

OPEC Organization of the Petroleum Exporting Countries

PCE personal consumption expenditures

SEC U.S. Securities and Exchange Commission

SLOOS Senior Loan Ocer Opinion Survey on Bank Lending Practices

TIPS Treasury Ination-Protected Securities

VIX implied volatility for the S&P 500 index

abbreviations

Board of Governors of the Federal Reserve System

For use at 11:00 a.m. EDT

July 5, 2019

Monetary Policy rePort

July 5, 2019