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Onetary Olicy Eport: July 9, 2021
Onetary Olicy Eport: July 9, 2021
EDT
July 9, 2021
The Board of Governors is pleased to submit its Monetary Policy Report pursuant to
section 2B of the Federal Reserve Act.
Sincerely,
The Federal Open Market Committee (FOMC) is firmly committed to fulfilling its statutory mandate from
the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The
Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity
facilitates well-informed decisionmaking by households and businesses, reduces economic and financial
uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability,
which are essential in a democratic society.
Employment, inflation, and long-term interest rates fluctuate over time in response to economic and financial
disturbances. Monetary policy plays an important role in stabilizing the economy in response to these
disturbances. The Committee’s primary means of adjusting the stance of monetary policy is through changes
in the target range for the federal funds rate. The Committee judges that the level of the federal funds rate
consistent with maximum employment and price stability over the longer run has declined relative to its
historical average. Therefore, the federal funds rate is likely to be constrained by its effective lower bound
more frequently than in the past. Owing in part to the proximity of interest rates to the effective lower bound,
the Committee judges that downward risks to employment and inflation have increased. The Committee is
prepared to use its full range of tools to achieve its maximum employment and price stability goals.
The maximum level of employment is a broad-based and inclusive goal that is not directly measurable
and changes over time owing largely to nonmonetary factors that affect the structure and dynamics of the
labor market. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the
Committee’s policy decisions must be informed by assessments of the shortfalls of employment from its
maximum level, recognizing that such assessments are necessarily uncertain and subject to revision. The
Committee considers a wide range of indicators in making these assessments.
The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee
has the ability to specify a longer-run goal for inflation. The Committee reaffirms its judgment that inflation
at the rate of 2 percent, as measured by the annual change in the price index for personal consumption
expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate. The
Committee judges that longer-term inflation expectations that are well anchored at 2 percent foster price
stability and moderate long-term interest rates and enhance the Committee’s ability to promote maximum
employment in the face of significant economic disturbances. In order to anchor longer-term inflation
expectations at this level, the Committee seeks to achieve inflation that averages 2 percent over time, and
therefore judges that, following periods when inflation has been running persistently below 2 percent,
appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.
Monetary policy actions tend to influence economic activity, employment, and prices with a lag. In setting
monetary policy, the Committee seeks over time to mitigate shortfalls of employment from the Committee’s
assessment of its maximum level and deviations of inflation from its longer-run goal. Moreover, sustainably
achieving maximum employment and price stability depends on a stable financial system. Therefore, the
Committee’s policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments
of the balance of risks, including risks to the financial system that could impede the attainment of the
Committee’s goals.
The Committee’s employment and inflation objectives are generally complementary. However, under
circumstances in which the Committee judges that the objectives are not complementary, it takes into account
the employment shortfalls and inflation deviations and the potentially different time horizons over which
employment and inflation are projected to return to levels judged consistent with its mandate.
The Committee intends to review these principles and to make adjustments as appropriate at its annual
organizational meeting each January, and to undertake roughly every 5 years a thorough public review of its
monetary policy strategy, tools, and communication practices.
Contents
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Recent Economic and Financial Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Monetary Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Special Topics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
List of Boxes
The Uneven Recovery in Labor Force Participation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Recent Inflation Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Supply Chain Bottlenecks in U.S. Manufacturing and Trade . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Assessing the Recent Rise in Inflation Expectations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Developments Related to Financial Stability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Monetary Policy Rules, the Effective Lower Bound, and the Economic Recovery . . . . . . . . . . 42
Developments in the Federal Reserve’s Balance Sheet and Money Markets. . . . . . . . . . . . . . . 46
Forecast Uncertainty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Note: This report reflects information that was publicly available as of noon EDT on July 7, 2021.
Unless otherwise stated, the time series in the figures extend through, for daily data, July 6, 2021; for monthly data,
May 2021; and, for quarterly data, 2021:Q1. In bar charts, except as noted, the change for a given period is measured to
its final quarter from the final quarter of the preceding period.
For figures 20, 32, and 44, note that the S&P/Case-Shiller U.S. National Home Price Index, the S&P 500 Index, and the Dow Jones Bank Index are
products of S&P Dow Jones Indices LLC and/or its affiliates and have been licensed for use by the Board. Copyright © 2021 S&P Dow Jones Indices LLC,
a division of S&P Global, and/or its affiliates. All rights reserved. Redistribution, reproduction, and/or photocopying in whole or in part are prohibited
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Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates, nor their third-party licensors make
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liability for any errors, omissions, or interruptions of any index or the data included therein.
For figure 22, neither DTCC Solutions LLC nor any of its affiliates shall be responsible for any errors or omissions in any DTCC data included in this
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costs, expenses, legal fees, or losses (including lost income or lost profit, trading losses, and opportunity costs) in connection with this publication.
1
Summary
Over the first half of 2021, progress on Inflation. Consumer price inflation, as
vaccinations has led to a reopening of the measured by the 12-month change in the
economy and strong economic growth, PCE price index, moved up from 1.2 percent
supported by accommodative monetary at the end of last year to 3.9 percent in May.
and fiscal policy. However, the effects of the The 12-month measure of inflation that
COVID-19 pandemic have continued to weigh excludes food and energy items (so-called
on the U.S. economy, and employment has core inflation) was 3.4 percent in May, up
remained well below pre-pandemic levels. from 1.4 percent at the end of last year.
Furthermore, shortages of material inputs Some of the strength in recent 12-month
and difficulties in hiring have held down inflation readings reflects the comparison
activity in a number of industries. In part of current prices with prices that sank at
because of these bottlenecks and other largely the onset of the pandemic as households
transitory factors, PCE (personal consumption curtailed spending—a transitory result of
expenditures) prices rose 3.9 percent over the “base effects.” More lasting but likely still
12 months ending in May. temporary upward pressure on inflation has
come from prices for goods experiencing
Over the first half of the year, the Federal supply chain bottlenecks, such as motor
Open Market Committee (FOMC) held vehicles and appliances. In addition, prices
its policy rate near zero and continued to for some services, such as airfares and
purchase Treasury securities and agency lodging, have moved up sharply in recent
mortgage-backed securities to support the months toward more normal levels as
economic recovery. These measures, along with demand has recovered. Both survey-based
the Committee’s guidance on interest rates and market-based measures of longer-term
and the Federal Reserve’s balance sheet, will inflation expectations have risen since the end
help ensure that monetary policy continues to of last year, largely reversing the downward
deliver powerful support to the economy until drift in those measures in recent years, and
the recovery is complete. are in a range that is broadly consistent with
the FOMC’s longer-run inflation objective.
Recent Economic and Financial
Developments Economic activity. In the first quarter, real
gross domestic product (GDP) increased
The labor market. The labor market continued 6.4 percent, propelled by a surge in household
to recover over the first six months of 2021. consumption and a solid increase in business
Job gains averaged 540,000 per month, and investment but restrained by a substantial
the unemployment rate moved down from drawdown in inventories as firms contended
6.7 percent in December to 5.9 percent in with production bottlenecks. Data for the
June. Although labor market improvement has second quarter suggest a further robust
been rapid, the unemployment rate remained increase in demand. Against a backdrop of
elevated in June, and labor force participation elevated household savings, accommodative
has not moved up from the low rates that financial conditions, ongoing fiscal support,
have prevailed for much of the past year. A and the reopening of the economy, the
surge in labor demand that has outpaced the strength in household spending has persisted,
recovery in labor supply has resulted in a jump reflecting continued strong spending on
in job vacancies and a step-up in wage gains in durable goods and solid progress toward more
recent months. normal levels of spending on services.
2 Summary
target range for the federal funds rate until surge in retirements, increased caregiving
labor market conditions have reached levels responsibilities, and individuals’ fear of
consistent with its assessments of maximum contracting COVID-19; expansions to
employment and inflation has risen to the availability, duration, and level of
2 percent and is on track to moderately exceed unemployment insurance benefits may also
that rate for some time. have supported individuals who withdrew from
the labor force. Many of these factors should
Balance sheet policy. With the federal funds have a diminishing effect on participation in
rate near zero, the Federal Reserve has also the coming months as public health conditions
continued to undertake asset purchases, continue to improve and as expanded
increasing its holdings of Treasury securities unemployment insurance expires. (See the
by $80 billion per month and its holdings box “The Uneven Recovery in Labor Force
of agency mortgage-backed securities by Participation” in Part 1.)
$40 billion per month. These purchases
help foster smooth market functioning and Recent inflation developments. Consumer price
accommodative financial conditions, thereby inflation has increased notably this spring
supporting the flow of credit to households as a surge in demand has run up against
and businesses. The Committee expects these production bottlenecks and hiring difficulties.
purchases to continue at least at this pace As these extraordinary circumstances pass,
until substantial further progress has been supply and demand should move closer to
made toward its maximum-employment and balance, and inflation is widely expected to
price-stability goals. In coming meetings, move down. (See the box “Recent Inflation
the Committee will continue to assess the Developments” in Part 1.)
economy’s progress toward these goals since
the Committee adopted its asset purchase Supply chain bottlenecks in U.S. manufacturing
guidance last December. and trade. Supply chain bottlenecks have
hampered U.S. manufacturers’ ability to
In assessing the appropriate stance of procure the inputs needed to meet the surge
monetary policy, the Committee will continue in demand that followed widespread factory
to monitor the implications of incoming shutdowns during the first half of last year.
information for the economic outlook. The Additionally, a massive influx of goods
Committee is prepared to adjust the stance of has exceeded the capacity of U.S. ports,
monetary policy as appropriate if risks emerge extending manufacturers’ wait times for
that could impede the attainment of the imported parts. The stress on supply chains
Committee’s goals. is reflected in historically high order backlogs
and historically low customer inventories;
Special Topics these stresses, together with strong demand,
have led to increased price pressures. When
The uneven recovery in labor force participation. these bottlenecks will resolve is uncertain, as
The labor force participation rate (LFPR) they reflect the global supply chain as well
has improved very little since early in the as industry-specific factors, but for some
recovery and remains well below pre-pandemic goods, such as lumber, the previous sharp
levels. Relative to its February 2020 level, the increases in prices have begun to reverse. (See
LFPR remains especially low for individuals the box “Supply Chain Bottlenecks in U.S.
without a college education, for individuals Manufacturing and Trade” in Part 1.)
aged 55 and older, and for Hispanics and
Latinos. Factors likely contributing both Inflation expectations. To avoid sustained
to the incomplete recovery of the LFPR periods of unusually low or high inflation, a
and to differences across groups include a fundamental aspect of the FOMC’s monetary
4 Summary
policy framework is for longer-term inflation critical for providing the necessary support to
expectations to be well anchored at the the economy through this challenging period.
Committee’s 2 percent longer-run inflation (See the box “Monetary Policy Rules, the
objective. Even though the pace of price Effective Lower Bound, and the Economic
increases has jumped in the first half of this Recovery” in Part 2.)
year, recent readings on various measures of
inflation expectations indicate that inflation is The Federal Reserve’s balance sheet. Since
expected to return to levels broadly consistent January, the growth in reserves, the drawdown
with the FOMC’s 2 percent longer-run of the Treasury General Account, and the
inflation objective after a period of temporarily surge in usage of the overnight reverse
higher inflation. That said, upside risks to repurchase agreement (ON RRP) facility
the inflation outlook in the near term have have significantly affected the composition
increased. (See the box “Assessing the Recent of the Federal Reserve’s liabilities. Against a
Rise in Inflation Expectations” in Part 1.) backdrop of low short-term market interest
rates and ample liquidity, the use of the
Monetary policy rules. Simple monetary policy ON RRP facility has increased substantially
rules, which relate a policy interest rate to a since April and has reached a recent high of
small number of other economic variables, nearly $1 trillion, compared with usage near
can provide useful guidance to policymakers. zero in February. Factors contributing to this
Many of the rules have prescribed strongly increase included the decline in Treasury bill
negative values of the federal funds rate since supply, downward pressure on money market
the start of the pandemic-driven recession. rates, and the recent technical adjustment
Because of the effective lower bound for the to the Federal Reserve’s administered rates.
federal funds rate, the Federal Reserve’s other (See the box “Developments in the Federal
monetary policy tools—namely, forward Reserve’s Balance Sheet and Money Markets”
guidance and asset purchases—have been in Part 2.)
5
Part 1
Recent Economic and Financial Developments
Domestic Developments 1. Nonfarm payroll employment
0.8 percentage point in the first half of the 2. Civilian unemployment rate
year, to 5.9 percent in June, it remained well
Monthly Percent
above its pre-pandemic level (figure 2). This
figure understates the shortfall in employment, 16
particularly as factors related to the pandemic 14
appear to be weighing on participation in the 12
labor market.
10
4
With economic activity rebounding, labor
2
demand rose briskly in the spring, while
the supply of labor struggled to keep up. 2005 2007 2009 2011 2013 2015 2017 2019 2021
Employers reported widespread hiring NOTE: The data extend through June 2021.
difficulties, job openings jumped to about SOURCE: Bureau of Labor Statistics via Haver Analytics.
30 percent above the average level for 2019, 3. Ratio of job openings to job seekers
and the ratio of job openings to job seekers
Monthly Ratio
surged (figure 3). With a dwindling pool of
temporarily laid-off workers to recall, hiring 1.5
increasingly involved reallocation of workers
across firms and industries, a more time- 1.2
Monthly Percent
20
18
Black or African American
16
14
12
Hispanic or Latino
10
White 8
6
Asian
4
B. Percent of the population not in the labor force and C. Percent of the population not in the labor
retired, change from January and February 2020 force and caregiving, change from January and
to April and May 2021 February 2020 to April and May 2021
Not in the Not in the labor Not in the
Group Not in the
labor force force and retired Group labor force and
labor force caregiving
All individuals aged 16 1.7 1.0
and older All individuals aged 16 1.7 .7
and older
Aged 55 and older 1.7 1.9
Women aged 25 to 54 without 1.8 1.0
Men 1.9 1.8 children
Women 1.5 2.0 Mothers aged 25 to 54 with 1.4 1.4
White 1.8 1.8 only children aged 5 and
younger
Black or African American .9 1.8
Mothers aged 25 to 54 with 2.6 2.6
Asian 3.8 4.2 children aged 6 to 17
Hispanic or Latino 2.5 2.9 White 2.7 2.5
Note: Federal Reserve Board staff estimates from microdata in the Current Black or African American 2.8 3.6
Population Survey (CPS). Estimates are not seasonally adjusted. Small sample
sizes preclude reliable estimates for Native Americans and other groups not Asian 2.3 1.3
included in the table.
SourCe: Census Bureau, CPS. Hispanic or Latino 5.0 4.0
Fathers aged 25 to 54 with .7 .6
children aged 6 to 17
indicates being out of the labor force and retired jumped Note: Federal Reserve Board staff estimates from microdata in the Current
at the start of the pandemic and, as shown in figure B, Population Survey (CPS). Estimates are not seasonally adjusted. Individuals
not in the labor force and caregiving are those who are not in the labor force and
has increased by 1 percentage point since early 2020— report “taking care of house or family” as their current situation. Small sample
accounting for more than one-half of the 1.7 percentage sizes preclude reliable estimates for Native Americans and other groups not
included in the table.
point decline in the aggregate LFPR over this period.4 SourCe: Census Bureau, CPS.
Among individuals aged 55 and older, the increase
has been larger for women than for men and larger for Consistent with a considerable effect from students’
Hispanics and Asians than for whites and Blacks. virtual education, estimates from the figure also show
Caregiving responsibilities: Figure C shows that that the increase in nonparticipation for caregiving
nonparticipation in the labor force associated with reasons has been larger for mothers aged 25 to 54
caregiving has increased 0.7 percentage point.5 This with children aged 6 to 17 (2.6 percentage points)
increase likely reflects in part the difficulties imposed than for women without their own children in the
on parents and other caregivers from in-person home (1.0 percentage point), women who only have
education not being fully available to many K–12 children aged 5 and younger (1.4 percentage points),
students, and some of these parents may have decided and fathers (0.6 percentage point) and accounts for all
to stop working or looking for work to help care for of the decline in the LFPR for mothers.7 The increase
their children and facilitate their virtual education.6 in nonparticipation for caregiving has been especially
large for Black and Hispanic mothers, and it accounts for
much of the larger decline in the LFPR for these groups.8
(Washington: Congressional Budget Office, March), https://
www.cbo.gov/system/files/115th-congress-2017-2018/ (continued on next page)
workingpaper/53616-wp-laborforceparticipation.pdf.
4. The Federal Reserve Board staff estimates presented in 7. The increase in nonparticipation due to caregiving
figures B and C are derived from non–labor force participants’ concerns for women with younger children may reflect
responses in the CPS to the question “What best describes the lack of available childcare facilities during much of the
your current situation at this time?”; some possible responses pandemic. For adults without their own school-age children,
include “in retirement,” “disabled,” “in school,” and “taking the increase may reflect that some of these individuals have
care of house or family.” These figures do not correspond also likely had to stop working or looking for work in order
exactly with figure A because figures B and C use data through to assist with children of relatives or with elderly or disabled
May 2021 (which is the latest month for which CPS microdata relatives rather than risk care outside of the home. Indeed,
were available at the time of writing) and show data that are the increase in nonparticipation for caregiving reasons among
not seasonally adjusted. Figures B and C display two-month women who are not mothers is larger for those with other
averages because these data can have considerable noise at adult household members who report being disabled or are
monthly frequency. aged 65 or older.
5. Nonparticipation in the labor force associated with 8. These differences may in part reflect that the groups
caregiving is measured as nonparticipants in the CPS who with larger increases in nonparticipation due to caregiving
report “taking care of house or family” as their current were less likely to work in telecommute-capable occupations
situation. before COvID-19; for example, based on May 2021 Federal
6. Indeed, according to the Return to Learn Tracker (R2L), Reserve Board staff estimates from the CPS, 19 percent of
even as of June 7, 2021, only 54 percent of districts provided white mothers aged 25 to 54 with kids aged 6 to 17 report
fully in-person education. More information is available on the telecommuting due to COvID, compared with 15 percent of
R2L website at https://www.returntolearntracker.net. Black mothers and 12 percent of Hispanic mothers. It may also
10 Part 1: Recent Economic and Financial Developments
Fear of the COVID-19 virus: Individuals’ fears of at the start of the pandemic by temporarily suspending
contracting the COvID-19 virus are likely also still work search requirements and relaxing other eligibility
depressing labor force participation somewhat and criteria. While the income support from expanded UI
may in part be reflected in the factors previously and other fiscal stimulus likely led some jobseekers
discussed; COvID-19 fears may be especially relevant to search less intensively or to be more selective in
for those who would otherwise be working on-site in accepting job offers, the effects of these programs on
high-contact industries and occupations—and even for labor force participation are not clear.11 The support
some fully vaccinated individuals, such as older and from enhanced UI has been especially consequential
immunocompromised workers who are at higher risk for lower-wage workers, who have borne the brunt of
for severe illness or death from COvID-19. Consistent recent job losses and who have benefited most from
with the importance of this reason, data from the broader coverage and higher benefit levels.12
Census Bureau’s Household Pulse Survey show that The path ahead: Many of the factors constraining
between May 26 and June 7, 2021, about 1 percent of labor force participation should gradually abate in
the population reported not working or having recently the coming months, and, as they do, the overall
looked for work because of fears of COvID-19.9 This participation rate should rise and the demographic
share was higher for Blacks and Hispanics, those aged disparities in labor force participation that widened
18 to 24, and individuals with no college education, during the pandemic will likely continue to narrow.
which aligns with demographic differences in the share Fears of getting or spreading COvID-19 are likely
of individuals employed in high-contact industries to recede if vaccination rates continue to climb and
before COvID-19 and with differences in individuals’ if caseloads continue to diminish, and caregiving
ability to work from home. responsibilities should ease if most students return to
Expanded unemployment insurance: The pandemic in-person instruction in the fall. With federal pandemic
recession prompted an unprecedented expansion UI programs slated to end in September and many
in the availability and level of support of UI. A suite states withdrawing from them in advance of their
of federal programs has extended benefits to groups nationwide expiration, any effects of enhanced UI
normally ineligible for UI, increased the potential benefits on labor force participation will likely wane
duration of benefits, and boosted the weekly benefit soon as well. The spate of retirements spurred by
amounts received by UI claimants.10 Complementing the pandemic will continue to weigh on labor force
the new programs, many states broadened UI eligibility participation for some time, but this factor should leave
a gradually diminishing imprint over the next few years,
because these workers were likely poised to retire soon
reflect that in-person education was less common in school even in the absence of the pandemic. The full effect
districts with a larger share of Black and Hispanic students; of the pandemic on the structure of the labor market
for example, data from the Return to Learn Tracker for June 7
show that fully in-person education was more common in remains to be seen, and the characteristics of maximum
majority-white school districts than majority-Black or majority- employment may well be different from those of
Hispanic school districts. early 2020.
9. The data are Federal Reserve Board staff calculations
from week 31 of the Household Pulse Survey Public Use
File. The percentage not working due to fears of COvID-19
is measured as the percentage of respondents who say that 11. Research into the labor market effects of pandemic UI
their main reason for not working was concern about “getting policy has largely centered on FPUC, rather than the broader
or spreading the coronavirus.” The data can be found on the set of state and federal policy changes, and has focused on
Census Bureau’s website at https://www.census.gov/programs- employment rather than labor market participation. Several
surveys/household-pulse-survey/datasets.html. recent studies have found that $600 weekly benefit increases
10. These programs are Pandemic Unemployment under FPUC had at most a modest effect on employment
Assistance (PUA), which provides benefits to pandemic- last year, in part because UI generosity has less effect on
affected individuals with insufficient wage and salary earnings hiring when the labor market is slack. (See, for example,
to qualify for regular UI benefits; Pandemic Emergency Nicolas Petrosky-Nadeau and Robert G. valletta (2021), “UI
Unemployment Compensation (PEUC), which provides Generosity and Job Acceptance: Effects of the 2020 CARES
additional weeks of coverage to workers who exhaust their Act,” Working Paper Series 2021-13 (San Francisco: Federal
regular UI benefits; and Federal Pandemic Unemployment Reserve Bank of San Francisco, June), https://www.frbsf.org/
Compensation (FPUC), which currently provides $300 economic-research/files/wp2021-13.pdf.) Less is known
in supplemental benefits to all UI claimants, including about the possible effects of FPUC, PEUC, and PUA on labor
those in the PUA and PEUC programs. See Tomaz Cajner, force participation, particularly in the tighter labor market
Andrew Figura, Brendan M. Price, David Ratner, and conditions prevailing in 2021.
Alison Weingarden (2020), “Reconciling Unemployment 12. The $300 FPUC supplement to weekly UI benefits
Claims with Job Losses in the First Months of the COvID-19 replaces a larger portion of lost earnings for workers displaced
Crisis,” Finance and Economics Discussion Series 2020-055 from lower-wage jobs, while PUA has made benefits available
(Washington: Board of Governors of the Federal Reserve to self-employed workers, labor market entrants, and other
System, July), https://doi.org/10.17016/FEDS.2020.055. groups with limited earnings histories.
MONETARY POLICY REPORT: JULY 2021 11
of the year, lifting the 12-month change up to 7. Measures of change in hourly compensation
2.8 percent (figure 7). More timely indicators Percent change from year earlier
show continuing large wage gains, though
swings in the composition of the workforce Compensation per hour, 10
business sector
make these difficult to interpret.2 In particular, 8
average hourly earnings exhibited very large Atlanta Fed’s
6
monthly increases in April, May, and June Wage Growth Tracker
2. Early in the pandemic, job losses were much 2013 2014 2015 2016 2017 2018 2019 2020 2021
larger for lower-wage workers, raising average wages
SOURCE: For trimmed mean, Federal Reserve Bank of Dallas; for all
and measured wage growth. This process is now being else, Bureau of Economic Analysis; all via Haver Analytics.
reversed as many lower-wage workers, particularly
in services, have been rehired, thus lowering average
wages and measured wage growth. Consequently, in the
12-month changes, large composition effects obscure the
underlying movements in wages of typical workers.
3. Over the same period, labor productivity in the
business sector is estimated to have increased 4 percent,
much faster than the pre-pandemic trend. Both
compensation and productivity have been affected by
changes in the composition of inputs and outputs that
may be largely transitory. Nevertheless, some of the
increases may reflect more persistent factors.
4. The trimmed mean omits the highest and lowest
price changes, removing products representing roughly
half of the PCE basket by consumption share.
12 Part 1: Recent Economic and Financial Developments
114
108
112
110 Trend 106
108 104
106
102
104
Trend 102 100
100 98
98
96
96
2017 2018 2019 2020 2021 2017 2018 2019 2020 2021
110
105
105
100
Trend 100 Trend
95 95
90 90
85
85
80
80
75
2017 2018 2019 2020 2021 2017 2018 2019 2020 2021
Overall, an important part of the rise in inflation become better aligned, and inflation is widely expected
this spring appears to be due to a surge in demand, to move down toward the FOMC’s 2 percent longer-
including the rebound in travel-related spending, run goal. (For a more detailed discussion of recent
running up against short-run production bottlenecks developments in inflation expectations, see the box
and hiring difficulties. As these extraordinary “Assessing the Recent Rise in Inflation Expectations.”)
circumstances pass, supply and demand should
MONETARY POLICY REPORT: JULY 2021 15
D. Ships waiting at anchor (Port of Los Angeles) E. Container flows at U.S. ports
25 2.4
Averages
Jan. 2016–Sept. 2020: .2 20 2.0
Inbound loaded
Oct. 2020–present: 10.9
15 1.6
10 1.2
5 .8
Outbound loaded
0 .4
Jan. Mar. May July Sept. Nov. Jan. Mar. May July 2017 2018 2019 2020 2021
2020 2021
NOTE: The data extend through April 2021. The data include the ports
NOTE: The data are 7-day moving averages.
of Baltimore, Charleston, Houston, Los Angeles, Long Beach, New York
SOURCE: Port of Los Angeles.
and New Jersey, Oakland, Savannah, Seattle, and Tacoma, which
accounted for 91 percent of total throughput at U.S. ports in 2019. TEUs
are 20-foot equivalent units.
SOURCE: Maryland Port Administration; South Carolina Ports
U.S. manufacturers. Relatedly, the higher inbound Authority; Port of Houston Authority; Port of Los Angeles; Port of
rates have created a challenge for U.S. exports in the Long Beach; Port of New York and New Jersey; Port of Oakland;
Georgia Ports Authority; Northwest Seaport Alliance; all via Haver
form of a container shortage. Shipping rates for U.S. Analytics; Federal Reserve Board staff calculations.
exports have risen by much less than rates for inbound
shipments, so carriers find it more profitable at times
to quickly return empty containers for another inbound
U.S. delivery than to receive modest revenue from the pandemic. As producers and the distribution network
taking on U.S. exports. Thus, although the number of work through these bottlenecks, production is expected
inbound loaded containers skyrocketed in the second to pick up and price pressures to ease—for example,
half of last year, the number of outbound loaded lumber prices have come down from their late-spring
containers stayed below pre-pandemic levels until peaks. The time frame for the resolution of these
March 2021 (figure E). bottlenecks is uncertain, as they reflect both the global
In summary, trade and production bottlenecks have supply chain and some industry-specific reasons for the
been an important factor as the economy emerges from tight conditions.
18 Part 1: Recent Economic and Financial Developments
6.0
. . . and ready access to credit for
5.5
households with good credit profiles
5.0
Household borrowing has expanded
moderately. Consumer loans have grown at 2005 2007 2009 2011 2013 2015 2017 2019 2021
a modest pace so far this year, driven by the NOTE: The series is the ratio of household net worth to disposable
continued expansion of auto loans (figure 16). personal income.
SOURCE: For net worth, Federal Reserve Board, Statistical Release
Banks reported significant easing of lending Z.1, “Financial Accounts of the United States”; for income, Bureau of
Economic Analysis via Haver Analytics.
standards on consumer loans in the first
quarter of 2021 after a moderate easing in 15. Personal saving rate
the last quarter of the previous year, though
standards remain tight relative to the period Monthly Percent
A. Inflation compensation implied by Treasury expectations that is not obscured by the presence of
Inflation-Protected Securities these risk premiums.
Information about inflation expectations obtained
Daily Percent
from surveys of financial market participants,
economists, and professional forecasters tells a story
3.5
similar to that of market-based measures. Since the
5-to-10-year 3.0 turn of the year, projections of PCE inflation for 2021
2.5 as a whole, obtained from information in the Blue
2.0
Chip Financial Forecasts, the Survey of Professional
Forecasters, and the Survey of Primary Dealers,
1.5 increased substantially to well above 2 percent. Over
5-year
1.0 the same period, the projections of PCE inflation
.5
beyond 2022 appear, in comparison, to be little
changed at levels just over 2 percent (figure B). This
0
pattern suggests that these forecasters expect the
recent jump in inflation to be transitory and that survey
2011 2013 2015 2017 2019 2021
respondents do not appear to have revised their views
NOTE: The data are at a business-day frequency and are based on regarding the longer-term inflation rate in response to
smoothed nominal and inflation-indexed Treasury yield curves.
SOURCE: Federal Reserve Bank of New York; Federal Reserve Board the recent strong readings on inflation.
staff calculations. Even if financial market participants and professional
forecasters see inflation returning to levels close to
inflation, but also other factors, including the inflation 2 percent after a bout of higher inflation as the most
risk premium and possibly other premiums driven by likely outcome, they still could have judged that the
liquidity differences and shifts in demand and supply likelihood of higher inflation had increased. Probability
of TIPS relative to those of nominal Treasury securities. (continued on next page)
The presence of these additional factors can make it
difficult to ascertain the information regarding expected B. Survey-based measures of personal
inflation embedded in market-based measures of consumption expenditures inflation expectations
inflation compensation.3 Survey-based measures, Annual Percent
in contrast, provide information about inflation
2005 2007 2009 2011 2013 2015 2017 2019 2021 2005 2007 2009 2011 2013 2015 2017 2019 2021
NOTE: The series are medians of the survey responses. The NY Fed NOTE: The Survey of Professional Forecasters (SPF) data begin in
data begin in June 2013. The Michigan survey data extend through June 2007:Q1 and extend through 2021:Q2.
2021. SOURCE: Federal Reserve Bank of Philadelphia, SPF; Federal Reserve
SOURCE: University of Michigan Surveys of Consumers; Federal Board, Index of Common Inflation Expectations (CIE).
Reserve Bank of New York, Survey of Consumer Expectations.
4. Of note, distributions of CPI inflation 5 to 10 years ahead 5. For more details, see Hie Joo Ahn and Chad
derived from the Federal Reserve Bank of New york’s Survey Fulton (2021), “Research Data Series: Index of Common
of Primary Dealers and Survey of Market Participants have Inflation Expectations,” FEDS Notes (Washington: Board
remained stable over the year, consistent with the stability of of Governors of the Federal Reserve System, March 5),
survey-based measures of longer-run inflation expectations. https://doi.org/10.17016/2380-7172.2873.
MONETARY POLICY REPORT: JULY 2021 23
4.5
Business investment has recovered from
its plunge last year and continues to rise 4.0
at a solid pace . . .
3.5
Solid business investment in the first half of
3.0
the year has been supported by the unwinding
of pandemic disruptions, accommodative 2.5
monetary policy and fiscal support, and
the strong business outlook. Investment in 2013 2015 2017 2019 2021
equipment and intangibles has led the rise NOTE: The data are contract rates on 30-year, fixed-rate conventional
home mortgage commitments and extend through July 1, 2021.
in investment, especially investment in high- SOURCE: Freddie Mac Primary Mortgage Market Survey.
technology equipment and software driven by
the shift to remote work and other changes
18. Private housing starts and permits
to business practices. Investment in structures
in the oil and gas sector also has risen in Monthly Millions of units, annual rate
(figure 21). 1.2
1.0
.8
. . . amid financing conditions that Single-family .6
permits
remain accommodative for nonfinancial .4
corporations Multifamily starts .2
0
Financing conditions for nonfinancial firms
2005 2007 2009 2011 2013 2015 2017 2019 2021
through capital markets have remained broadly
SOURCE: Census Bureau via Haver Analytics.
24 Part 1: Recent Economic and Financial Developments
19. New and existing home sales accommodative since the start of the year
Millions, annual rate Millions, annual rate
and continued to be supported by historically
low interest rates. The gross issuance of
7.5
1.4 nonfinancial corporate bonds continued to
7.0
1.2
be solid during the first part of year and was
6.5
particularly strong in March for investment-
6.0 Existing home sales 1.0
grade firms (figure 22). Corporate bond yields
5.5
.8 have remained at historically low levels, and
5.0
4.5 .6 corporate bond spreads have narrowed to
4.0
very low levels, supported in part by signs
.4
3.5 of improvement in the credit quality of
3.0
New home sales .2 nonfinancial firms.
2007 2009 2011 2013 2015 2017 2019 2021
In contrast, net bank lending to businesses
NOTE: The data are monthly. New home sales include only
single-family sales. Existing home sales include single-family, condo, and has been subdued so far this year. For
co-op sales. commercial and industrial loans, increasing
SOURCE: For new home sales, Census Bureau; for existing home sales,
National Association of Realtors; all via Haver Analytics. new loan originations have been obscured
20. Real prices of existing single-family houses to some degree by balance reductions due
to forgiveness of loans under the Paycheck
Quarterly 2005:Q1 = 100
Protection Program (PPP). Commercial real
estate loans have remained little changed, held
120
down in part by weak growth in construction
Zillow index
110
and land development loans amid tighter
S&P/Case-Shiller 100 credit standards earlier in the year.
national index
90
For small businesses, privately financed lending
80
CoreLogic has climbed smartly since the turn of the year,
price index 70 as the PPP has increased access to credit.
60 Outside of the PPP, credit availability for
small businesses remains fairly tight, demand
2005 2007 2009 2011 2013 2015 2017 2019 2021 for such credit is weak, and default risk is still
NOTE: Series are deflated by the personal consumption expenditures elevated. Small business loan performance has
price index.
SOURCE: CoreLogic Home Price Index; Zillow; S&P/Case-Shiller U.S. improved, and the share of small businesses
National Home Price Index. The S&P/Case-Shiller index is a product of
S&P Dow Jones Indices LLC and/or its affiliates. (For Dow Jones
expecting to require additional financial
Indices licensing information, see the note on the Contents page.) assistance has moved down, though hotels and
21. Real business fixed investment restaurants report ongoing stress.
Billions of chained 2012 dollars Billions of chained 2012 dollars
Exports have partly recovered as imports
650 Equipment and 2,400
have continued to increase
intangible capital
600 2,200 U.S. exports have moved higher in recent
2,000 months but still remain below pre-pandemic
550
1,800 levels (figure 23). Despite the robust recovery
500
1,600
for goods exports, the overall contribution
450 to GDP from exports has been held down
1,400
400
by the continuing depressed level of service
1,200
Structures
exports given ongoing restraint in international
350 1,000 travel. In contrast to the relatively modest
2006 2009 2012 2015 2018 2021
recovery of exports, imports have soared since
NOTE: Business fixed investment is known as “private nonresidential
fixed investment” in the national income and product accounts. The data
are quarterly.
SOURCE: Bureau of Economic Analysis via Haver Analytics.
MONETARY POLICY REPORT: JULY 2021 25
last summer, boosted by strong demand for 22. Selected components of net debt financing for
both immediate consumption and rebuilding nonfinancial businesses
inventories. High levels of imports have Billions of dollars, monthly rate
strained the ability of the international Commercial paper
logistics channel to deliver goods to U.S. Bonds
120
Bank loans
customers in a timely fashion. Given the recent Sum
strength of imports relative to the milder 80
Q1
recovery in exports, both the nominal trade
40
deficit and current account deficit, relative to
GDP, widened since 2019 (figure 24). +
0_
Federal fiscal policies enacted in response to SOURCE: Mergent Inc., Fixed Income Securities Database; S&P
Global, Leveraged Commentary & Data; DTCC Solutions LLC, an
the pandemic, most recently the American affiliate of the Depository Trust & Clearing Corporation. This
publication includes data licensed from DTCC Solutions LLC, an
Rescue Plan, continue to fuel the economic affiliate of the Depository Trust & Clearing Corporation. (For the
recovery now under way. Stimulus checks DTCC licensing disclaimer, see the note on the Contents page.)
25. Federal receipts and expenditures (figure 25). Federal debt held by the public
Monthly Percent change from year earlier
jumped to around 100 percent of nominal
GDP—the highest debt-to-GDP ratio since
70 1947—and is expected to rise further this fiscal
60
year (figure 26).6
50
40
Challenges to state and local government
30
Expenditures financing have been mitigated by federal aid
20
10
+
The pandemic pushed down state and local
0_ government tax collections and induced
Receipts
10 additional COVID-related expenses. In
20 response, federal policymakers provided a
2005 2007 2009 2011 2013 2015 2017 2019 2021 historic level of fiscal support to state and
NOTE: The data are 12-month moving sums. local governments, covering budget shortfalls
SOURCE: Office of Management and Budget via Haver Analytics. in aggregate, although some governments
continue to confront pandemic-related fiscal
stress. Moreover, the drag on state tax receipts
26. Federal government debt and net interest outlays from the pandemic is abating, as revenues have
Percent of nominal GDP Percent of nominal GDP
moved up smartly so far this year (figure 27).
Property tax receipts—the primary tax
120
4.0
Net interest outlays 110 source for local governments—have increased
3.5 on federal debt
100 steadily during the pandemic. State and
90
3.0
80
local government payrolls, though, have only
2.5
70 edged up from their lows at the onset of the
2.0 60 pandemic, and they remain 5 percent below
50
1.5
40 pre-pandemic levels, including notably lower
1.0 30 education employment (figure 28). Finally,
.5 Debt held by
the public
20
municipal bond market conditions continued
10
0
0 to be generally accommodative this year.
1901 1921 1941 1961 1981 2001 2021
Issuance has been robust, as yields remained
historically low and bond spreads relative to
NOTE: The data for net interest outlays are annual, begin in 1948, and
extend through 2021. Net interest outlays are the cost of servicing the Treasury securities have declined moderately
debt held by the public. Federal debt held by the public equals federal
debt less Treasury securities held in federal employee defined-benefit so far this year.
retirement accounts, evaluated at the end of the quarter. The data for
federal debt are annual from 1901 to 1951 and quarterly thereafter. GDP
is gross domestic product.
SOURCE: For GDP, Bureau of Economic Analysis via Haver Financial Developments
Analytics; for federal debt, Federal Reserve Board, Statistical Release
Z.1, “Financial Accounts of the United States.”
The path of the federal funds rate
expected to prevail over the next year
remains near zero
Market-based measures of the path that the
federal funds rate is expected to take over the
next few years remain below 0.25 percent until 27. State and local tax receipts
the fourth quarter of 2022, about two quarters Year-over-year percent change
earlier than in February (figure 29).7 The
shift in the path followed news of the rapid
15
deployment in the United States of highly
effective COVID-19 vaccines, the reopening of 10
Total state taxes
contact-intensive sectors of the economy, and
expectations that further support for aggregate 5
demand would be coming from fiscal policy. Property taxes +
0_
. . . while spreads of other long-term debt 2005 2007 2009 2011 2013 2015 2017 2019 2021
to Treasury securities narrowed modestly NOTE: The data are seasonally adjusted and extend through June
on net 2021.
SOURCE: Bureau of Labor Statistics, National Compensation Survey
via Haver Analytics.
Across different categories of corporate credit,
bond yields are little changed since mid-
February and have remained near the lowest
levels of their historical distributions. Spreads
29. Market-implied federal funds rate path of corporate bond yields over comparable-
Quarterly Percent
maturity Treasury securities have narrowed
modestly and stand somewhat below the
1.50 levels prevailing at the onset of the pandemic,
1.25
supported in part by signs of improvement in
the credit quality of nonfinancial firms.
1.00
Bank credit remained little changed, 2007 2009 2011 2013 2015 2017 2019 2021
while lending standards eased NOTE: The data are calculated as monthly annualized growth rates
and are seasonally and break adjusted.
Total loans and leases outstanding at SOURCE: Federal Reserve Board, Statistical Release H.8, “Assets and
Liabilities of Commercial Banks in the United States.”
commercial banks remained little changed
in the first half of the year (figure 34). The
April Senior Loan Officer Opinion Survey on
Bank Lending Practices, conducted by the 35. Profitability of bank holding companies
Federal Reserve, reported easier standards for
most business and household loans over the Percent, annual rate Percent, annual rate
growth in the second quarter of 2021 in many 39. Real gross domestic product in selected
of these EMEs following a sharp rebound in emerging market economies
the first quarter, with economic activity still Percent change from 2019:Q4
well below pre-pandemic levels.
10
8
Unemployment rates in Europe are about
6
1 percentage point higher in early 2021 than
4
before the pandemic (figure 40). This relatively
muted change is partly a result of wage subsidy 2
+
programs that kept workers on payrolls and 0
_
employment protection regulations that limited 2
41. Consumer price inflation in selected advanced proved effective in containing a rise in bond
foreign economies yields. By contrast, while still maintaining
Monthly 12-month percent change an accommodative policy rate, the Bank of
Canada announced plans to end liquidity
4 support programs and started slowing its pace
United Kingdom
3 of asset purchases. The Bank of England
Canada
also slowed its pace of asset purchases but
2
indicated that its policy stance remains
1 accommodative. Monetary policy in EMEs
Japan +
0
_ was generally accommodative as well, but
Euro area 1
some EME central banks—including in Brazil,
Russia, and Turkey—increased policy rates,
2
citing concerns about inflationary pressures.
2016 2017 2018 2019 2020 2021 The Bank of Mexico, while leaving its policy
NOTE: The data for the euro area incorporate the flash estimate for
rate unchanged, highlighted concerns about
June 2021. financial market volatility and past peso
SOURCE: For the United Kingdom, Office for National Statistics; for
Japan, Ministry of Internal Affairs and Communications; for the euro depreciation.
area, Statistical Office of the European Communities; for Canada,
Statistics Canada; all via Haver Analytics.
Improved outlook led to increases in
foreign yields and equity prices . . .
42. 24-month policy expectations for selected advanced Longer-term sovereign yields and market-
foreign economies
based inflation compensation measures
Weekly Basis points increased in some major advanced economies,
300
as the economic outlook brightened and
commodity prices rose (figure 43). Despite the
250
increase, market-based inflation compensation
200
in many AFEs remained below the inflation
150
target of their respective central banks.
Canada 100
Japanese yields were little changed due to the
United Kingdom 50
+ Bank of Japan’s yield curve control policy.
0_
Japan Equity markets in AFEs generally rose despite
50
Euro area the new wave of COVID-19 infections earlier
100
this year, as many economies proved resilient
2016 2017 2018 2019 2020 2021 to increased case numbers and lockdowns and
NOTE: The data are weekly averages of daily 24-month market-implied the vaccine rollout allowed gradual reopening
central bank policy rates. The 24-month policy rates are implied by
quotes on overnight index swaps tied to the policy rates. The data extend (figure 44).
through July 2, 2021.
SOURCE: Bloomberg; Federal Reserve Board staff estimations.
Equities in emerging markets were mixed.
Since the beginning of the year, equity prices
in some EMEs, including South Korea,
Taiwan, and Mexico, improved considerably,
but equity prices in other countries, including
China, underperformed (figure 45). Inflows
into dedicated EME investment funds slowed
this year but remained positive, and EME
bond spreads moved little so far this year
(figure 46).
MONETARY POLICY REPORT: JULY 2021 37
. . . and the dollar remained little changed 45. Equity indexes for selected emerging market
economies
After depreciating sharply in late 2020, the
Weekly Week ending January 8, 2016 = 100
broad dollar index—a measure of the trade-
weighted value of the dollar against foreign 350
currencies—has changed little, on net, since
300
the beginning of the year. It has strengthened
somewhat recently, amid increases in medium- 250
Brazil Taiwan
term U.S. yields (figure 47). Among AFE 200
currencies, the dollar appreciated most against South Korea
150
the Japanese yen, as Japanese yields moved
least. Since the beginning of the year, the U.S. 100
China Mexico
dollar depreciated against the Canadian dollar, 50
which was buoyed by higher commodity prices
2016 2017 2018 2019 2020 2021
and signs of a stronger-than-expected recovery
in Canada (figure 48). NOTE: The data are weekly averages of daily data and extend through
July 2, 2021.
SOURCE: For China, Shanghai Composite Index; for Brazil, Bovespa
43. Nominal 10-year government bond yields in Index; for South Korea, Korean Composite Index; for Mexico, IPC
selected advanced economies Index; for Taiwan, TAIEX; all via Bloomberg.
Weekly Percent
140
120
NOTE: The data are weekly averages of daily data and extend through
July 2, 2021.
SOURCE: For euro area, Dow Jones Euro Stoxx Index; for Japan, Tokyo
Stock Price Index; for United Kingdom, Financial Times Stock Exchange
100 Index; for United States, S&P 500 Index; all via Bloomberg. (For Dow
Jones Indices licensing information, see the note on the Contents page.)
38 Part 1: Recent Economic and Financial Developments
47. U.S. dollar exchange rate indexes 48. Exchange rate indexes for selected economies
Weekly Week ending January 8, 2016 = 100 Weekly Week ending January 8, 2016 = 100
100 100
90
95
AFE dollar index Canadian dollar Japanese yen 80
90 70
2016 2017 2018 2019 2020 2021 2016 2017 2018 2019 2020 2021
NOTE: The data, which are in foreign currency units per dollar, are NOTE: The data, which are in foreign currency units per dollar, are
weekly averages of daily values of the broad dollar index, advanced weekly averages of daily data and extend through July 2, 2021. As
foreign economies (AFE) dollar index, and emerging market economies indicated by the leftmost arrow, increases in the data reflect U.S. dollar
(EME) dollar index. The weekly data extend through July 2, 2021. As appreciation and decreases reflect U.S. dollar depreciation.
indicated by the leftmost arrow, increases in the data reflect U.S. dollar SOURCE: Federal Reserve Board, Statistical Release H.10, “Foreign
appreciation and decreases reflect U.S. dollar depreciation. Exchange Rates.”
SOURCE: Federal Reserve Board, Statistical Release H.10, “Foreign
Exchange Rates.”
39
Part 2
Monetary Policy
The Federal Open Market Committee inflation expectations remain well anchored at
maintained the federal funds rate near 2 percent. The Committee expects to maintain
zero as it seeks to achieve maximum an accommodative stance of monetary policy
employment and inflation at the rate of until these outcomes are achieved.
2 percent over the longer run . . .
. . . and the Committee increased the
As part of its actions to ensure that monetary holdings of Treasury securities and agency
policy will continue to deliver powerful mortgage-backed securities in the System
support to the economy until the recovery Open Market Account
is complete, the Federal Open Market
Committee (FOMC) has maintained the In addition, the Federal Reserve has continued
target range for the federal funds rate at 0 to to expand its holdings of Treasury securities
¼ percent (figure 49). The Committee has by $80 billion per month and its holdings of
indicated that it expects it will be appropriate agency mortgage-backed securities (MBS) by
to maintain the target range for the federal $40 billion per month. These asset purchases
funds rate at 0 to ¼ percent until labor market help foster smooth market functioning and
conditions have reached levels consistent with accommodative financial conditions, thereby
the Committee’s assessments of maximum supporting the flow of credit to households
employment and inflation has risen to and businesses. The Committee’s current
2 percent and is on track to moderately guidance regarding asset purchases indicates
exceed 2 percent for some time. With that increases in the holdings of Treasury
inflation having run persistently below the securities and agency MBS in the System Open
Committee’s longer-run goal, the Committee Market Account will continue at least at this
will aim to achieve inflation moderately above pace until substantial further progress has
2 percent for some time so that inflation been made toward its maximum-employment
averages 2 percent over time and longer-term and price-stability goals since the Committee
Daily Percent
5
10-year Treasury rate
4
2
2-year Treasury rate
1
0
Target federal funds rate
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
NOTE: The 2-year and 10-year Treasury rates are the constant-maturity yields based on the most actively traded securities.
SOURCE: Department of the Treasury; Federal Reserve Board.
40 Part 2: Monetary Policy
adopted its asset purchase guidance last policymakers routinely consult prescriptions
December. In addition, the minutes of for the policy interest rate provided by various
the June 2021 FOMC meeting noted the monetary policy rules. These rule prescriptions
importance that policymakers attach to clear can provide useful benchmarks for the FOMC.
communications about the Committee’s Simple rules cannot capture the complexities
assessment of progress toward its longer-run of monetary policy, and many practical
goals and to providing these communications considerations make it undesirable for the
well in advance of the time when progress FOMC to adhere strictly to the prescriptions
can be judged substantial enough to warrant of any specific rule. However, some principles
a change in the pace of asset purchases.9 In associated with good monetary policy can be
coming meetings, the FOMC will continue illustrated by these policy rules (see the box
to assess the economy’s progress toward the “Monetary Policy Rules, the Effective Lower
Committee’s goals. Bound, and the Economic Recovery”). The
FOMC’s framework for conducting monetary
The FOMC is committed to using its full policy involves a systematic approach in
range of tools to promote maximum keeping with key principles of good monetary
employment and price stability policy but allows for more flexibility than is
Progress on vaccinations will likely continue implied by simple policy rules.
to reduce the effects of the public health crisis
The size of the Federal Reserve’s balance
on the economy, but risks to the economic
sheet continued to grow, reflecting
outlook remain. The Federal Reserve is
purchases of U.S. Treasury securities and
committed to using its full range of tools to
agency mortgage-backed securities
support the U.S. economy in this challenging
time, thereby promoting its maximum- The Federal Reserve’s balance sheet has grown
employment and price-stability goals. The to $8.1 trillion from $7.4 trillion at the end of
Committee will continue to monitor the January, reflecting continued asset purchases
implications of incoming information for the to help foster smooth market functioning and
economic outlook and is prepared to adjust accommodative financial conditions, thereby
the stance of monetary policy as appropriate if supporting the flow of credit to households
risks emerge that could impede the attainment and businesses (figure 50). The Federal
of the Committee’s goals. The Committee’s Reserve has continued rolling over at auction
assessments will continue to take into account all principal payments from its holdings
a wide range of information, including of Treasury securities. Principal payments
readings on public health, labor market received from agency MBS and agency debt
conditions, inflation pressures and inflation continue to be reinvested into agency MBS.
expectations, and financial and international After the March FOMC meeting, in light of
developments. the sustained smooth functioning of markets
for agency commercial mortgage-backed
In addition to considering a wide range of securities (CMBS), the Federal Reserve ended
economic and financial data and information regular purchases of agency CMBS.
gathered from business contacts and other
informed parties around the country, The increase in aggregate asset holdings on
the Federal Reserve’s balance sheet arising
from Treasury security and agency MBS
purchases has been offset in part by declines
9. The minutes for the June 2021 FOMC meeting in several other asset categories. Outstanding
are available on the Board’s website at https://www. balances at many of the Federal Reserve’s
federalreserve.gov/monetarypolicy/fomccalendars.htm. emergency liquidity and credit facilities
MONETARY POLICY REPORT: JULY 2021 41
Other assets
8
Credit and liquidity facilities
Agency debt and mortgage-backed securities holdings 6
Treasury securities held outright 4
2
+
0
-
2
4
Federal Reserve notes in circulation
6
Deposits of depository institutions
Capital and other liabilities 8
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
NOTE: “Agency debt and mortgage-backed securities holdings” includes agency residential mortgage-backed securities and agency commercial
mortgage-backed securities. “Credit and liquidity facilities” consists of primary, secondary, and seasonal credit; term auction credit; central bank liquidity
swaps; support for Maiden Lane, Bear Stearns Companies, Inc., and AIG; and other credit and liquidity facilities, including the Primary Dealer Credit
Facility, the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Term
Asset-Backed Securities Loan Facility, the Primary and Secondary Market Corporate Credit Facilities, the Paycheck Protection Program Liquidity Facility,
the Municipal Liquidity Facility, and the Main Street Lending Program. “Other assets” includes repurchase agreements, FIMA (Foreign and International
Monetary Authorities) repurchase agreements, and 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
30, 2021. The key identifies shaded areas in order from top to bottom.
SOURCE: Federal Reserve Board, Statistical Release H.4.1, “Factors Affecting Reserve Balances.”
have declined since the end of January, functioning. Draws on central bank liquidity
and most facilities have now expired.10 In swap lines have decreased further to near
June, the Federal Reserve Board announced zero, and usage of repurchase operations has
plans to begin winding down the portfolio remained at zero since February. In contrast,
of the Secondary Market Corporate Credit the Paycheck Protection Program Liquidity
Facility (SMCCF). The SMCCF proved very Facility has expanded to around $80 billion
important in restoring market functioning last since the end of January.
year, supporting the availability of credit for
large employers, and bolstering employment Reserves have increased significantly to around
through the COVID-19 pandemic. The $4 trillion, mostly because of asset purchases
winding down of the SMCCF portfolio and the large drawdown in the Treasury
has been gradual and orderly and has not General Account from around $1.6 trillion
produced any adverse effect on market in January to about $850 billion in June.
However, reserves have been relatively stable
more recently given a substantial increase in
10. A list of credit and liquidity facilities established the use of the overnight reverse repurchase
by the Federal Reserve in response to COVID-19
is available on the Board’s website at https://www.
agreement facility. (See the box “Developments
federalreserve.gov/funding-credit-liquidity-and-loan- in the Federal Reserve’s Balance Sheet and
facilities.htm. Money Markets.”)
42 Part 2: Monetary Policy
Simple interest rate rules relate a policy interest Policy Rules: Some Key Design Principles
rate, such as the federal funds rate, to a small number and Limitations
of other economic variables—typically including
In many stylized models of the economy, desirable
the deviation of inflation from its target value
economic outcomes can be achieved by following a
and a measure of resource slack in the economy.
monetary policy rule that incorporates key principles
Policymakers consult prescriptions of the policy interest
of good monetary policy. One such principle is that
rate derived from a variety of policy rules for guidance,
monetary policy should respond in a predictable way to
without mechanically following the prescriptions
changes in economic conditions, thus fostering public
of any particular rule. This discussion examines the
understanding of policymakers’ goals and strategy.
prescriptions of a number of interest rate rules. One
A second principle is that, to stabilize inflation, the
simplification these rules typically adopt is ignoring
policy rate should be adjusted over time in response
the effective lower bound (ELB) on interest rates, and
to persistent increases or decreases in inflation to an
many of the rules have prescribed negative values for
extent sufficient to ensure a return of inflation to the
the federal funds rate since the onset of the pandemic-
central bank’s longer-run objective.
driven recession.
Simple monetary policy rules also have important
Most rules analyzed in the research literature
limitations. As noted earlier, simple rules do not
respond to deviations—both positive and negative—
typically recognize that the ELB limits the extent to
of resource utilization from its trend level because
which the policy rate can be lowered to support the
they were informed by historical periods and
economy, which may impart a downward bias to both
economic models in which high resource utilization
employment and inflation. To mitigate the challenges
is accompanied by inflation pressure. By contrast, the
posed by the ELB and anchor longer-term inflation
Federal Open Market Committee’s (FOMC) Statement
expectations at 2 percent, the Committee indicates
on Longer-Run Goals and Monetary Policy Strategy
in its statement that it “seeks to achieve inflation that
indicates that policymakers would not respond to
averages 2 percent over time, and therefore judges
high employment unless it was accompanied by signs
that, following periods when inflation has been
of unwanted increases in inflation or the emergence
running persistently below 2 percent, appropriate
of other risks that could impede the attainment of
monetary policy will likely aim to achieve inflation
the Committee’s goals.1 Accordingly, this discussion
moderately above 2 percent for some time.”3 None of
examines—in addition to the prescriptions of a number
the simple rules analyzed in this discussion include
of commonly studied monetary policy rules—the
any mechanism to offset the downward bias in inflation
prescriptions of a modified simple rule that, all else
imposed by the ELB. As such, they do not reflect these
being equal, does not mechanically call for policy rate
important aspects of the FOMC’s monetary policy
increases as unemployment drops below its estimated
strategy.
longer-run level.2
(continued)
Another limitation is that simple rules respond rules, figure A shows a “balanced approach (shortfalls)”
to only a small set of economic variables and thus rule, which represents one simple way to illustrate
necessarily abstract from many of the considerations the Committee’s focus on shortfalls from maximum
that the FOMC takes into account. For example, employment. All of the policy rules analyzed in this
a simple rule might respond to movements in a discussion embody the key principles of good monetary
specific labor market indicator, such as the overall policy previously noted as well as the important
unemployment rate. However, no single labor market limitations.
indicator can precisely capture the size of the shortfall All five rules feature the unemployment rate gap,
from maximum employment or identify when a strong measured as the difference between an estimate of
labor market can be sustained without putting undue the rate of unemployment in the longer run (utLR) and
upward pressure on inflation; many labor market the current unemployment rate; the first-difference
indicators must be assessed.4 Similarly, simple policy rule includes the change in the unemployment rate
rules that systematically call for increases in the policy gap rather than its level.7 All of the rules abstract
rate as slack in the labor market diminishes might from the uncertainty that surrounds estimates of the
fail to recognize the benefits of sustaining a strong unemployment rate gap. In addition, all of the rules
labor market.5 include the difference between inflation and the
Finally, simple rules for the policy rate do not FOMC’s longer-run objective of 2 percent.8 All but the
explicitly recognize that the monetary policy toolkit
(continued on next page)
includes other tools—notably, large-scale asset
purchases and forward guidance, which are especially
relevant when the policy rate is constrained by the ELB. adjusted Taylor (1993) rule was studied in David Reifschneider
and John C. Williams (2000), “Three Lessons for Monetary
(See the box “Developments in the Federal Reserve’s Policy in a Low-Inflation Era,” Journal of Money, Credit and
Balance Sheet and Money Markets.”) Banking, vol. 32 (November), pp. 936–66. The first-difference
rule is based on a rule suggested by Athanasios Orphanides
(2003), “Historical Monetary Policy Analysis and the Taylor
Policy Rules: Descriptions Rule,” Journal of Monetary Economics, vol. 50 (July),
pp. 983–1022. A review of policy rules is in John B. Taylor
Economists have analyzed many monetary policy and John C. Williams (2011), “Simple and Robust Rules for
rules, including the well-known Taylor (1993) rule, the Monetary Policy,” in Benjamin M. Friedman and Michael
“balanced approach” rule, the “adjusted Taylor (1993)” Woodford, eds., Handbook of Monetary Economics, vol. 3B
rule, and the “first difference” rule.6 In addition to these (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
4. See Lael Brainard (2021), “How Should We Think prescriptions.
about Full Employment in the Federal Reserve’s Dual 7. The original Taylor (1993) rule represented slack in
Mandate?” speech delivered at the Ec10, Principles of resource utilization using an output gap (the difference
Economics, Lecture, Faculty of Arts and Sciences, Harvard between the current level of real gross domestic product
University, Cambridge, Mass. (via webcast), February 24, (GDP) and the level that GDP would be if the economy were
https://www.federalreserve.gov/newsevents/speech/ operating at maximum employment, measured in percent of
brainard20210224a.htm. the latter). The rules in figure A represent slack in resource
5. For examples of the benefits associated with strong utilization using the unemployment gap instead, because that
labor market conditions, see Fed Listens: Perspectives from gap better captures the FOMC’s statutory goal to promote
the Public, which summarizes the feedback received from maximum employment. Movements in these alternative
the community as part of the FOMC’s 2019–20 review of its measures of resource utilization are highly correlated. For
monetary policy strategy, tools, and communication practices more information, see the note below figure A.
and is available on the Board’s website at https://www. 8. None of these rules take into account historical inflation
federalreserve.gov/publications/files/fedlistens-report- performance. As such, these rules do not incorporate the aim
20200612.pdf. of achieving inflation that averages 2 percent over time as
6. The Taylor (1993) rule was suggested in John B. Taylor described in the FOMC’s Statement on Longer-Run Goals and
(1993), “Discretion versus Policy Rules in Practice,” Carnegie- Monetary Policy Strategy. In particular, that statement indicates
Rochester Conference Series on Public Policy, vol. 39 that “the Committee seeks to achieve inflation that averages
(December), pp. 195–214. The balanced-approach rule was 2 percent over time, and therefore judges that, following
analyzed in John B. Taylor (1999), “A Historical Analysis of periods when inflation has been running persistently below
Monetary Policy Rules,” in John B. Taylor, ed., Monetary Policy 2 percent, appropriate monetary policy will likely aim to
Rules (Chicago: University of Chicago Press), pp. 319–41. The achieve inflation moderately above 2 percent for some time.”
44 Part 2: Monetary Policy
93 = + + 0.5( − )+( − )
Taylor (1993) rule
93 93
Adjusted Taylor (1993) rule = { − , ELB}
Note: RtT93, RtBA, RtSBA, RtT93adj, and RtFD represent the values of the nominal federal funds rate prescribed by the Taylor
(1993), balanced-approach, balanced-approach (shortfalls), adjusted Taylor (1993), and first-difference rules, respectively.
Rt denotes the realized nominal federal funds rate for quarter t, πt is the 4-quarter price inflation for quarter t, ut is the
unemployment rate in quarter t, and rtLR is the level of the neutral real federal funds rate in the longer run that is expected to be
consistent with sustaining maximum employment and inflation at the Federal Open Market Committee’s 2 percent longer-run
objective, πLR. In addition, utLR is the rate of unemployment expected in the longer run. Zt is the cumulative sum of past
deviations of the federal funds rate from the prescriptions of the Taylor (1993) rule when that rule prescribes setting the federal
funds rate below an effective lower bound (ELB) of 12.5 basis points.
The Taylor (1993) rule and other policy rules are generally written in terms of the deviation of real output from its full
capacity level. In these equations, the output gap has been replaced with the gap between the rate of unemployment in the
longer run and its actual level (using a relationship known as Okun’s law) to represent the rules in terms of the unemployment
rate. The rules are implemented as responding to core personal consumption expenditures (PCE) inflation rather than to
headline PCE inflation because current and near-term core inflation rates tend to outperform headline inflation rates as
predictors of the medium-term behavior of headline inflation. Box note 6 provides references for the policy rules.
first-difference rule include an estimate of the neutral level. However, when the unemployment rate is below
real interest rate in the longer run (rtLR).9 that level, the balanced-approach (shortfalls) rule is
By construction, the balanced-approach (shortfalls) more accommodative than the balanced-approach rule
rule prescribes identical policy rates to those prescribed because it does not call for the policy rate to rise as the
by the balanced-approach rule at times when the unemployment rate drops further.
unemployment rate is above its estimated longer-run Unlike the other simple rules featured here, the
adjusted Taylor (1993) rule recognizes that the federal
funds rate cannot be reduced materially below
9. The neutral real interest rate in the longer run (rtLR) is the ELB. To make up for the cumulative shortfall in
the level of the real federal funds rate that is expected to be accommodation following a recession during which
consistent, in the longer run, with maximum employment
and stable inflation. Like utLR, rtLR is determined largely by the federal funds rate has fallen to its ELB, the adjusted
nonmonetary factors. The first-difference rule shown in Taylor (1993) rule prescribes delaying the return of the
figure A does not involve an estimate of rtLR. However, this rule policy rate to the (positive) levels prescribed by the
has its own shortcomings. For example, research suggests that standard Taylor (1993) rule until after the economy
this sort of rule often results in greater volatility in employment
and inflation relative to what would be obtained under the
begins to recover.
Taylor (1993) and balanced-approach rules. (continued)
MONETARY POLICY REPORT: JULY 2021 45
Quarterly Percent
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
NOTE: The rules use historical values of the federal funds rate, core personal consumption expenditures inflation, and the unemployment rate.
Quarterly projections of longer-run values for the federal funds rate and the unemployment rate are derived through interpolations of the biannual
projections from Blue Chip Economic Indicators. The longer-run value for inflation is taken as 2 percent.
SOURCE: Federal Reserve Bank of Philadelphia; Wolters Kluwer, Blue Chip Economic Indicators; Federal Reserve Board staff estimates.
Policy Rules: Prescriptions Regarding the recovery from the 2008–09 recession,
all of the simple rules shown here prescribed departure
Figure B shows historical prescriptions for the from the ELB well before the FOMC determined that
federal funds rate from the five rules. For each period, it was appropriate to raise the federal funds rate.
the figure reports the policy rates prescribed by The FOMC judged, on the basis of a wide range
the rules, taking as given the prevailing economic of information available at the time, that it was
conditions and estimates of utLR and rtLR at the time. appropriate to maintain a more accommodative path
The four rules whose formulas do not impose a lower of the federal funds rate than prescribed by these rules.
bound on the value of the federal funds rate imply Similarly, in the aftermath of the pandemic-driven
prescriptions of strongly negative policy rates in recession, the FOMC has been drawing from a broad
response to the pandemic-driven recession, well below range of indicators, analyses, and judgments in making
their respective troughs in the 2008–09 recession. The its determinations concerning the appropriate stance
prescriptions of the balanced-approach and balanced- for monetary policy, including readings on public
approach (shortfalls) rules are the most negative health, labor market conditions, inflation pressures and
because these rules call for relatively large responses inflation expectations, and financial and international
to resource slack. The negative prescriptions of the four developments. Under the FOMC’s flexible form of
rules show the extent to which policymakers’ ability to average inflation targeting, departure from the ELB
support the economy through reductions in the federal might be delayed relative to the simple rules by the
funds rate has been constrained by the ELB during desire to see inflation run moderately above 2 percent
the pandemic-driven recession—a constraint that for some time. While the simple rules are concerned
underlines the importance of the FOMC’s other policy with period-by-period inflation, the Committee aims
actions at the time, including forward guidance about for a sustained return of inflation to the 2 percent
the federal funds rate and large-scale asset purchases. objective.
46 Part 2: Monetary Policy
pandemic in January 2020 and have since grown to Central bank liquidity swaps 8
Repurchase agreements
$8.1 trillion (figure A). As net asset purchases proceed Agency debt and MBS
7
at a pace of $120 billion per month, the Federal Treasury securities 6
held outright
Reserve’s total liabilities increase correspondingly.1 5
Alongside this growth in aggregate liabilities arising 4
from asset purchases, there have also been large 3
compositional shifts between liabilities this year due to 2
factors that are not directly related to monetary policy 1
decisions (figure B). This discussion reviews recent
developments in the Federal Reserve’s balance sheet 2019 2020 2021
and associated changes in money market conditions. NOTE: The data extend through June 30, 2021. MBS is mortgage-backed
securities. The key identifies shaded areas in order from top to bottom.
Reserve balances are the largest liability on the SOURCE: Federal Reserve Board, Statistical Release H.4.1, “Factors Affecting
Reserve Balances.”
Federal Reserve’s balance sheet. Federal Reserve asset
purchases are settled by adding reserves to the banking
system; thus, the magnitude of asset purchases since B. Federal Reserve liabilities
the onset of the pandemic has brought reserves to Weekly Trillions of dollars
record levels.2 Reserves grew substantially earlier this Reverse repurchase agreements
Deposits of depository institutions (reserves) 9
year, from $3.1 trillion in early January to $3.9 trillion U.S. Treasury General Account 8
by early April. The level of reserves was, however, Other deposits
Capital and other liabilities 7
mostly stable from April to June 2021, reflecting
Federal Reserve notes
6
growth in other liabilities such as the overnight reverse
repurchase agreement (ON RRP) facility. 5
Part 3
Summary of Economic Projections
The following material was released after the conclusion of the June 15–16, 2021, meeting of the
Federal Open Market Committee.
In conjunction with the Federal Open Market The longer-run projections represent each
Committee (FOMC) meeting held on June 15– participant’s assessment of the value to which
16, 2021, meeting participants submitted their each variable would be expected to converge,
projections of the most likely outcomes for over time, under appropriate monetary
real gross domestic product (GDP) growth, policy and in the absence of further shocks
the unemployment rate, and inflation for each to the economy. “Appropriate monetary
year from 2021 to 2023 and over the longer policy” is defined as the future path of policy
run. Each participant’s projections were based that each participant deems most likely to
on information available at the time of the foster outcomes for economic activity and
meeting, together with her or his assessment inflation that best satisfy his or her individual
of appropriate monetary policy—including a interpretation of the statutory mandate to
path for the federal funds rate and its longer- promote maximum employment and price
run value—and assumptions about other stability.
factors likely to affect economic outcomes.
Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their
individual assumptions of projected appropriate monetary policy, June 2021
Percent
Median1 Central tendency2 Range3
Variable
Longer Longer Longer
2021 2022 2023 2021 2022 2023 2021 2022 2023
run run run
Change in real GDP. . . . . . 7.0 3.3 2.4 1.8 6.8–7.3 2.8–3.8 2.0–2.5 1.8–2.0 6.3–7.8 2.6–4.2 1.7–2.7 1.6–2.2
March projection. . . . . . 6.5 3.3 2.2 1.8 5.8–6.6 3.0–3.8 2.0–2.5 1.8–2.0 5.0–7.3 2.5–4.4 1.7–2.6 1.6–2.2
Unemployment rate. . . . . . 4.5 3.8 3.5 4.0 4.4–4.8 3.5–4.0 3.2–3.8 3.8–4.3 4.2–5.0 3.2–4.2 3.0–3.9 3.5–4.5
March projection. . . . . . 4.5 3.9 3.5 4.0 4.2–4.7 3.6–4.0 3.2–3.8 3.8–4.3 4.0–5.5 3.2–4.2 3.0–4.0 3.5–4.5
PCE inflation. . . . . . . . . . . . 3.4 2.1 2.2 2.0 3.1–3.5 1.9–2.3 2.0–2.2 2.0 3.0–3.9 1.6–2.5 1.9–2.3 2.0
March projection. . . . . . 2.4 2.0 2.1 2.0 2.2–2.4 1.8–2.1 2.0–2.2 2.0 2.1–2.6 1.8–2.3 1.9–2.3 2.0
Core PCE inflation4. . . . . . 3.0 2.1 2.1 2.9–3.1 1.9–2.3 2.0–2.2 2.7–3.3 1.7–2.5 2.0–2.3
March projection. . . . . . 1.9–2.5 1.8–2.3 1.9–2.3
2.2 2.0 2.1 2.0–2.3 1.9–2.1 2.0–2.2
Memo: Projected
appropriate policy path . .
Federal funds rate 0.1 0.1 0.6 2.5 0.1 0.1–0.4 0.1–1.1 2.3–2.5 0.1 0.1–0.6 0.1–1.6 2.0–3.0
March projection. . . . . . 0.1 0.1 0.1 2.5 0.1 0.1–0.4 0.1–0.9 2.3–2.5 0.1 0.1–0.6 0.1–1.1 2.0–3.0
Note: Projections of change in real gross domestic product (GDP) and projections for both measures of inflation are percent changes from the fourth quarter of the previous
year to the fourth quarter of the year indicated. PCE inflation and core PCE inflation are the percentage rates of change in, respectively, the price index for personal consump-
tion expenditures (PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civilian unemployment rate in the
fourth quarter of the year indicated. Each participant’s projections are based on his or her assessment of appropriate monetary policy. Longer-run projections represent each
participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the econ-
omy. The projections for the federal funds rate are the value of the midpoint of the projected appropriate target range for the federal funds rate or the projected appropriate
target level for the federal funds rate at the end of the specified calendar year or over the longer run. The March projections were made in conjunction with the meeting of the
Federal Open Market Committee on March 16–17, 2021. One participant did not submit longer-run projections for the change in real GDP, the unemployment rate, or the
federal funds rate in conjunction with the March 16–17, 2021, meeting, and one participant did not submit such projections in conjunction with the June 15–16, 2021, meeting.
1. For each period, the median is the middle projection when the projections are arranged from lowest to highest. When the number of projections is even, the median is the
average of the two middle projections.
2. The central tendency excludes the three highest and three lowest projections for each variable in each year.
3. The range for a variable in a given year includes all participants’ projections, from lowest to highest, for that variable in that year.
4. Longer-run projections for core PCE inflation are not collected.
50 Part 3: Summary of Economic Projections
Figure 1. Medians, central tendencies, and ranges of economic projections, 2021–23 and over the longer run
Percent
Change in real GDP
8
7
6
5
4
3
2
1
Actual 0
Median of projections
−1
−2
Central tendency of projections −3
Range of projections −4
Percent
Unemployment rate
8
7
6
5
4
3
2
1
Percent
PCE inflation
5
Percent
Core PCE inflation
5
Note: Definitions of variables and other explanations are in the notes to table 1. The data for the actual values of the
variables are annual.
MONETARY POLICY REPORT: JULY 2021 51
Figure 2. FOMC participants’ assessments of appropriate monetary policy: Midpoint of target range or target
level for the federal funds rate
Percent
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Note: Each shaded circle indicates the value (rounded to the nearest 1/8 percentage point) of an individual participant’s
judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal
funds rate at the end of the specified calendar year or over the longer run. One participant did not submit longer-run projections
for the federal funds rate.
52 Part 3: Summary of Economic Projections
Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2021–23 and over the longer run
Number of participants
18
2021 June projections 16
March projections 14
12
10
8
6
4
2
1.4− 2.0− 2.6− 3.2− 3.8− 4.4− 5.0− 5.6− 6.2− 6.8− 7.4−
1.5 2.1 2.7 3.3 3.9 4.5 5.1 5.7 6.3 6.9 7.5
Percent range
Number of participants
18
2022 16
14
12
10
8
6
4
2
1.4− 2.0− 2.6− 3.2− 3.8− 4.4− 5.0− 5.6− 6.2− 6.8− 7.4−
1.5 2.1 2.7 3.3 3.9 4.5 5.1 5.7 6.3 6.9 7.5
Percent range
Number of participants
18
2023 16
14
12
10
8
6
4
2
1.4− 2.0− 2.6− 3.2− 3.8− 4.4− 5.0− 5.6− 6.2− 6.8− 7.4−
1.5 2.1 2.7 3.3 3.9 4.5 5.1 5.7 6.3 6.9 7.5
Percent range
Number of participants
18
Longer run 16
14
12
10
8
6
4
2
1.4− 2.0− 2.6− 3.2− 3.8− 4.4− 5.0− 5.6− 6.2− 6.8− 7.4−
1.5 2.1 2.7 3.3 3.9 4.5 5.1 5.7 6.3 6.9 7.5
Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.
MONETARY POLICY REPORT: JULY 2021 53
Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2021–23 and over the longer run
Number of participants
18
2021 June projections 16
March projections 14
12
10
8
6
4
2
Number of participants
18
2022 16
14
12
10
8
6
4
2
Number of participants
18
2023 16
14
12
10
8
6
4
2
Number of participants
18
Longer run 16
14
12
10
8
6
4
2
Note: Definitions of variables and other explanations are in the notes to table 1.
54 Part 3: Summary of Economic Projections
Figure 3.C. Distribution of participants’ projections for PCE inflation, 2021–23 and over the longer run
Number of participants
2021 June projections
March projections
18
16
14
12
10
8
6
4
2
1.3− 1.5− 1.7− 1.9− 2.1− 2.3− 2.5− 2.7− 2.9− 3.1− 3.3− 3.5− 3.7− 3.9−
1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 4.0
Percent range
Number of participants
2022
18
16
14
12
10
8
6
4
2
1.3− 1.5− 1.7− 1.9− 2.1− 2.3− 2.5− 2.7− 2.9− 3.1− 3.3− 3.5− 3.7− 3.9−
1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 4.0
Percent range
Number of participants
2023
18
16
14
12
10
8
6
4
2
1.3− 1.5− 1.7− 1.9− 2.1− 2.3− 2.5− 2.7− 2.9− 3.1− 3.3− 3.5− 3.7− 3.9−
1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 4.0
Percent range
Number of participants
Longer run
18
16
14
12
10
8
6
4
2
1.3− 1.5− 1.7− 1.9− 2.1− 2.3− 2.5− 2.7− 2.9− 3.1− 3.3− 3.5− 3.7− 3.9−
1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 4.0
Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.
MONETARY POLICY REPORT: JULY 2021 55
Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2021–23
Number of participants
2021 June projections
March projections
18
16
14
12
10
8
6
4
2
1.5− 1.7− 1.9− 2.1− 2.3− 2.5− 2.7− 2.9− 3.1− 3.3−
1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4
Percent range
Number of participants
2022
18
16
14
12
10
8
6
4
2
1.5− 1.7− 1.9− 2.1− 2.3− 2.5− 2.7− 2.9− 3.1− 3.3−
1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4
Percent range
Number of participants
2023
18
16
14
12
10
8
6
4
2
1.5− 1.7− 1.9− 2.1− 2.3− 2.5− 2.7− 2.9− 3.1− 3.3−
1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4
Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.
56 Part 3: Summary of Economic Projections
Figure 3.E. Distribution of participants’ judgments of the midpoint of the appropriate target range for the
federal funds rate or the appropriate target level for the federal funds rate, 2021–23 and over the longer run
Number of participants
2021 June projections
March projections
18
16
14
12
10
8
6
4
2
0.13− 0.38− 0.63− 0.88− 1.13− 1.38− 1.63− 1.88− 2.13− 2.38− 2.63− 2.88−
0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12
Percent range
Number of participants
2022
18
16
14
12
10
8
6
4
2
0.13− 0.38− 0.63− 0.88− 1.13− 1.38− 1.63− 1.88− 2.13− 2.38− 2.63− 2.88−
0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12
Percent range
Number of participants
2023
18
16
14
12
10
8
6
4
2
0.13− 0.38− 0.63− 0.88− 1.13− 1.38− 1.63− 1.88− 2.13− 2.38− 2.63− 2.88−
0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12
Percent range
Number of participants
Longer run
18
16
14
12
10
8
6
4
2
0.13− 0.38− 0.63− 0.88− 1.13− 1.38− 1.63− 1.88− 2.13− 2.38− 2.63− 2.88−
0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12
Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.
MONETARY POLICY REPORT: JULY 2021 57
Percent
Change in real GDP
Median of projections 8
70% confidence interval 7
6
5
4
3
2
Actual 1
0
−1
−2
−3
−4
FOMC participants’ assessments of uncertainty and risks around their economic projections
Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the percent
change in real gross domestic product (GDP) from the fourth quarter of the previous year to the fourth quarter of the year
indicated. The confidence interval around the median projected values is assumed to be symmetric and is based on root mean
squared errors of various private and government forecasts made over the previous 20 years; more information about these data
is available in table 2. Because current conditions may differ from those that prevailed, on average, over the previous 20 years,
the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC
participants’ current assessments of the uncertainty and risks around their projections; these current assessments are summa-
rized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as “broadly
similar” to the average levels of the past 20 years would view the width of the confidence interval shown in the historical fan
chart as largely consistent with their assessments of the uncertainty about their projections. Likewise, participants who judge
the risks to their projections as “broadly balanced” would view the confidence interval around their projections as approximate-
ly symmetric. For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.”
58 Part 3: Summary of Economic Projections
Percent
Unemployment rate
Median of projections 8
70% confidence interval
7
6
5
Actual 4
3
2
1
FOMC participants’ assessments of uncertainty and risks around their economic projections
Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the average
civilian unemployment rate in the fourth quarter of the year indicated. The confidence interval around the median projected
values is assumed to be symmetric and is based on root mean squared errors of various private and government forecasts made
over the previous 20 years; more information about these data is available in table 2. Because current conditions may differ from
those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the
basis of the historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty and risks
around their projections; these current assessments are summarized in the lower panels. Generally speaking, participants who
judge the uncertainty about their projections as “broadly similar” to the average levels of the past 20 years would view the
width of the confidence interval shown in the historical fan chart as largely consistent with their assessments of the uncertainty
about their projections. Likewise, participants who judge the risks to their projections as “broadly balanced” would view the
confidence interval around their projections as approximately symmetric. For definitions of uncertainty and risks in economic
projections, see the box “Forecast Uncertainty.”
MONETARY POLICY REPORT: JULY 2021 59
Percent
PCE inflation
Median of projections
70% confidence interval
5
Actual 2
FOMC participants’ assessments of uncertainty and risks around their economic projections
Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the percent
change in the price index for personal consumption expenditures (PCE) from the fourth quarter of the previous year to the
fourth quarter of the year indicated. The confidence interval around the median projected values is assumed to be symmetric
and is based on root mean squared errors of various private and government forecasts made over the previous 20 years; more
information about these data is available in table 2. Because current conditions may differ from those that prevailed, on average,
over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors
may not reflect FOMC participants’ current assessments of the uncertainty and risks around their projections; these current
assessments are summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their
projections as “broadly similar” to the average levels of the past 20 years would view the width of the confidence interval shown
in the historical fan chart as largely consistent with their assessments of the uncertainty about their projections. Likewise,
participants who judge the risks to their projections as “broadly balanced” would view the confidence interval around their
projections as approximately symmetric. For definitions of uncertainty and risks in economic projections, see the box “Forecast
Uncertainty.”
60 Part 3: Summary of Economic Projections
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Diffusion index
Unemployment rate
1.00
0.75
0.50
0.25
0.00
−0.25
−0.50
−0.75
−1.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Diffusion index
PCE inflation
1.00
0.75
0.50
0.25
0.00
−0.25
−0.50
−0.75
−1.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Diffusion index
Core PCE inflation
1.00
0.75
0.50
0.25
0.00
−0.25
−0.50
−0.75
−1.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Note: For each SEP, participants provided responses to the question “Please indicate your judgment of the uncertainty
attached to your projections relative to the levels of uncertainty over the past 20 years.” Each point in the diffusion indexes
represents the number of participants who responded “Higher” minus the number who responded “Lower,” divided by the total
number of participants. Figure excludes March 2020 when no projections were submitted.
MONETARY POLICY REPORT: JULY 2021 61
Figure 4.E. Diffusion indexes of participants’ risk weightings
Diffusion index
Change in real GDP
1.00
0.75
0.50
0.25
0.00
−0.25
−0.50
−0.75
−1.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Diffusion index
Unemployment rate
1.00
0.75
0.50
0.25
0.00
−0.25
−0.50
−0.75
−1.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Diffusion index
PCE inflation
1.00
0.75
0.50
0.25
0.00
−0.25
−0.50
−0.75
−1.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Diffusion index
Core PCE inflation
1.00
0.75
0.50
0.25
0.00
−0.25
−0.50
−0.75
−1.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Note: For each SEP, participants provided responses to the question “Please indicate your judgment of the risk weighting
around your projections.” Each point in the diffusion indexes represents the number of participants who responded “Weighted
to the Upside” minus the number who responded “Weighted to the Downside,” divided by the total number of participants.
Figure excludes March 2020 when no projections were submitted.
62 Part 3: Summary of Economic Projections
Percent
Federal funds rate
Actual 1
Note: The blue and red lines are based on actual values and median projected values, respectively, of the Committee’s target
for the federal funds rate at the end of the year indicated. The actual values are the midpoint of the target range; the median
projected values are based on either the midpoint of the target range or the target level. The confidence interval around the
median projected values is based on root mean squared errors of various private and government forecasts made over the
previous 20 years. The confidence interval is not strictly consistent with the projections for the federal funds rate, primarily
because these projections are not forecasts of the likeliest outcomes for the federal funds rate, but rather projections of
participants’ individual assessments of appropriate monetary policy. Still, historical forecast errors provide a broad sense of the
uncertainty around the future path of the federal funds rate generated by the uncertainty about the macroeconomic variables as
well as additional adjustments to monetary policy that may be appropriate to onset the effects of shocks to the economy.
The confidence interval is assumed to be symmetric except when it is truncated at zero - the bottom of the lowest target range
for the federal funds rate that has been adopted in the past by the Committee. This truncation would not be intended to
indicate the likelihood of the use of negative interest rates to provide additional monetary policy accommodation if doing so
was judged appropriate. In such situations, the Committee could also employ other tools, including forward guidance and
large-scale asset purchases, to provide additional accommodation. Because current conditions may differ from those that
prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the
historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty and risks around their
projections.
* The confidence interval is derived from forecasts of the average level of short-term interest rates in the fourth quarter of the
year indicated; more information about these data is available in table 2. The shaded area encompasses less than a 70 percent
confidence interval if the confidence interval has been truncated at zero.
MONETARY POLICY REPORT: JULY 2021 63
Forecast Uncertainty
The economic projections provided by the members reported in table 2 would imply a probability of about
of the Board of Governors and the presidents of 70 percent that actual GDP would expand within a
the Federal Reserve Banks inform discussions of range of 1.5 to 4.5 percent in the current year and
monetary policy among policymakers and can aid 1.0 to 5.0 percent in the second and third years. The
public understanding of the basis for policy actions. corresponding 70 percent confidence intervals for
Considerable uncertainty attends these projections, overall inflation would be 1.2 to 2.8 percent in the
however. The economic and statistical models and current year and 1.0 to 3.0 percent in the second and
relationships used to help produce economic forecasts third years. Figures 4.A through 4.C illustrate these
are necessarily imperfect descriptions of the real world, confidence bounds in “fan charts” that are symmetric
and the future path of the economy can be affected and centered on the medians of FOMC participants’
by myriad unforeseen developments and events. Thus, projections for GDP growth, the unemployment rate,
in setting the stance of monetary policy, participants and inflation. However, in some instances, the risks
consider not only what appears to be the most likely around the projections may not be symmetric. In
economic outcome as embodied in their projections, particular, the unemployment rate cannot be negative;
but also the range of alternative possibilities, the furthermore, the risks around a particular projection
likelihood of their occurring, and the potential costs to might be tilted to either the upside or the downside,
the economy should they occur. in which case the corresponding fan chart would
Table 2 summarizes the average historical accuracy be asymmetrically positioned around the median
of a range of forecasts, including those reported in projection.
past Monetary Policy Reports and those prepared Because current conditions may differ from those
by the Federal Reserve Board’s staff in advance of that prevailed, on average, over history, participants
meetings of the Federal Open Market Committee provide judgments as to whether the uncertainty
(FOMC). The projection error ranges shown in the attached to their projections of each economic variable
table illustrate the considerable uncertainty associated is greater than, smaller than, or broadly similar to
with economic forecasts. For example, suppose a typical levels of forecast uncertainty seen in the past
participant projects that real gross domestic product 20 years, as presented in table 2 and reflected in the
(GDP) and total consumer prices will rise steadily at widths of the confidence intervals shown in the top
annual rates of, respectively, 3 percent and 2 percent. panels of figures 4.A through 4.C. Participants’ current
If the uncertainty attending those projections is similar assessments of the uncertainty surrounding their
to that experienced in the past and the risks around projections are summarized in the bottom-left panels
the projections are broadly balanced, the numbers (continued)
MONETARY POLICY REPORT: JULY 2021 65
of those figures. Participants also provide judgments as year basis. However, the forecast errors should provide
to whether the risks to their projections are weighted a sense of the uncertainty around the future path of
to the upside, are weighted to the downside, or the federal funds rate generated by the uncertainty
are broadly balanced. That is, while the symmetric about the macroeconomic variables as well as
historical fan charts shown in the top panels of figures additional adjustments to monetary policy that would
4.A through 4.C imply that the risks to participants’ be appropriate to offset the effects of shocks to the
projections are balanced, participants may judge that economy.
there is a greater risk that a given variable will be above If at some point in the future the confidence interval
rather than below their projections. These judgments around the federal funds rate were to extend below
are summarized in the lower-right panels of figures 4.A zero, it would be truncated at zero for purposes of
through 4.C. the fan chart shown in figure 5; zero is the bottom of
As with real activity and inflation, the outlook the lowest target range for the federal funds rate that
for the future path of the federal funds rate is subject has been adopted by the Committee in the past. This
to considerable uncertainty. This uncertainty arises approach to the construction of the federal funds rate
primarily because each participant’s assessment of fan chart would be merely a convention; it would
the appropriate stance of monetary policy depends not have any implications for possible future policy
importantly on the evolution of real activity and decisions regarding the use of negative interest rates to
inflation over time. If economic conditions evolve provide additional monetary policy accommodation
in an unexpected manner, then assessments of the if doing so were appropriate. In such situations, the
appropriate setting of the federal funds rate would Committee could also employ other tools, including
change from that point forward. The final line in forward guidance and asset purchases, to provide
table 2 shows the error ranges for forecasts of short- additional accommodation.
term interest rates. They suggest that the historical While figures 4.A through 4.C provide information
confidence intervals associated with projections of on the uncertainty around the economic projections,
the federal funds rate are quite wide. It should be figure 1 provides information on the range of views
noted, however, that these confidence intervals are not across FOMC participants. A comparison of figure 1
strictly consistent with the projections for the federal with figures 4.A through 4.C shows that the dispersion
funds rate, as these projections are not forecasts of of the projections across participants is much smaller
the most likely quarterly outcomes but rather are than the average forecast errors over the past 20 years.
projections of participants’ individual assessments of
appropriate monetary policy and are on an end-of-
67
Abbreviations
AFE advanced foreign economy
CBO Congressional Budget Office
CIE common inflation expectations
CMBS commercial mortgage-backed securities
COVID-19 coronavirus disease 2019
CPI consumer price index
CPS Current Population Survey
CRE commercial real estate
EFFR effective federal funds rate
ELB effective lower bound
EME emerging market economy
EPOP ratio employment-to-population ratio
FIMA Foreign and International Monetary Authorities
FOMC Federal Open Market Committee; also, the Committee
FPUC Federal Pandemic Unemployment Compensation
GDP gross domestic product
LFPR labor force participation rate
MBS mortgage-backed securities
MMF money market fund
ON RRP overnight reverse repurchase agreement
OPEC Organization of the Petroleum Exporting Countries
PCE personal consumption expenditures
PEUC Pandemic Emergency Unemployment Compensation
PPP Paycheck Protection Program
PUA Pandemic Unemployment Assistance
repo repurchase agreement
SMCCF Secondary Market Corporate Credit Facility
S&P Standard & Poor’s
TGA Treasury General Account
TIPS Treasury Inflation-Protected Securities
UI unemployment insurance
VIX implied volatility for the S&P 500 index
For use at 11:00 a.m. EDT
July 9, 2021