Monetary Policy Report

For use at 11:00 a.m.
EST
February 19, 2021
Monetary Policy Report

February 19, 2021
Board of Governors of the Federal Reserve System

Letter of Transmittal
Board of Governors of the

Federal Reserve System
Washington, D.C., February 19, 2021
The President of the Senate

The Speaker of the House of Representatives
The Board of Governors is pleased to submit its Monetary Policy Report pursuant to
section 2B of the Federal Reserve Act.
Sincerely,
Jerome H. Powell, Chair

Statement on Longer-Run Goals and Monetary Policy Strategy
Adopted effective January 24, 2012; as amended effective January 26, 2021
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
Economic and Financial Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Monetary Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Special Topics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Part 1: Recent Economic and Financial Developments. . . . . . . . . . . . . . . . . . . . . 5

Domestic Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Financial Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
International Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Part 2: Monetary Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Part 3: Summary of Economic Projections. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
List of Boxes
Monitoring Economic Activity with Nontraditional High-Frequency Indicators. . . . . . . . . . . . . 7
Disparities in Job Loss during the Pandemic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Developments Related to Financial Stability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
The FOMC’s Revised Statement on Longer-Run Goals and Monetary Policy Strategy . . . . . . . 40
Monetary Policy Rules and Shortfalls from Maximum Employment. . . . . . . . . . . . . . . . . . . . . 45
Forecast Uncertainty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Note: This report reflects information that was publicly available as of noon EST on February 17, 2021.
Unless otherwise stated, the time series in the figures extend through, for daily data, February 16, 2021; for monthly
data, January 2021; and, for quarterly data, 2020:Q4. In bar charts, except as noted, the change for a given period is
measured to its final quarter from the final quarter of the preceding period.
For figures 15, 33, 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 without written
permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please
visit www.spdji.com. S&P® is a registered trademark of Standard & Poor’s Financial Services LLC, and Dow Jones® is a
registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark
Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to
the ability of any index to accurately represent the asset class or market sector that it purports to represent, and neither
S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have
any liability for any errors, omissions, or interruptions of any index or the data included therein.
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 publication, regardless of the cause, and, in no event, shall DTCC or any of its affiliates be
liable for any direct, indirect, special, or consequential damages, costs, expenses, legal fees, or losses (including lost
income or lost profit, trading losses, and opportunity costs) in connection with this publication.
1
Summary
The COVID-19 pandemic continues to amid a worsening of the pandemic. All told,
weigh heavily on economic activity and labor GDP is currently estimated to have declined
markets in the United States and around 2.5 percent over the four quarters of last
the world, even as the ongoing vaccination year and payroll employment in January was
campaigns offer hope for a return to more almost 10 million jobs below pre-pandemic
normal conditions later this year. While levels, while the unemployment rate remained
unprecedented fiscal and monetary stimulus elevated at 6.3 percent and the labor force
and a relaxation of rigorous social-distancing participation rate was severely depressed.
restrictions supported a rapid rebound in the Job losses have been most severe and
U.S. labor market last summer, the pace of unemployment remains particularly elevated
gains has slowed and employment remains among Hispanics, African Americans, and
well below pre-pandemic levels. In addition, other minority groups as well as those who
weak aggregate demand and low oil prices hold lower-wage jobs.
have held down consumer price inflation. In
this challenging environment, the Federal Inflation. After declining sharply as the
Open Market Committee (FOMC) has held pandemic struck, consumer price inflation
its policy rate near zero and has continued rebounded along with economic activity, but
to purchase Treasury securities and agency inflation remains below pre-COVID levels and
mortgage-backed securities to support the the FOMC’s longer-run objective of 2 percent.
economic recovery. These measures, along The 12-month measure of PCE (personal
with the Committee’s strong guidance on consumption expenditures) inflation was
interest rates and the balance sheet, will ensure 1.3 percent in December, while the measure
that monetary policy will continue to deliver that excludes food and energy items—so-called
powerful support to the economy until the core inflation, which is typically less volatile
recovery is complete. than total inflation—was 1.5 percent. Both
total and core inflation were held down in part
Economic and Financial by prices for services adversely affected by
Developments the pandemic, and indicators of longer-run
inflation expectations are now at similar levels
Economic activity and the labor market. The to those seen in recent years.
initial wave of COVID-19 infections led to a
historic contraction in economic activity as Financial conditions. Financial conditions
a result of both mandatory restrictions and have improved notably since the spring of last
voluntary changes in behavior by households year and remain generally accommodative.
and businesses. The level of gross domestic Low interest rates, the Federal Reserve’s asset
product (GDP) fell a cumulative 10 percent purchases, the establishment of emergency
over the first half of 2020, and the measured lending facilities, and other extraordinary
unemployment rate spiked to a post–World actions, together with fiscal policy, continued
War II high of 14.8 percent in April. As to support the flow of credit in the economy
mandatory restrictions were subsequently and smooth market functioning. The nominal
relaxed and households and firms adapted Treasury yield curve steepened and equity
to pandemic conditions, many sectors of the prices continued to increase steadily in the
economy recovered rapidly and unemployment second half of last year as concerns over the
fell back. Momentum slowed substantially resurgence in COVID-19 cases appeared to
in the late fall and early winter, however, as have been outweighed by positive news about
spending on many services contracted again vaccine prospects and expectations of further
2 Summary
fiscal support. Spreads of yields on corporate adapted to containment measures that have
bonds over those on comparable-maturity often been less stringent than earlier.
Treasury securities narrowed significantly,
partly because the credit quality of firms Despite the resurgence of the pandemic in
improved and market functioning remained many economies, financial markets abroad
stable. Mortgage rates for households remain have recovered since the spring, buoyed
near historical lows. However, financing by continued strong fiscal and monetary
conditions remain relatively tight for policy support and the start of vaccination
households with low credit scores and for small campaigns in many countries. With the
businesses. abatement of financial stress, the broad dollar
has depreciated, more than reversing its
Financial stability. While some financial appreciation at the onset of the pandemic. On
vulnerabilities have increased since the start balance, global equity prices have recovered
of the pandemic, the institutions at the core and sovereign credit spreads in emerging
of the financial system remain resilient. market economies and in the European
Asset valuation pressures have returned to periphery have narrowed. In major advanced
or exceeded pre-pandemic levels in most economies, sovereign yields remained near
markets, including in equity, corporate bond, historical low levels amid continued monetary
and residential real estate markets. Although policy accommodation.
government programs have supported business
and household incomes, some businesses and Monetary Policy
households have become more vulnerable to
shocks, as earnings have fallen and borrowing Review of the strategic framework for monetary
has risen. Strong capital positions before the policy. The Federal Reserve concluded the
pandemic helped banks absorb large losses review of its strategic framework for monetary
related to the pandemic. Financial institutions, policy in the second half of 2020. The review
however, may experience additional losses as was motivated by changes in the U.S. economy
a result of rising defaults in the coming years, that affect monetary policy, including the
and long-standing vulnerabilities at money global decline in the general level of interest
market mutual funds and open-end investment rates and the reduced sensitivity of inflation
funds remain unaddressed. Although some to labor market tightness. In August, the
facilities established by the Federal Reserve in FOMC issued a revised Statement on Longer-
the wake of the pandemic have expired, those Run Goals and Monetary Policy Strategy.1
remaining continue to serve as important The revised statement acknowledges the
backstops against further stress. (See the box changes in the economy over recent decades
“Developments Related to Financial Stability” and articulates how policymakers are taking
in Part 1.) these changes into account in conducting
monetary policy. In the revised statement,
International developments. Mirroring the the Committee indicates that it aims to attain
United States, economic activity abroad its statutory goals by seeking to eliminate
bounced back last summer after the spread shortfalls from maximum employment—a
of the virus moderated and restrictions eased. broad-based and inclusive goal—and achieve
Subsequent infections and renewed restrictions inflation that averages 2 percent over time.
have again depressed economic activity, Achieving inflation that averages 2 percent
however. Relative to the spring, the current
slowdown in economic activity has been 1. The statement, revised in August 2020, was
less dramatic. Fiscal and monetary policies unanimously reaffirmed at the FOMC’s January 2021
continue to be supportive, and people have meeting.
MONETARY POLICY REPORT: FEBRUARY 2021 3
over time helps ensure that longer-term supporting the flow of credit to households
inflation expectations remain well anchored at and businesses. The Committee expects these
the FOMC’s longer-run 2 percent objective. purchases to continue at least at this pace until
Hence, following periods when inflation has substantial further progress has been made
been running persistently below 2 percent, toward its maximum-employment and price-
appropriate monetary policy will likely aim to stability goals.
achieve inflation moderately above 2 percent
for some time. (See the box “The FOMC’s In assessing the appropriate stance of
Revised Statement on Longer-Run Goals and monetary policy, the Committee will continue
Monetary Policy Strategy” in Part 2.) to monitor the implications of incoming
information for the economic outlook. The
In addition, in December the FOMC Committee is prepared to adjust the stance of
introduced two changes to the Summary monetary policy as appropriate if risks emerge
of Economic Projections (SEP) intended that could impede the attainment of the
to enhance the information provided to the Committee’s goals.
public. First, the release of the full set of SEP
exhibits was accelerated by three weeks, from
the publication of the minutes three weeks Special Topics
after the end of an FOMC meeting to the
day of the policy decision, the second day of Disparities in job loss. The COVID-19 crisis
an FOMC meeting. Second, new charts were has exacerbated pre-existing disparities in
included that display how FOMC participants’ labor market outcomes across job types and
assessments of uncertainties and risks have demographic groups. Job losses last spring
evolved over time. were disproportionately severe among lower-
wage workers, less-educated workers, and
Interest rate policy. In light of the effects of the racial and ethnic minorities, as in previous
continuing public health crisis on the economy recessions, but also among women, in contrast
and the associated risks to the outlook, the to previous recessions. While all groups
FOMC has maintained the target range for the have experienced at least a partial recovery
federal funds rate at 0 to ¼ percent since last in employment rates since April 2020, the
March. In pursuing the strategy outlined in its shortfall in employment remains especially
revised statement, the Committee noted that it large for lower-wage workers and for
expects it will be appropriate to maintain this Hispanics, African Americans, and other
target range until labor market conditions have minority groups, and the additional childcare
reached levels consistent with the Committee’s burdens resulting from school closures have
assessments of maximum employment and weighed more heavily on women’s labor
inflation has risen to 2 percent and is on track force participation than on men’s labor force
to moderately exceed 2 percent for some time. participation. (See the box “Disparities in Job
Loss during the Pandemic” in Part 1.)
Balance sheet policy. With the federal funds
rate near zero, the Federal Reserve has also High-frequency indicators. The unprecedented
continued to undertake asset purchases to magnitude, speed, and nature of the
increase its holdings of Treasury securities COVID-19 shock to the economy rendered
by $80 billion per month and its holdings traditional statistics insufficient for monitoring
of agency mortgage-backed securities by economic activity in a timely manner. As a
$40 billion per month. These purchases result, policymakers turned to nontraditional
help foster smooth market functioning and high-frequency indicators of activity,
accommodative financial conditions, thereby especially for the labor market and consumer
4 Summary
spending. These indicators presented a more can provide useful guidance to policymakers.
timely and granular picture of the drop and This discussion presents the policy rate
subsequent rebound in economic activity last prescriptions from a number of rules that have
spring. The most recent readings obtained received attention in the research literature,
from those indicators suggest that economic many of which mechanically prescribe raising
activity began to edge up again in January, the federal funds rate as employment rises
likely reflecting in part the disbursement of above estimates of its longer-run level. A rule
additional stimulus payments to households. that instead responds only to shortfalls of
(See the box “Monitoring Economic Activity employment from assessments of its maximum
with Nontraditional High-Frequency level is featured to illustrate one aspect of
Indicators” in Part 1.) the FOMC’s revised approach to policy, as
described in the revised Statement on Longer-
Monetary policy rules. Simple monetary policy Run Goals and Monetary Policy Strategy. (See
rules, which relate a policy interest rate to a the box “Monetary Policy Rules and Shortfalls
small number of other economic variables, from Maximum Employment” in Part 2.)
5
Part 1
Recent Economic and Financial Developments
Domestic Developments
The labor market has partially recovered 1. Nonfarm payroll employment
from the pandemic-induced collapse, Monthly Millions of jobs
but the pace of improvement slowed
substantially toward the end of last year . . . 155
The public health crisis spurred by the 150
spread of COVID-19 weighed on economic 145

activity throughout 2020, and patterns
140
in the labor market reflected the ebb and
flow of the virus and the actions taken by 135
households, businesses, and governments 130

to combat its spread. During the initial 125
stage of the pandemic in March and April,
payroll employment plunged by 22 million 2005 2007 2009 2011 2013 2015 2017 2019 2021
jobs, while the measured unemployment rate SOURCE: Bureau of Labor Statistics via Haver Analytics.
jumped to 14.8 percent—its highest level
since the Great Depression (figures 1 and 2).2
As cases subsided and early lockdowns were 2. Civilian unemployment rate
relaxed, payroll employment rebounded
Monthly Percent
rapidly—particularly outside of the service
sectors—and the unemployment rate fell 16
back. Beginning late last year, however, the 14
pace of improvement in the labor market
12
slowed markedly amid another large wave
10
of COVID-19 cases. The unemployment
rate declined only 0.4 percentage point from 8
November through January, while payroll 6
gains averaged just 29,000 per month, weighed 4

down by a contraction in the leisure and 2
hospitality sector, which is particularly affected
by social distancing and government-mandated 2005 2007 2009 2011 2013 2015 2017 2019 2021
restrictions. SOURCE: Bureau of Labor Statistics.
2. Since the beginning of the pandemic, a substantial

number of people on temporary layoff, who should be
counted as unemployed, have instead been recorded as
“employed but on unpaid absence.” The Bureau of Labor
Statistics reports that, if these workers had been correctly
classified, the unemployment rate would have been
5 percentage points higher in April. The misclassification
problem has abated since then, and the unemployment
rate in January was at most about ½ percentage
point lower than it would have been in the absence of
misclassification.
6 Part 1: Recent Economic and Financial Developments
All told, the incomplete recovery left the level

of employment in January almost 10 million
lower than it was a year earlier, while the
unemployment rate stood at 6.3 percent—
nearly 3 percentage points higher than before
the onset of the pandemic. Most recently,
high-frequency data—including initial claims
for unemployment insurance and weekly
employment data from the payroll processor
ADP—suggest modest further improvement
in the labor market in recent weeks. (For more
discussion of what high-frequency indicators
are suggesting about the current trajectory
of the economy, see the box “Monitoring
Economic Activity with Nontraditional High-
Frequency Indicators.”)
. . . and the harm has been substantial

The damage to the labor market has been
even more substantial than is indicated by
the extent of unemployment alone. The labor
3. Labor force participation rate and force participation rate (LFPR)—the share
employment-to-population ratio
of the population that is either working or
Monthly Percent actively looking for work—plunged in March
68
and April, as many of those who lost their
66
jobs were not seeking work and so were not
Labor force participation rate
64 counted among the unemployed. Despite
62 recovering some over the summer, the LFPR
Employment-to-
population ratio 60 remains nearly 2 percentage points below
58 its pre-pandemic level (figure 3). A number
56 of factors appear to have contributed to the
54 continued weakness in the LFPR, including
52 a lack of job opportunities, the effects of
50 school closings and virtual learning on
2005 2007 2009 2011 2013 2015 2017 2019 2021 parents’ ability to work, the health concerns
NOTE: The labor force participation rate and the employment- of potential workers, and a spate of early
to-population ratio are percentages of the population aged 16 and over.
SOURCE: Bureau of Labor Statistics via Haver Analytics.
retirements triggered by the crisis. All told,
the employment-to-population ratio—the
share of the population with jobs, regardless
of the number seeking work—in January
was 3.6 percentage points below the level at
the beginning of 2020. Job losses last year
fell most heavily on lower-wage workers
and on Hispanics, African Americans,
and other minority groups. As a result,
the rise in unemployment and the decline
Monitoring Economic Activity with Nontraditional

High-Frequency Indicators
The unprecedented magnitude, speed, and nature state of the labor market.1 An important example is
of the COvID-19 shock to the economy rendered data from the payroll processor ADP that cover roughly
traditional statistics insufficient for monitoring 20 percent of private U.S. employment, a sample size
economic activity in a timely manner. As a result, similar to the one used by the BLS to construct the CES.
policymakers around the world turned to nontraditional Estimates of changes in employment constructed from
indicators of activity, both those based on private- ADP data have tracked the official CES data remarkably
sector “big data” and those newly developed by official well since the start of the pandemic recession, and
statistical agencies. Because some of the most salient the ADP data possess the important benefits of being
characteristics of these indicators are their timeliness available earlier and at a weekly frequency (figure A,
and the time span they cover (such as daily or weekly), left panel).2
they are often called “high-frequency indicators.” (continued on next page)
An important example of the usefulness of high-
frequency indicators is the case of payroll employment. 1. See, for example, Raj Chetty, John N. Friedman,
Nathaniel Hendren, Michael Stepner, and the Opportunity
The Bureau of Labor Statistics’ (BLS) monthly measure Insights Team (2020), “The Economic Impacts of COvID-19:
of payroll employment is one of the most reliable, Evidence from a New Public Database Built Using Private
timely, and closely watched business cycle indicators. Sector Data,” NBER Working Paper Series 27431 (Cambridge,
However, during the onset of the pandemic in the Mass.: National Bureau of Economic Research, November),
https://www.nber.org/papers/w27431; and Alexander W. Bartik,
United States, even the BLS Current Employment Marianne Bertrand, Feng Lin, Jesse Rothstein, and Matt Unrath
Statistics (CES) data were published with too long of (forthcoming), “Measuring the Labor Market at the Onset of
a lag to track the dramatic dislocations in the labor the COvID-19 Crisis,” Brookings Papers on Economic Activity.
market in a timely manner. Specifically, from the 2. For further analysis of the ADP employment series, see
Tomaz Cajner, Leland D. Crane, Ryan A. Decker, John Grigsby,
second half of March through early April, the economy Adrian Hamins-Puertolas, Erik Hurst, Christopher Kurz, and
was shedding jobs at an unprecedented rate, but Ahu yildirmaz (forthcoming), “The U.S. Labor Market during
those employment losses were captured only in the the Beginning of the Pandemic Recession,” Brookings Papers
on Economic Activity. Note that the ADP employment series
employment situation release issued on May 8, 2020.
referenced in this discussion differ from the ADP National
Because of this lag, economists looked to various Employment Report, which is published monthly by the ADP
private data sources to gain insights about the current Research Institute in close collaboration with Moody’s Analytics.
A. Estimates of private payroll employment growth
Aggregate payroll employment growth Payroll employment growth in leisure and hospitality
Millions of jobs, monthly rate Millions of jobs, monthly rate
10
BLS CES 5 BLS CES 3
+
0_ +
0_
5
ADP-FRB, 4-week average 10
ADP-FRB, 4-week average 3
15
20
6
25
ADP-FRB 30 9
ADP-FRB
35
Feb. Apr. June Aug. Oct. Dec. Feb. Feb. Apr. June Aug. Oct. Dec. Feb.
2020 2021 2020 2021
NOTE: ADP data are weekly and extend through February 6, 2021. BLS data are monthly.
SOURCE: Federal Reserve Board staff calculations using ADP, Inc., Payroll Processing Data; Bureau of Labor Statistics (BLS), Current
Employment Statistics (CES).
Monitoring Economic Activity (continued)
Weekly employment estimates based on ADP data analytics firm) on nonfood retail sales captured in real
were particularly valuable not only last spring when time the dramatic and sudden drop in consumption in
employment plummeted and then quickly rebounded, mid-March; the monthly Census Bureau data recorded
but also during the renewed COvID-19 wave that that decline only with a lag (figure B, left panel).3
started this past fall. In particular, high-frequency ADP The NPD data also reflected how the income support
employment data indicate that the fall and winter virus payments to families, provided by the Coronavirus Aid,
wave had a smaller effect on the labor market than Relief, and Economic Security Act, or CARES Act,
was seen last spring, likely because there were fewer rapidly affected consumer spending in mid-April.
mandated shutdowns of businesses than in the spring, More recently, the NPD data showed some decline
because many businesses implemented adaptations in consumption late last year, followed by a pickup
that made it easier for them to continue to operate in January after the passage of the most recent fiscal
(for example, curbside pickup), and because many stimulus package. Several nontraditional data sources
individuals changed their behavior (for example, by illustrate that services spending remains depressed as
wearing masks such that more economic activities are social distancing continues to restrain in-person activity
deemed safer now than in the spring). Most recently, (figure B, right panel).4
the BLS data show that private payroll employment With rapid changes in the economic environment,
remained little changed through its survey week in many statistical agencies also developed high-frequency
mid-January, and the ADP data indicate that (continued)
employment improved modestly through early 3. Information from the NPD Group, Inc., and its affiliates
February. Additionally, the latest ADP data indicate contained in this report is the proprietary and confidential
that the leisure and hospitality sector—which includes property of NPD and was made available for publication
hotels, restaurants, and entertainment venues and under a limited license from NPD. Such information may not
is particularly affected by government-mandated be republished in any manner, in whole or in part, without the
express written consent of NPD.
restrictions and social distancing—started adding jobs 4. Services spending accounts for roughly one-half of
again in recent weeks after experiencing a temporary aggregate spending, but it is measured with some lag. In
downturn at the end of last year (figure A, right panel). particular, the services spending information folded into
Outside of the labor market, several new high- gross domestic product comes from the revenue information
sourced from the Census Bureau’s Quarterly Services Survey
frequency indicators have been useful in monitoring (QSS). The advance QSS (early data for a subset of industries
the massive effects of the COvID-19 pandemic on found in the full QSS) and full QSS are released two and three
consumer spending. Weekly data from NPD (a market months, respectively, after a given quarter ends.
B. Indicators of consumption growth
Retail goods spending Services spending
Percent change from year earlier Daily Year-over-year percent change
30 40
Total, Census
20
20 Food services +
0
_
10 Health-care visits
+ 20
0_
40
Total, NPD 10 Hotel occupancy
60
20 Airport passengers 80
30 100
Feb. Apr. June Aug. Oct. Dec. Feb. Feb. Apr. June Aug. Oct. Dec. Feb.
2020 2021 2020 2021
NOTE: NPD data are weekly and extend through February 6, 2021, NOTE: Year-over-year percent change in 7-day moving average.
and Census data are monthly. All series show nominal spending on Health-care visits data extend through February 7, 2021; food services
nonfood retail goods. Dashed lines represent the first and second waves data extend through February 15, 2021; and hotel occupancy data extend
of stimulus tranche. through February 6, 2021.
SOURCE: NPD Group; Census Bureau. SOURCE: SafeGraph, Inc.; Fiserv, Inc.; STR, Inc.; Transportation
Security Administration.
indicators. For example, the Census Bureau released financial struggles of households (figure C, right
data on weekly new business applications (figure C, panel). These data indicate that the financial stress of
left panel). During the initial stage of the pandemic households increased late last year as households were
recession, new business applications fell compared becoming less confident about being able to make their
with previous years, a typical pattern during economic next mortgage or rent payment as well as more likely
downturns. However, new business applications started to expect income loss over the next four weeks, but
to rebound notably during the summer, and for the year households’ financial expectations improved somewhat
as a whole, they were higher than the average over the in January.
previous three years, a pattern that differs dramatically Overall, nontraditional high-frequency indicators
from previous business cycles.5 The increase in have served several purposes over the past year.
applications appears to be concentrated in industries First, they provide timely alternative estimates that
that rapidly adapted to the landscape of the pandemic, complement official statistics and can also be used to
such as online retail, personal services, information verify movements in official statistics. Second, they are
technology, and delivery. It remains unclear, however, often helpful for assessing economic developments
whether these business applications will lead to actual more quickly and with greater granularity than what
job creation at the same rate as in the past.6 As another can be found in official statistics. Third, high-frequency
example, the Census Bureau developed high-frequency indicators without a direct counterpart in official
survey statistics that contain information about the statistics give a different perspective and help enhance
our understanding of economic developments. These
nontraditional indicators are also subject to several
5. For further discussion, see Emin Dinlersoz, Timothy potential limitations, such as systematic biases due to
Dunne, John Haltiwanger, and veronika Penciakova nonrepresentativeness of data or small (and possibly
(forthcoming), “Business Formation: A Tale of Two Recessions,” nonrandom) samples. Importantly, only time will tell if
American Economic Review Papers and Proceedings.
6. The link between applications and job creation in the such indicators will continue to provide a signal above
pre-pandemic period is studied in Kimberly Bayard, Emin and beyond traditional indicators as the high-frequency
Dinlersoz, Timothy Dunne, John Haltiwanger, Javier Miranda, shocks associated with the pandemic dissipate. Overall,
and John Stevens (2018), “Early-Stage Business Formation: however, the use of nontraditional high-frequency
An Analysis of Applications for Employer Identification
Numbers,” Finance and Economics Discussion Series 2018-
indicators over the past year has amply shown that they
015 (Washington: Board of Governors of the Federal Reserve can yield large benefits, especially when economic
System, March), https://dx.doi.org/10.17016/FEDS.2018.015. conditions are changing rapidly.
C. High-frequency indicators by official statistical agencies
New business applications Houshold expectations
Weekly Thousands Weekly Percent of households
600 70
Cumulative 2020 500
60
400 High confidence High confidence
in making in making
Cumulative next mortgage next rent 50
2017-19 average 300 payment payment
40
Cumulative 200
2021
30
100 Expect loss of
+ employment
0 income in 20
_ next 4 weeks
Feb. Apr. June Aug. Oct. Dec. May June July Aug. Sept. Oct. Nov. Dec. Jan. Feb.
2020 2021
NOTE: The cumulative 2021 data extend through February 6, 2021. NOTE: Data extend through February 1, 2021. Dashed lines represent
The data are derived from Employer Identification Number applications pauses in Household Pulse Survey data collection.
with planned wages. SOURCE: Household Pulse Survey, Census Bureau via Haver
SOURCE: Business Formation Statistics, Census Bureau via Haver Analytics.
Analytics.
4. Unemployment rate, by race and ethnicity
Monthly Percent
20
18
Black or African American
16
14
12
Hispanic or Latino
10
White 8
6
Asian
4
2005 2007 2009 2011 2013 2015 2017 2019 2021

NOTE: Unemployment rate measures total unemployed as a percentage of the labor force. Persons whose ethnicity is identified as Hispanic or Latino
may be of any race. Small sample sizes preclude reliable estimates for Native Americans and other groups for which monthly data are not reported by
the Bureau of Labor Statistics.
SOURCE: Bureau of Labor Statistics via Haver Analytics.
in the employment-to‑population ratio

were particularly evident among those
groups (figure 4). (For more discussion
of the pandemic’s effects on the labor
market outcomes of various groups, see
the box “Disparities in Job Loss during the
5. Measures of change in hourly compensation Pandemic.”)
Percent change from year earlier
Aggregate wage growth appears to be
10 little changed despite the weakness in the
labor market
8
Compensation per hour, Atlanta Fed’s

6
Although weakness in the labor market
business sector Wage Growth Tracker
generally puts downward pressure on overall
4
wages, the best available measures suggest
Employment 2 that wage growth in 2020 was little changed
cost index, +
private sector 0
_
from 2019. Total hourly compensation as
Average hourly earnings,
private sector
2
measured by the employment cost index,
which includes both wages and benefits, rose
2005 2007 2009 2011 2013 2015 2017 2019 2021 2.6 percent during the 12 months ending in
NOTE: Business-sector compensation is on a 4-quarter percent change December, only slightly below pre-pandemic
basis. For the private-sector employment cost index, change is over the
12 months ending in the last month of each quarter; for private-sector
rates (figure 5). Wage growth as computed by
average hourly earnings, the data are 12-month percent changes and the Federal Reserve Bank of Atlanta, which
begin in March 2007; for the Atlanta Fed’s Wage Growth Tracker, the
data are shown as a 3-month moving average of the 12-month percent tracks the median 12-month wage growth
change.
SOURCE: Bureau of Labor Statistics; Federal Reserve Bank of Atlanta,
of individuals responding to the Current
Wage Growth Tracker; all via Haver Analytics. Population Survey, was about 3½ percent
during 2020, similar to the growth rate

in 2019.3 The continued gains in aggregate
wages mask important heterogeneity,
however; according to the Atlanta Fed data,
workers with lower earnings and nonwhites
experienced larger decelerations in wages than
other groups last year.
6. Change in the price index for personal consumption
expenditures
Price inflation remains low despite
rebounding since last spring Monthly 12-month percent change
As measured by the 12-month change in Trimmed mean 3.0

the price index for personal consumption
2.5
expenditures (PCE), inflation fell from Excluding food
and energy
1.6 percent in December 2019 to a low of 2.0
0.5 percent in April, as economic activity 1.5

dropped sharply (figure 6). Since then, 1.0
Total
inflation has partially recovered along with the
.5
pickup in demand, but it was only 1.3 percent
in December—still well below the Federal 0
Open Market Committee’s (FOMC) objective

2014 2015 2016 2017 2018 2019 2020
of 2 percent. After excluding consumer food
NOTE: The data extend through December 2020.
and energy prices, which are often quite SOURCE: For trimmed mean, Federal Reserve Bank of Dallas; for all
volatile, the 12-month measure of core PCE else, Bureau of Economic Analysis; all via Haver Analytics.
inflation was 1.5 percent in December. An

alternative way to abstract from transitory
influences on measured inflation is provided
by the trimmed mean measure of PCE price
inflation constructed by the Federal Reserve
Bank of Dallas.4 The 12-month change in this
measure declined to 1.7 percent in December
3. Some other common wage measures are providing

misleading signals at present because they are dominated
by compositional effects: Pandemic-related job losses fell
most heavily on lower-wage workers, which mechanically
increased measures of average wages. For example,
average hourly earnings from the payroll survey rose
more than 5 percent over the 12 months ending in
January. Similarly, the fourth-quarter reading on
compensation per hour, which includes both wages and
benefits, was 7.7 percent above its year-ago level. Output
per hour, or productivity, has also been affected by the
same composition effects, rising 2.5 percent over the four
quarters of 2020, the fastest pace in a decade.
4. The trimmed mean price index excludes whichever
prices showed the largest increases or decreases in a given
month. Over the past 20 years, changes in the trimmed
mean index have averaged ¼ percentage point above core
PCE inflation and 0.1 percentage point above total PCE
inflation.
Disparities in Job Loss during the Pandemic

Although employment has improved substantially A. Changes in private-sector employment, by industry
since its trough in April 2020, the labor market Percent change since Feb. 2020
recovery remains far from complete: As of Industry (1) (2)
January 2021, the employment-to-population (EPOP) As of Apr. 2020 As of Jan. 2021
ratio, a broad measure that encompasses both 1. Total private ........................... −16.5 −6.6
increased unemployment and decreased labor force 2. Mining and logging ............... −9.9 −11.7
participation, was still 3.6 percentage points below
3. Manufacturing ....................... −10.8 −4.5
its February 2020 level. All industries, occupations,
and demographic groups experienced significant 4. Construction .......................... −14.6 −3.3
employment declines at the start of the pandemic, 5. Wholesale trade ..................... −6.9 −4.5
and, over the ensuing months, all groups have 6. Retail trade ............................. −15.2 −2.5
experienced at least some partial recovery. That 7. Transp., warehousing, and −9.1 −2.7
said, employment declines last spring were steeper utilities ....................................
for workers with lower earnings and for Hispanics, 8. Information and fi nancial −4.8 −2.8
activities ..................................
African Americans, and other minority groups, and
9. Professional and business −11.1 −3.8
the hardest-hit groups still have the most ground left services ....................................
to regain.
10. Education and health −11.6 −5.4
Although disparities in labor market outcomes services ....................................
generally widen during recessions, certain 11. Leisure and hospitality ......... −48.6 −22.9
factors unique to this episode—in particular, the
12. Other services ........................ −23.7 −7.8
social-distancing measures taken by households,
Note: The data are seasonally adjusted.
businesses, and governments to limit in-person SourCe: Bureau of Labor Statistics.
interactions—have profoundly shaped the incidence
of recent job losses in different segments of the labor
market. Because jobs differ in the degree to which distancing measures and relatively few workers are able
they involve personal contact and physical proximity, to work from home.2
in whether they can be performed remotely, and in In keeping with the sectoral composition of recent
whether they are deemed to serve “essential” functions, job losses, workers in lower-wage jobs have been hit
social-distancing measures have had disparate effects especially hard. Figure B uses data from the payroll
across industries and occupations. To illustrate this processor ADP to plot employment indexes for four
point, figure A reports net changes in employment in job tiers defined by hourly wages. Between February
11 broad industry categories, both during the period and April of last year, employment fell most sharply for
of acute job losses last spring (column 1) and over the jobs in the bottom quartile of the pre-pandemic wage
longer interval since the start of the pandemic (column distribution. Between April and June, employment
2). Net job losses through January have been especially rose most quickly for these lowest-paying jobs. In
severe in the leisure and hospitality industry—in which subsequent months, job gains moderated substantially
employment is still 22.9 percent below pre-pandemic for all groups, and as of mid-January, employment in
levels (line 11)—and in other services, a category that the lowest-paying jobs was about 20 percent below its
includes barber shops and beauty salons (line 12).1 By (continued)
contrast, employment in most other broad industries is
now 5 percent or less below pre-pandemic levels. Job
2. For instance, in the January 2021 round of the Current
losses have thus been disproportionately concentrated Population Survey, 41 percent of those employed in the
in lower-wage consumer service industries, in which professional and business services industry reported working
business operations are strongly affected by social- from home during the previous four weeks as a result of the
pandemic, compared with about 7 percent of those employed
in leisure and hospitality. See Bureau of Labor Statistics (2021),
1. Net job losses have also been pronounced in mining “Supplemental Data Measuring the Effects of the Coronavirus
and logging (line 2), which is unique among these industries (COvID-19) Pandemic on the Labor Market,” Current
in having experienced further contraction in employment Population Survey, January, https://www.bls.gov/cps/effects-of-
between April 2020 and January 2021. the-coronavirus-covid-19-pandemic.htm.
B. Employment declines for low-, middle-, and C. Change in employment-to-population ratio, by

high-wage workers demographic group
Weekly Week ending February 15, 2020 = 100

Feb. to Apr. 2020 Feb. 2020 to Jan. 2021
Men
110 Women
Top-middle Top 100 Less than a high school diploma
High school graduates, no college
90 Some college or associate’s degree
Bachelor’s degree and higher
80 16–24
Bottom- 25–54
middle 70 55+
White
60 Black or African American
Bottom Asian
50 Hispanic or Latino
-20 -15 -10 -5 0

Mar. May July Sept. Nov. Jan. Percentage points
2020 2021
NOTE: The data are seasonally adjusted by the Federal Reserve Board NOTE: The data are seasonally adjusted. Small sample sizes preclude
and extend through January 16, 2021. Wage quartiles are defined using reliable estimates for Native Americans and other groups for which
the February 2020 wage distribution. monthly data are not reported by the Bureau of Labor Statistics.
SOURCE: Federal Reserve Board staff calculations using ADP, Inc., SOURCE: Bureau of Labor Statistics via Haver Analytics.
payroll processing data.
pre-pandemic level. In comparison, employment in the experienced the greatest net employment declines to
higher-paying job tiers is now about 10 percent or less date, such as leisure and hospitality; these demographic
below pre-pandemic levels. groups are also less likely to report being able to work
Similar disparities are apparent across demographic from home.4
groups. Figure C shows the change in each group’s (continued on next page)
EPOP ratio. Between February 2020 and January 2021,
the EPOP ratio fell by a similar amount for both men 4. For more information on the groups with the largest
and women; in contrast, during many previous employment declines since February 2020, see Kenneth
recessions the EPOP ratio declined substantially more A. Couch, Robert W. Fairlie, and Huanan Xu (2020),
“Early Evidence of the Impacts of COvID-19 on Minority
for men. (In fact, given that men’s employment rate was Unemployment,” Journal of Public Economics, vol. 192
substantially higher than women’s before the pandemic, (December), pp. 1–11; Guido Matias Cortes and Eliza C.
the decline in employment for women as a percentage Forsythe (2020), “The Heterogeneous Labor Market Impacts
of pre-recession employment has been larger, which of the Covid-19 Pandemic,” Upjohn Institute Working Paper
Series 20-327 (Kalamazoo, Mich.: W.E. Upjohn Institute for
contrasts even more starkly with previous recessions.) Employment Research, May), https://research.upjohn.org/cgi/
Since February 2020, the EPOP ratio has fallen more viewcontent.cgi?article=1346&context=up_workingpapers;
for people without a bachelor’s degree than for those and Titan Alon, Matthias Doepke, Jane Olmstead-Rumsey, and
with at least a bachelor’s degree, more for prime-age Michèle Tertilt (2020), “This Time It’s Different: The Role of
individuals than for those under age 25 or over age 55, Women’s Employment in a Pandemic Recession,” NBER Working
Paper 27660 (Cambridge, Mass.: National Bureau of Economic
and more for Hispanics, African Americans, and Asians Research, August), https://www.nber.org/papers/w27660.
than for whites.3 In general, the groups experiencing the Additional details on differences across demographic
largest declines in employment since last February are groups in the ability to work from home can be found in the
more commonly employed in the industries that have Current Population Survey. For example, in January, around
23 percent of white workers reported working from home in the
previous four weeks because of the pandemic, compared with
3. The decline in employment also appears to have been 19 percent of African Americans and 14 percent of Hispanics;
relatively large for Native Americans, based on annual average 43 percent of those with a bachelor’s degree or higher reported
data for 2020. (Monthly data are not available for this group working from home, compared with 16 percent or less for those
because of small sample sizes and are not shown in figure C with lower levels of education. See Bureau of Labor Statistics,
for that reason.) “Supplemental Data,” in box note 2.
Disparities in Job Loss (continued)
Since the start of the pandemic, another important be important for narrowing the disparities that have
impediment to individuals’ ability to work or look for widened since the start of the pandemic, as research
work has been the absence of in-person education for has consistently shown that strong labor markets
many K–12 students.5 Because many working parents especially benefit lower-wage and disadvantaged
are unable to work from home while monitoring their workers.7 The pace of labor market gains will also
children’s virtual education (depending on the nature depend on how many unemployed workers have
of their jobs and the availability of other caregivers), the opportunity to return to their original jobs. In
the widespread lack of K–12 in-person education may January 2021, 2.2 percent of labor force participants
also explain some of the differences across groups. (representing 34.6 percent of unemployed workers)
For example, among mothers aged 25 to 54 with reported being unemployed because of a permanent
children aged 6 to 17, the fraction who said they are job loss, up from 1.3 percent of the labor force
not working or looking for work for caregiving reasons (8.8 percent of unemployed workers) in April 2020.8
was 2½ percentage points higher in the three months Research has shown that workers who return to their
ending January 2021 than over the year-earlier period, previous employers after a temporary layoff tend to earn
compared with a ½ percentage point increase for wages similar to what they were making previously,
fathers. Relative to white mothers, the increase was whereas laid-off workers who do not return to their
about twice as large for Hispanic mothers and more previous employer experience a longer-lasting decline
than twice as large for African American mothers, and it in earnings.9
was also more than twice as large for mothers without
any college education as for mothers with more 7. For example, see Stephanie R. Aaronson, Mary C. Daly,
education.6 William L. Wascher, and David W. Wilcox (2019), “Okun
Revisited: Who Benefits Most from a Strong Economy?”
As the spread of COvID-19 is contained and Brookings Papers on Economic Activity, Spring, pp. 333–75,
a growing share of the population is immunized, https://www.brookings.edu/wp-content/uploads/2019/03/
some of the unique factors that have exacerbated aaronson_web.pdf; and Tomaz Cajner, Tyler Radler, David
disparities since the start of the pandemic will likely Ratner, and Ivan vidangos (2017), “Racial Gaps in Labor
ease. For example, as COvID becomes less prevalent, Market Outcomes in the Last Four Decades and over
the Business Cycle,” Finance and Economics Discussion
businesses offering in-person services (for example, in Series 2017-071 (Washington: Board of Governors of the
the leisure and hospitality industry) will move closer Federal Reserve System, June), https://dx.doi.org/10.17016/
to pre-pandemic levels of employment. In addition, as FEDS.2017.071.
more schools return to offering in-person education, 8. The data are Federal Reserve Board staff calculations
from published Bureau of Labor Statistics estimates. By
childcare constraints will become less acute. comparison, the number of permanent job losers peaked
Even as labor market impediments specific to the at 4.4 percent of labor force participants (representing
pandemic subside, however, the speed at which the 44.8 percent of unemployed workers) during the Great Recession.
labor market moves toward full employment will 9. See Louis S. Jacobson, Robert J. LaLonde, and Daniel G.
Sullivan (1993), “Earnings Losses of Displaced Workers,”
American Economic Review, vol. 83 (September), pp. 685–
5. According to the Census Bureau’s Household Pulse 709; Shigeru Fujita and Giuseppe Moscarini (2017), “Recall
Survey, 85 percent of parents surveyed in early January and Unemployment,” American Economic Review, vol. 107
reported that their children’s classes for the 2020–21 school (December), pp. 3875–916; and Marta Lachowska, Alexandre
year were moved to virtual learning. Mas, and Stephen A. Woodbury (2020), “Sources of Displaced
6. The findings are Federal Reserve Board staff estimates Workers’ Long-Term Earnings Losses,” American Economic
based on publicly available Current Population Survey microdata. Review, vol. 110 (October), pp. 3231–66.
from 2 percent a year earlier, a similar decrease

to those in total and core PCE inflation.
The low level of consumer price inflation

in 2020 partly reflected the deterioration in
economic activity. For example, inflation in
tenants’ rent and owners’ equivalent rent,
which tend to be sensitive to overall economic
conditions, softened in 2020 from the rates
observed during the preceding few years.
Low inflation also reflected the net effect
of a number of pandemic-driven shifts in
specific sectors of the economy, such as a
decline in gasoline prices that resulted from
a collapse in oil prices in the early part of
the year, which only partially reversed in the
second half. Similarly, airfares and hotel prices
fell markedly, driven by huge reductions in
demand due to the pandemic. In contrast,
food prices increased at an unusually fast
pace last year, given stronger demand at retail
grocery stores and, at times, some pandemic-
related supply chain disruptions. In addition,
prices for some durable goods, such as motor
vehicles and home appliances, rose sharply
during the summer and remained somewhat
elevated at the end of the year, in part because
of a pandemic-induced shift in demand away
from services and toward these goods.
Prices of imports and oil have also

rebounded
The partial rebound in inflation later in 2020 7. Nonfuel import prices and industrial metals indexes
also stemmed from a firming of import prices.
After declining in the first half of last year, January 2014 = 100 January 2014 = 100
nonfuel import prices increased in the second 120 Industrial metals 104
half, as the dollar depreciated and the recovery
110 102
in global demand put upward pressure on
100 100
non-oil commodity prices—a substantial
component of nonfuel import prices (figure 7). 90 98
Prices of both agricultural commodities and 80 96

Nonfuel import prices
industrial metals increased considerably, and 70 94
nonfuel import prices are now higher than 60 92
they were a year ago.
2014 2015 2016 2017 2018 2019 2020 2021
Early in the pandemic, benchmark oil prices NOTE: The data for nonfuel import prices are monthly and extend through
December 2020. The data for industrial metals are monthly averages of daily
fell below $20 per barrel, a level not breached data and extend through January 29, 2021.
SOURCE: For nonfuel import prices, Bureau of Labor Statistics; for industrial
since 2002. While prices have now nearly metals, S&P GSCI Industrial Metals Spot Index via Haver Analytics.
8. Spot and futures prices for crude oil recovered, oil consumption and production are
Weekly Dollars per barrel
still well below pre-pandemic levels (figure 8).
Although global economic activity has picked
160 up since last spring, oil demand has not fully
140 recovered, held back by the slow recovery in
Brent spot price 120 travel and commuting. Weak demand has been
100
met by reductions in supply: U.S. production
has fallen dramatically relative to a year ago,
80
while OPEC (Organization of the Petroleum
24-month-ahead 60
futures contracts Exporting Countries) and Russia have only
40 slightly increased production after making
20 sharp cuts last spring.
2007 2009 2011 2013 2015 2017 2019 2021
Survey-based measures of long-run
NOTE: The data are weekly averages of daily data. The data begin on
Thursdays and extend through February 10, 2021. inflation expectations have been
SOURCE: ICE Brent Futures via Bloomberg. broadly stable . . .
Despite the volatility in actual inflation last
year, survey-based measures of inflation
9. Surveys of inflation expectations
expectations at medium- and longer-term
Percent horizons, which likely influence actual inflation
by affecting wage- and price-setting decisions,
Michigan survey, 4
have been little changed on net (figure 9).
NY Fed survey,
next 5 to 10 years 3 years ahead In the University of Michigan Surveys of
3
Consumers, the median value for inflation
expectations over the next 5 to 10 years was
2.7 percent in January and early February.
2
Survey of Professional In the Survey of Consumer Expectations,
Forecasters,
next 10 years conducted by the Federal Reserve Bank
1
of New York, the median of respondents’
expected inflation rate three years ahead was
2005 2007 2009 2011 2013 2015 2017 2019 2021 3.0 percent in January, somewhat above its
NOTE: The series are medians of the survey responses. The Michigan year-earlier level. Finally, in the first-quarter
survey data are monthly and extend through February 2021; the
February data are preliminary. The Survey of Professional Forecasters Survey of Professional Forecasters, conducted
data for inflation expectations for personal consumption expenditures by the Federal Reserve Bank of Philadelphia,
are quarterly, begin in 2007:Q1, and extend through 2021:Q1. The NY
Fed survey data are monthly and begin in June 2013. the median expectation for the annual rate
SOURCE: University of Michigan Surveys of Consumers; Federal
Reserve Bank of New York, Survey of Consumer Expectations; Federal of increase in the PCE price index over the
Reserve Bank of Philadelphia, Survey of Professional Forecasters. next 10 years was 2.0 percent, close to the
level around which it had typically hovered in
previous years.
. . . and market-based measures of

inflation compensation have retraced
earlier declines
Inflation expectations can also be inferred
from market-based measures of inflation
compensation, although the inference is
not straightforward because these measures
are affected by changes in premiums that
provide compensation for bearing inflation
and liquidity risks. Measures of longer-term 10. 5-to-10-year-forward inflation compensation

inflation compensation—derived either from Weekly Percent
differences between yields on nominal Treasury
securities and those on comparable-maturity 3.5
Inflation swaps
Treasury Inflation-Protected Securities (TIPS), 3.0
or from inflation swaps—dropped sharply 2.5
last March, partly reflecting a reduction in 2.0
the relative liquidity of TIPS compared with
1.5
nominal Treasury securities (figure 10). Both TIPS breakeven rates
measures rebounded in the next couple of 1.0
months as liquidity improved, before drifting .5
up further through the remainder of 2020 and

2013 2015 2017 2019 2021
early 2021. The TIPS-based measure of 5-to-
NOTE: The data are weekly averages of daily data and extend through
10-year-forward inflation compensation and February 12, 2021. TIPS is Treasury Inflation-Protected Securities.
SOURCE: Federal Reserve Bank of New York; Barclays; Federal Reserve
the analogous measure from inflation swaps Board staff estimates.
are now about 2¼ percent and 2½ percent,
respectively, a bit above the average levels seen
in 2019.5
The plunge and rebound in gross

domestic product reflected unusual 11. Real gross domestic product and gross
patterns of spending during the pandemic domestic income
After contracting with unprecedented speed Quarterly Billions of chained 2012 dollars
and severity in the first half of 2020, gross 20

domestic product (GDP) rose rapidly in the
19
third quarter and continued to pick up, albeit
at a much slower pace, in the fourth quarter Gross domestic income 18
(figure 11). The rebound in activity reflected a 17
relaxation of voluntary and mandatory social Gross domestic product 16
distancing, as well as unprecedented fiscal and
monetary support. Nevertheless, the recovery 15
remains incomplete: At the end of 2020, GDP 14

was 2.5 percent below its level four quarters
earlier. This incomplete recovery reflected 2006 2008 2010 2012 2014 2016 2018 2020
weakness in services consumption and overall NOTE: Gross domestic income extends through 2020:Q3.
SOURCE: Bureau of Economic Analysis via Haver Analytics.
exports that resulted largely from ongoing
social-distancing measures to contain the virus,
both at home and abroad. The concentration
of the recession in services is unprecedented in
the United States. Indeed, the sectors that are
typically responsible for the cyclical dynamics
of GDP have shown remarkable resilience:
Activity in the housing market and consumer
spending on goods were both above their
5. As these measures are based on consumer price

index (CPI) inflation, one should probably subtract about
¼ percentage point—the average differential between CPI
and PCE inflation over the past two decades—to infer
inflation compensation on a PCE basis.
pre-pandemic levels in the fourth quarter, and

business fixed investment and manufacturing
output also recovered rapidly from their
initial plunges.
Consumer spending, particularly on

goods, bounced back in the second half
of 2020 . . .
12. Real personal consumption expenditures Household consumption rebounded rapidly
during the late spring and summer from its
Billions of chained 2012 dollars Billions of chained 2012 dollars
COVID-induced plunge, and it continued to
5.5 9.5
make gains through the fourth quarter, ending
the year 2.6 percent below its year-earlier
5.0 9.0
level. Notably, purchases of both durable
4.5 8.5 and nondurable goods rose above their pre-
4.0 Goods 8.0 COVID levels in the second half of 2020, as
3.5 7.5
spending shifted away from services curtailed
Services by voluntary and mandatory social distancing
3.0 7.0
(figure 12). Within durable goods, sales of light
2.5 6.5 motor vehicles moved up quickly in the second
half and are now close to their pre-pandemic
2005 2008 2011 2014 2017 2020
level; any residual weakness in sales may be
NOTE: The data are monthly and extend through December 2020.
attributable to low supply, as production
has failed to keep pace with demand.
Services spending also rebounded from the
13. Indexes of consumer sentiment extraordinarily low level seen in April, but
1985 = 100 1966 = 100 it remained well below its pre-pandemic
pace through the fourth quarter, as concerns
170 120 about the virus continued to limit in-person
150 Conference Board 110 interactions. Notably, consumer sentiment has
130
100 also remained well below pre-pandemic levels
110
90 (figure 13).
90
80
70 . . . assisted by government income
70
50 support . . .
30 60
Michigan survey 50
Consumer spending has been bolstered by
10
government income support in the form
2006 2009 2012 2015 2018 2021 of unemployment insurance and stimulus
NOTE: The data are monthly. Michigan survey data extend through measures targeted at households. These
February 2021; the February data are preliminary.
SOURCE: University of Michigan Surveys of Consumers; Conference payments were largest in the spring and
Board. summer of last year, but even in the fourth
quarter aggregate real disposable personal
income (DPI) was 3.7 percent above the level
prevailing in late 2019, despite the low level of
employment.6 The still-elevated level of DPI,
6. The Consolidated Appropriations Act, 2021,

which was enacted in late December, should provide a
combined with the low level of consumption, 14. Personal saving rate
resulted in an aggregate saving rate of more Monthly Percent
than 13 percent in the fourth quarter, nearly
double its level from a year earlier (figure 14).7 36
That said, these aggregate figures mask 32

28
important variation across households, and
24
many low-income households, especially
20
those whose earnings declined as a result of
16
the pandemic and recession, have seen their 12
finances stretched.8 8
4
. . . but spending fell back late in the year 0
As COVID cases began rising again 2006 2008 2010 2012 2014 2016 2018 2020
in November, some states retightened NOTE: The data extend through December 2020.
restrictions, and many households likely cut SOURCE: Bureau of Economic Analysis via Haver Analytics.
back voluntarily on their activities, leading

to a retrenchment in spending on services
such as restaurants and travel. Spending
on durable goods also stepped down late in
the fourth quarter, possibly in part because
many households had already purchased
durable items such as furniture and electronics
earlier in the year. Further, while higher-
income households accrued substantial
savings over the course of 2020, some lower-
income consumers likely began to reduce
their spending toward the end of the year,
as support provided by the Coronavirus
Aid, Relief, and Economic Security Act
(CARES Act) waned. More recently,
however, retail sales data and high-frequency
indicators suggest that consumer spending
substantial further boost to DPI in the first quarter of

this year.
7. The saving rate reached 26 percent in the second
quarter of 2020—by far the highest level since World
War II—before falling back as consumption rebounded
and government transfers declined over the course of
the year. Even so, the saving rate in the fourth quarter
remained higher than in any other period since the 1970s.
8. Food pantries saw a significant increase in demand
in 2020, and there was a sharp increase in the number of
families reporting that they did not have sufficient money
to buy food. See, for example, Marianne Bitler, Hilary
W. Hoynes, and Diane Whitmore Schanzenbach (2020),
“The Social Safety Net in the Wake of COVID-19,”
NBER Working Paper Series 27796 (Cambridge, Mass.:
National Bureau of Economic Research, September),
https://www.nber.org/system/files/working_papers/
w27796/w27796.pdf.
15. Real prices of existing single-family houses rose appreciably in January, likely in part
Quarterly 2005 = 100
because of additional fiscal support from the
Consolidated Appropriations Act, 2021, which
120 was enacted in late December.
110
Zillow index Soaring equity and house prices have
100 pushed aggregate household wealth to
S&P/Case-Shiller
national index
90 record highs
80 Stock markets rallied after plunging in the
CoreLogic
price index 70 spring and, more recently, have reached
60
record highs, largely reflecting the arrival of
effective vaccines, optimism about further
2006 2008 2010 2012 2014 2016 2018 2020 fiscal stimulus, and notable improvement in
NOTE: The data for the S&P/Case-Shiller index extend through the outlook for corporate earnings. House
2020:Q3. Series are deflated by the personal consumption expenditure
price index.
prices—which are of particular importance for
SOURCE: CoreLogic Home Price Index; Zillow; S&P/Case-Shiller U.S. the value of assets held by many households—
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 have also soared, boosted by strong demand
Indices licensing information, see the note on the Contents page.) from record-low mortgage rates, a shift in
16. Wealth-to-income ratio demand from multifamily to single-family
Quarterly Ratio
homes during the pandemic, and a shortage
of inventory (figure 15). As a result, aggregate
7.5 household wealth is elevated relative to income,
which is supporting consumption, particularly
7.0
of relatively well-off households (figure 16).
6.5
6.0
Lending standards for households are
less accommodative than before the
5.5 pandemic, but credit is still available to
5.0 households with good credit profiles
Consumer lending standards remain less
1999 2002 2005 2008 2011 2014 2017 2020
accommodative than before the pandemic,
NOTE: The series is the ratio of household net worth to disposable
personal income. Data extend through 2020:Q3.
on balance, and are particularly tight for
SOURCE: For net worth, Federal Reserve Board, Statistical Release individuals with low credit ratings. Banks
Z.1, “Financial Accounts of the United States”; for income, Bureau of
Economic Analysis via Haver Analytics. tightened lending standards substantially in the
17. Consumer credit flows first half of 2020, but the tightening moderated
in the second half and credit remains available
Billions of dollars, monthly rate
to higher-score borrowers. Banks also reported
considerably weaker demand for consumer
Q3 20
credit on balance. Credit card lending volumes
H1
10 have been weak, consistent with the incomplete
+ recovery in overall consumer spending, but
0_
auto lending has been stronger amid the rapid
10 recovery in motor vehicle sales to consumers
Student loans 20
(figure 17). Mortgage lending has also been
Auto loans robust, boosted both by record-low mortgage
Credit cards 30 interest rates and by mortgage credit that is
generally available to those with good credit
2008 2010 2012 2014 2016 2018 2020
scores who are seeking traditional mortgage
NOTE: The data are seasonally adjusted by the Federal Reserve Board.
SOURCE: Federal Reserve Board, Statistical Release G.19, “Consumer
Credit.”
products (figure 18). Overall, loan defaults 18. Mortgage rates

have remained low despite the weak labor Weekly Percent
market, supported by various forbearance
programs.
6
The housing sector made a remarkable 5

recovery in the second half of 2020 . . .
4
Residential investment grew at a robust
pace of 14 percent over the four quarters 3
of 2020, as booming home sales and housing
construction in the second half more than 2
offset the outsized declines in the second
quarter that resulted from the COVID-19 2011 2013 2015 2017 2019 2021
outbreak and mitigation efforts. Historically NOTE: The data extend through February 11, 2021.
low mortgage rates and the swift adaptation SOURCE: Freddie Mac Primary Mortgage Market Survey.
of the real estate sector to the pandemic

boosted housing activity later in the year,
19. Private housing starts and permits
with both single-family housing starts and
existing home sales rising to their highest levels Monthly Millions of units, annual rate
since the mid-2000s (figures 19 and 20).9 The 2.0

burst of housing demand has left inventories 1.8
of both new and existing homes at all-time 1.6
lows, putting upward pressure on home Single-family starts 1.4
prices and supporting new construction. 1.2
1.0
Some of these patterns in the data likely
.8
reflect changes in preferences during the Single-family .6
permits
pandemic, with households opting for larger .4
homes and housing in less dense areas, but Multifamily starts .2
the degree to which these changes will persist 0
remains unclear. 2006 2008 2010 2012 2014 2016 2018 2020
. . . and business fixed investment also SOURCE: Census Bureau via Haver Analytics.
rebounded rapidly . . .
Business fixed investment—that is, private 20. New and existing home sales
expenditures for equipment, structures,
research and development, and other Millions, annual rate Millions, annual rate
intellectual property—contracted sharply 7.5

1.4
in the first half of 2020 but largely retraced 7.0
1.2
its decline in the second half. The recovery 6.5
in business investment has been centered in 6.0 Existing home sales 1.0
equipment and intellectual property, which 5.5
.8
rose 2.4 percent over the four quarters of 2020, 5.0
4.5 .6
supported by stronger business sentiment,
4.0
improved financing conditions, and the .4
3.5
New home sales .2
3.0
9. In particular, during the pandemic, the real estate 2006 2008 2010 2012 2014 2016 2018 2020
sector has made increased use of virtual tours, remote
NOTE: Data are monthly and extend through December 2020. New
closings, and waivers on inspections and appraisals. home sales include only single-family sales. Existing home sales include
single-family, condo, and co-op sales.
SOURCE: For new home sales, Census Bureau; for existing home sales,
National Association of Realtors; all via Haver Analytics.
21. Real business fixed investment unwinding of direct disruptions from social
Billions of chained 2012 dollars Billions of chained 2012 dollars
distancing (figure 21). In addition, the health
crisis and the shift to widespread teleworking
650 Equipment and
intangible capital
2,400 have led to a surge in investment in both
600 2,200 medical equipment and computers. In contrast,
2,000 investment in nonresidential structures
550
1,800
continued to decline sharply in the second
500 half. Drilling investment was particularly
1,600
450 hard hit and fell 30 percent in 2020 as a result
1,400
of declines in energy demand and oil prices.
400 1,200 Investment in nondrilling structures also fell,
Structures
350 1,000 although more moderately. Long build times
imply that the decline in new construction
2005 2008 2011 2014 2017 2020
projects started in the first half of 2020 led
NOTE: Business fixed investment is known as “private nonresidential
fixed investment” in the national income and product accounts. The data to less ongoing spending in the second half;
are quarterly.
moreover, firms likely remain uncertain about
future demand for many types of structures in
the wake of the pandemic.
. . . amid notable improvements in

corporate financing conditions
22. Selected components of net debt financing for
nonfinancial businesses Financing conditions for nonfinancial firms
through capital markets have improved
Billions of dollars, monthly rate
notably since June. In particular, interest
Commercial paper H1
200
rates have remained very low and corporate
Bonds
Bank loans 160
bond spreads have narrowed. Gross issuance
Sum of nonfinancial corporate bonds was solid
120
in the second half of the year, although it
80
slowed from the exceptional pace in the second
40 quarter (figure 22). In contrast, aggregate
+
0_ bank lending to businesses contracted in the
40 second half, reflecting lower demand for new
H2
80 loans, the repayment of outsized draws on
credit lines earlier this year, the forgiveness
2008 2010 2012 2014 2016 2018 2020 of some loans under the Paycheck Protection
SOURCE: Mergent Inc., Fixed Income Securities Database; S&P Program, and tighter bank credit standards. In
Global, Leveraged Commentary & Data; DTCC Solutions LLC, an
affiliate of The Depository Trust & Clearing Corporation. This part because of policy actions to foster smooth
publication includes data licensed from DTCC Solutions LLC, an
affiliate of The Depository Trust & Clearing Corporation. (For the market functioning, corporations have been
DTCC licensing disclaimer, see the note on the Contents page.) able to take advantage of favorable funding
conditions in capital markets to refinance debt
and bolster their balance sheets; as a result,
corporate cash holdings are at record levels.
In the small business sector, privately financed
lending also picked up over the summer, and
loan performance improved, supported by the
Paycheck Protection Program. Nevertheless,
credit availability for small businesses remains 23. Real imports and exports of goods
fairly tight, demand for such credit is weak, and services
and default risk is still elevated. Quarterly Billions of chained 2012 dollars
3,750
Exports remain lower, but imports have
3,500
recovered Imports 3,250
U.S. exports remain well below pre-pandemic 3,000
levels. With many foreign economies still weak, 2,750
U.S. exports of goods have not quite fully Exports 2,500
recovered from their earlier sharp declines, 2,250

2,000
while exports of services remain depressed
1,750
because of the continued suspension of most
1,500
international travel. In contrast, imports have
regained most of their lost ground. Reduced 2008 2010 2012 2014 2016 2018 2020
imports of services have been offset by a full SOURCE: Bureau of Economic Analysis via Haver Analytics.
rebound of goods imports, which reflects
strong U.S. demand for household goods 24. U.S. trade and current account balances
(figure 23). Both the nominal trade deficit
and current account deficit, relative to GDP, Annual Percent of nominal GDP
widened since 2019 (figure 24). +

0
_
1
Federal fiscal stimulus provided 2
substantial support to economic activity 3
while also significantly boosting the
4
budget deficit and debt Trade
5
Federal fiscal policy measures enacted in 6
response to the pandemic continue to provide Current account
7
crucial income support to households and
businesses, as well as grants-in-aid to state 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
and local governments. These measures NOTE: GDP is gross domestic product. The data for the trade balance
extend through 2020. The data for the current account balance extend
have also facilitated loans to businesses, through 2019. The blue dot refers to the average current account balance
households, states, and localities.10 In total, for 2020:Q1–2020:Q3.
the Congressional Budget Office projects that
in fiscal years 2020 and 2021, the additional
federal government expenditures and foregone
revenues from these policies will total roughly
$3 trillion—around 15 percent of nominal
GDP.11 In addition, the decline in economic
10. These policy measures include the CARES Act

from last spring and the Consolidated Appropriations
Act, 2021, enacted in December. Passage of additional
fiscal support remains under discussion.
11. The CBO’s projection and estimate can be found
at Congressional Budget Office (2020), An Update to
the Budget Outlook: 2020 to 2030 (Washington: CBO,
September 2), https://www.cbo.gov/publication/56517;
and Congressional Budget Office and Joint Committee
25. Federal receipts and expenditures activity has pushed down tax receipts while
Monthly Percent change from year earlier
pushing up outlays for certain transfer
programs—most notably for unemployment
50 insurance and Medicaid (figure 25). These tax
40 decreases and transfer increases (referred to as
30
automatic stabilizers) worked in tandem with
Expenditures 20
the discretionary stimulus to support aggregate
demand and blunt the extent of the economic
10
+ downturn.
0
_
10 The combination of the discretionary stimulus
Receipts 20 measures and the automatic stabilizers caused
the budget deficit in fiscal 2020 to rise to
2005 2007 2009 2011 2013 2015 2017 2019 2021
15 percent of nominal GDP—the largest
NOTE: The data are 12-month moving sums.
SOURCE: Office of Management and Budget via Haver Analytics. deficit as a share of GDP in the post–World
War II era—up from its already elevated level
of 4½ percent in fiscal 2019. Consequently,
26. Federal government debt and net interest outlays the ratio of federal debt held by the public to
Percent of nominal GDP Percent of nominal GDP
nominal GDP rose from 79 percent in fiscal
2019 to 100 percent by the end of fiscal 2020,
120
4.0
Net interest outlays 110 the highest debt-to-GDP ratio since 1947
3.5 on federal debt
100 (figure 26). Even so, the cost of servicing the
90
3.0
80
federal debt is not particularly elevated by
2.5
70 historical standards, because Treasury rates are
2.0 60 extremely low.
50
1.5
40
1.0 30 State and local governments are facing
.5 Debt held by
20 challenging fiscal conditions
the public 10
0
0 State and local governments are confronting
1900 1920 1940 1960 1980 2000 2020 challenging budget conditions because of
NOTE: The data for net interest outlays are annual, begin in 1948, and weak tax collections and extraordinary
extend through 2020. Net interest outlays are the cost of servicing the
debt held by the public. Federal debt held by the public equals federal
expenses related to the pandemic. Nominal
debt less Treasury securities held in federal employee defined-benefit state government tax collections in 2020 were
retirement accounts, evaluated at the end of the quarter. The data for
federal debt begin in 1900 and are annual from 1900 to 1951 and about 1 percent below their 2019 level and
quarterly thereafter. The data for gross domestic product (GDP) and
federal debt extend through 2020:Q3. well below levels generally expected before
SOURCE: For GDP, Bureau of Economic Analysis via Haver the pandemic (figure 27).12 The magnitude of
Analytics; for federal debt, Federal Reserve Board, Statistical Release
Z.1, “Financial Accounts of the United States.”
on Taxation (2021), “H.R. 133, Summary Estimate for
Divisions M Through FF Consolidated Appropriations
Act, 2021 Public Law 116–260,” cost estimate,
January 14, https://www.cbo.gov/publication/56963.
12. State tax collection data are available through
November 2020. For additional details, see Urban
Institute (2020), “State Tax and Economic Review,”
State and Local Finance Initiative, November, https://
www.urban.org/policy-centers/cross-center-initiatives/
state-and-local-finance-initiative/projects/state-tax-and-
economic-review (accessed January 2021).
Although depressed, tax receipts have not fallen as
significantly as economic activity, for several reasons.
First, some of the federal fiscal aid to households (for
these revenue shortfalls varied considerably 27. State and local tax receipts
across states, with the largest shortfalls in Year-over-year percent change
states that rely heavily on sales taxes, tourism,
and energy production. In contrast, property
taxes—the principal local government Total state taxes 10
tax—have continued to rise apace, and

state and local governments have received 5
federal aid that has assisted with COVID- Property taxes +
related expenses and helped ease budget 0
_
strains. Meanwhile, bond market conditions
for state and local governments have been 5
generally accommodative in the second
half of the year, as robust municipal bond
2015 2016 2017 2018 2019 2020
issuance has been supported by historically
NOTE: State tax data are 12-month percent changes of 4-quarter
low yields and tax-exempt municipal bond moving averages, extend through November 2020, and are aggregated
funds have seen solid inflows. Even so, in over all states except Wyoming, for which data are not available.
Revenues from Washington, DC, are also excluded. Data for October
response to social-distancing restrictions and November are missing for New Mexico, as this state has longer
reporting lags than others. Property tax data are 4-quarter percent
(including virtual learning), current budget changes of 4-quarter moving averages, extend through 2020:Q3, and are
pressures, and concerns over future budgetary primarily collected by local governments.
SOURCE: State Tax and Economic Review Project; State and Local
challenges, state and local governments have Finance Initiative at Urban Institute; Census Bureau.
cut payrolls—particularly in the education
sector—an unprecedented 6½ percent over the 28. State and local government payroll employment
past year (figure 28). Notably, public-sector
employment is down significantly in nearly all Monthly Millions
states, including those that have experienced

relatively smaller revenue shocks. 20.0
Vaccines offer hope of an end to the 19.5
pandemic, but risks to the outlook are 19.0

still substantial
18.5
The economic outlook presented in Part 3
depends crucially on the course of the 18.0
COVID-19 pandemic. The vaccination
campaign now under way offers the prospect
2006 2009 2012 2015 2018 2021
of a return to more normal conditions
NOTE: The data are seasonally adjusted.
by the end of this year. But the pace of SOURCE: Bureau of Labor Statistics, National Compensation Survey.
vaccinations, the rate of decline in the spread
of the virus, and the speed with which people
return to normal activities all remain highly
uncertain, particularly given the emergence
of new, apparently more contagious strains.
The longer-run economic effects of the
pandemic are also difficult to predict. Many
example, unemployment benefits) is taxable. Second,

goods consumption, which is likelier to be subject to
sales taxes than services, has largely held up. Finally,
unemployment has been concentrated among low-income
individuals, who pay less in income taxes.
small businesses have shut down and may

not reopen. Some pandemic-driven shifts in
economic activity, such as from in-person
to online shopping and from office-based to
remote work, may prove to be permanent.
These shifts could increase productivity by
substituting remote interactions for costly
travel and commuting, but they could also put
persistent upward pressure on unemployment,
as affected workers may need to seek new jobs
and perhaps new occupations. The pandemic
has also disrupted schooling at all levels,
which could have persistent negative effects
on educational attainment and economic
outcomes for affected students.
Financial Developments
The expected level of the federal funds
rate over the next few years has remained
29. Market-implied federal funds rate path near zero
Quarterly Percent Economic forecasters and financial market
participants expect the federal funds rate over
1.25
the next several years to remain at the effective
1.00 lower bound. Market-based measures of
.75 federal funds rate expectations over the next
February 16, 2021
.50
few years have increased moderately since June
and remain below 0.25 percent until the second
.25
+
quarter of 2023 (figure 29).13 According to
0_ the results of the Survey of Primary Dealers
June 11, 2020
.25 and the Survey of Market Participants, both
conducted by the Federal Reserve Bank of
2020 2021 2022 2023 2024 2025 New York in January, the median respondent
NOTE: The federal funds rate path is implied by quotes on overnight views the most likely path of the federal funds
index swaps—a derivative contract tied to the effective federal funds rate.
The implied path as of June 11, 2020, is compared with that as of rate as remaining in its current range of 0 to
February 16, 2021. The path is estimated with a spline approach,
assuming a term premium of 0 basis points. The June 11, 2020, path
¼ percent until the first half of 2024.14
extends through June 2024 and the February 16, 2021, path through
January 2025.
SOURCE: Bloomberg; Federal Reserve Board staff estimates.
13. These measures are based on a straight read of

market quotes and are not adjusted for term premiums.
14. The results of the Survey of Primary Dealers
and the Survey of Market Participants are available
on the Federal Reserve Bank of New York’s website at
https://www.newyorkfed.org/markets/primarydealer_
survey_questions.html and https://www.newyorkfed.org/
markets/survey_market_participants, respectively.
Yields on longer-term U.S. nominal

Treasury securities increased markedly . . .
Yields on nominal Treasury securities at longer 30. Yields on nominal Treasury securities
maturities increased markedly since mid-2020 Daily Percent
after falling sharply in late February and early
March as investors’ concerns regarding the
5-year 4
implications of the COVID-19 outbreak for
the economic outlook led to both falling policy 10-year 3
rate expectations and flight-to-safety flows
(figure 30). The increase in yields on longer- 2
term Treasury securities followed news of the
1
imminent arrival of multiple highly effective 2-year
COVID-19 vaccines in the fall of 2020 and 0

expectations of further fiscal support, as well
as an increase in the issuance of longer-term
2011 2013 2015 2017 2019 2021
Treasury securities. Near-term uncertainty
SOURCE: Department of the Treasury via Haver Analytics.
about longer-dated nominal Treasury
yields—as measured by volatility of near-
term swaptions of 10-year interest rates—has
remained low.
. . . while spreads of other long-term debt 31. Yield and spread on agency mortgage-backed
to Treasury securities narrowed . . . securities
Despite the rise in Treasury yields, yields on Percent Basis points
30-year agency mortgage-backed securities

250
(MBS)—an important determinant of 5
Yield
mortgage interest rates—decreased somewhat, 200
4
on balance, amid the Federal Reserve’s
150
ongoing purchases of MBS and have remained 3
near their historical lows (figure 31). Thus, the 100
spread between yields on 30-year agency MBS 2
50
and comparable-maturity Treasury yields has Spread
1
narrowed. 0
Approval of the effective vaccines late last 2011 2013 2015 2017 2019 2021
year, optimism about further fiscal support, NOTE: The yield is on mortgage-backed securities from Fannie Mae
through May 31, 2019, and from uniform mortgage-backed securities
and notable improvement in the outlook thereafter. Data are daily.
for corporate earnings boosted investors’ SOURCE: Department of the Treasury; J.P. Morgan. Courtesy of J.P.
Morgan Chase & Co., Copyright 2021.
optimism, and improvement in the credit
quality of firms drove declines in yields on
investment- and speculative-grade corporate
bonds (figure 32). As with mortgage securities,
spreads on corporate bond yields over
comparable-maturity nominal Treasury
yields have narrowed considerably since
the end of June—as corporate bond yields
declined and yields on nominal Treasury
32. Corporate bond yields, by securities rating, and securities increased—and have returned to
municipal bond yield levels observed before the pandemic. Yields
Daily Percent on municipal debt continued to decline in the
second half of 2020, and spreads on municipal
12 bonds over comparable-maturity nominal
High-yield corporate Investment-grade corporate 10 Treasury yields have narrowed substantially
since the end of June, as nominal Treasury
8
yields increased and investors grew more
6 optimistic about further fiscal stimulus and
4 aid to state and local governments. The year-
2
end expiration of lending facilities that were
Municipal authorized under section 13(3) of the Federal
0
Reserve Act and that use CARES Act funding
2011 2013 2015 2017 2019 2021
did not lead to upward pressure on corporate
NOTE: Investment-grade corporate is the 10-year triple-B, which
or municipal bond spreads.
reflects the effective yield of the ICE BofAML 7-to-10-year triple-B U.S.
Corporate Index (C4A4). High-yield corporate is the 10-year high yield
and reflects the effective yield of the ICE BofAML 7-to-10-year U.S.
Cash Pay High Yield Index (J4A0). Municipal is the Municipal Market
. . . and market functioning for Treasury
Advisors 20-year yield. securities, corporate bonds, mortgage-
SOURCE: ICE Data Indices, LLC, used with permission; Municipal
Market Advisors. backed securities, and municipal bonds
continued to improve . . .
After having improved substantially in the
spring of last year, measures of market
liquidity for Treasury securities—such as
measures of market depth and trade sizes—
continued to improve somewhat in the second
half of 2020 and moved closer to pre-
pandemic levels, especially for shorter-dated
Treasury securities. However, measures of
liquidity for longer-dated Treasury securities
and in some portions of the MBS market—
notably for those securities excluded from
Federal Reserve open market purchases—
remained somewhat below pre-pandemic
levels. Measures of market functioning of the
corporate bond market continued to improve
as bid-ask spreads narrowed considerably
and returned to their pre-pandemic levels
and issuance of corporate bonds in primary
markets was robust. Measures of market
functioning of the municipal bond market—
such as robust issuance of municipal bonds in
primary markets and round-trip transaction
costs—indicate that market conditions
remained stable in the second half of 2020.
. . . while conditions in short-term

funding markets remained stable
The effective federal funds rate and other
secured and unsecured short-term rates
continued to trade within the target range
of the federal funds rate, as ample liquidity,
primarily due to substantial increases in
reserves, has kept markets functioning
smoothly. Since June, measures of stress
in short-term funding markets—including
trading volumes, issuance, and spreads to
overnight index swaps—have remained stable
at or near pre-pandemic levels, and year-end
funding pressures were minimal.
33. Equity prices
Broad stock prices have risen notably Daily December 31, 2009 = 100
After starting to rebound last spring from 350

their COVID-related declines, broad stock 300
prices have risen notably further since
250
mid‑2020, as the arrival of effective vaccines, S&P 500 index 200
optimism about further fiscal support, and
notable improvement in the outlook for 150
corporate earnings outweighed investor Dow Jones bank index 100
concerns regarding the rise in COVID-19 50

cases (figure 33). The prospect of an economic 0
recovery aided by effective vaccines and
fiscal support led to outsized price gains in 2011 2013 2015 2017 2019 2021
some cyclical sectors, such as the consumer SOURCE: S&P Dow Jones Indices LLC via Bloomberg. (For Dow
Jones Indices licensing information, see the note on the Contents page.)
discretionary, materials, and information
technology sectors. Similarly, stock prices
of smaller corporations considerably 34. S&P 500 volatility
outperformed large-cap stock price indexes. Daily Percent
After experiencing depressed levels through
90
early fall, bank stock price indexes increased
80
considerably in late 2020, boosted by positive
70
vaccine news, a generally improved investor 60
outlook for loan losses and bank profitability, 50
and the release of favorable stress-test results VIX
40
in late 2020. Measures of realized and 30
implied stock price volatility for the S&P 500 20
index—the 20-day realized volatility and the 10
Realized volatility
VIX—decreased sharply from their very high 0
levels at the end of the second quarter but 2011 2013 2015 2017 2019 2021
remained moderately above their historical NOTE: The VIX is a measure of implied volatility that represents the
medians, respectively (figure 34). (For a expected annualized change in the S&P 500 index over the following 30
days. For realized volatility, 5-minute S&P 500 returns are used in an
discussion of financial stability issues, see exponentially weighted moving average with 75 percent of weight
the box “Developments Related to Financial distributed over the past 20 days.
SOURCE: Cboe Volatility Index® (VIX®) via Bloomberg; Federal
Stability.”) Reserve Board staff estimates.
Developments Related to Financial Stability

This discussion reviews vulnerabilities in the elevated before the outbreak of the pandemic. Business
U.S. financial system since the COvID-19 outbreak leverage now stands near historical highs. While near-
and summarizes recent actions and developments term risks associated with debt service may be limited
at facilities established by the Federal Reserve to by large cash balances at large firms, low interest rates,
support the flow of credit throughout the economy.1 and recently improved earnings prospects, insolvency
The framework used by the Federal Reserve Board for risks at small and medium-sized firms, as well as at
assessing the resilience of the U.S. financial system some large firms, remain considerable. The household
focuses on financial vulnerabilities in four broad areas: sector entered the downturn with relatively low debt
asset valuations, business and household debt, leverage but experienced significant financial strains because
in the financial sector, and funding risks. of the unprecedented spike in unemployment and
Overall, asset valuation pressures, which were business closures. Government programs—including
elevated before the COvID-19 outbreak in the United expanded unemployment insurance and direct stimulus
States, briefly subsided at the onset of the outbreak as payments in the Coronavirus Aid, Relief, and Economic
asset prices plummeted but have since retraced in most Security Act, or CARES Act—and a rebound in
markets. In particular, prices in equity, corporate bond, economic activity in the second half of 2020 reduced
and residential real estate (RRE) markets have returned economic hardship for households and mitigated the
to or exceeded pre-pandemic levels, buoyed in part by deterioration in household credit quality.
recent developments related to vaccines. Equity prices In the financial sector, bank profitability and capital
have more than recovered from the steep declines positions, which were strained by the outbreak of
at the onset of the pandemic, with investor appetite the pandemic, improved in the second half of 2020
broadly rebounding across most sectors. Equity market because of a combination of lower-than-expected
volatility remains high, indicating persistent uncertainty losses, a better economic outlook, and restrictions
regarding the pandemic and the related course of imposed by the Federal Reserve on capital distributions
economic activity. yields on corporate bonds over by the largest banks. In particular, the capitalization of
comparable-maturity Treasury securities have narrowed U.S. global systemically important banks, or G-SIBs,
considerably. Treasury yields across the maturity exceeds pre-pandemic levels. In addition, the results
spectrum declined at the onset of the pandemic and of stress tests released in June and December 2020
remain near historical lows. The credit quality of indicated that banks would generally remain well
outstanding leveraged loans deteriorated early this year, capitalized under extremely severe recession scenarios.
but investor appetite remains strong and new issuance Leverage at broker-dealers changed little over 2020 and
has increased in the second half of 2020. RRE prices remains at historically low levels. While the liquidity
also rose rapidly in the second half of 2020, outpacing deterioration across dealer-intermediated markets in
rent increases. Commercial real estate prices remain March 2020 demonstrated potential fragility despite
at historically high levels despite high vacancy rates dealers’ low leverage, this fragility has been likely
and appear susceptible to sharp declines, particularly mitigated by emergency lending facilities and the
if the pace of distressed transactions picks up or, in the supervisory action of the Federal Reserve. By contrast,
longer term, the pandemic leads to permanent changes leverage at life insurance companies has risen to post-
in demand. 2008 highs. vulnerabilities from leverage at hedge
vulnerabilities associated with business and funds remain elevated. Finally, securitization volumes
household debt increased over the course of 2020. increased after coming to a halt in March 2020 but
Business debt has risen from levels that were already remain significantly below pre-pandemic levels.
Over the course of 2020, banks relied only modestly
1. The Financial Stability Report published in November on short-term wholesale funding and maintained
2020 presents the most recent, detailed assessment of U.S. significant levels of high-quality liquid assets. By
financial system vulnerabilities and a summary of Federal contrast, developments at the onset of the pandemic
Reserve actions and developments at facilities during the demonstrated significant structural vulnerabilities at
COvID-19 crisis. See Board of Governors of the Federal
Reserve System (2020), Financial Stability Report (Washington:
money market mutual funds and open-end investment
Board of Governors, November), https://www.federalreserve. funds, particularly those that invest substantially in
gov/publications/files/financial-stability-report-20201109.pdf. (continued)
corporate and municipal debt. These funds experienced The Paycheck Protection Program Liquidity Facility
large, sudden redemptions in March 2020, which (PPPLF) was established to extend credit to lenders
contributed to strains in broader short-term funding that participate in the Paycheck Protection Program of
markets and fixed-income debt markets. Federal the Small Business Administration (SBA), which has
Reserve actions, including emergency lending provided payroll support for small businesses. Through
facilities, have mitigated these vulnerabilities for now, mid-January 2021, the Federal Reserve has made nearly
but without structural reforms, the vulnerabilities 15,000 PPPLF advances to more than 850 banking
demonstrated in March 2020 will persist and could institutions, totaling more than $110 billion in liquidity.
significantly amplify future shocks. The Federal Reserve has taken actions that reduce
The outlook for the pandemic and economic spillovers to the U.S. economy from foreign financial
activity remains uncertain globally. In response to stresses. Temporary U.S. dollar liquidity swap lines
the economic disruptions caused by the pandemic, were established in March 2020, in addition to the
many foreign governments have ramped up spending preexisting standing lines, and have improved liquidity
to support households and businesses. Nevertheless, conditions in dollar funding markets in the United
financial systems in some foreign economies are States and abroad by providing foreign central banks
more vulnerable than before the pandemic, and these with the capacity to deliver U.S. dollar funding to
vulnerabilities may grow in the near term. Risks from institutions in their jurisdictions during times of market
widespread and persistent stresses in emerging markets stress. The FIMA (Foreign and International Monetary
and dollar funding markets could interact with risks Authorities) Repo Facility has helped support the
associated with the course of COvID-19 for the U.S. smooth functioning of the U.S. Treasury market by
financial system. In turn, these risks could be amplified providing a temporary source of U.S. dollars to a
by the vulnerabilities identified in this discussion and broad range of countries, many of which do not have
produce additional strains for the U.S. financial system swap line arrangements with the Federal Reserve. The
and economic activity. temporary swap lines and the FIMA Repo Facility will
continue to serve as liquidity backstops until their
Developments Associated with Facilities scheduled expiration at the end of September 2021.
to Support the Economy during the Other facilities established at the onset of the
COVID-19 Crisis pandemic expired either at the end of December 2020
or at the beginning of January 2021. The Primary
In the immediate wake of the pandemic, the Market Corporate Credit Facility, the Secondary
Federal Reserve took forceful actions and established Market Corporate Credit Facility, and the Municipal
emergency lending facilities, with the approval of the Liquidity Facility were established to improve the flow
Secretary of the Treasury as needed. These actions of credit through bond markets, where large firms and
and facilities have supported the flow of credit to municipalities obtain most of their long-term funding.
households and businesses and have served as The Term Asset-Backed Securities Loan Facility was
backstop measures that have given investors confidence also set up to support the issuance of securities backed
that support will be available should conditions by student loans, auto loans, credit card loans, loans
deteriorate substantially. backed by the SBA, and certain other assets. Altogether,
Some of the facilities established at the onset of the before expiring at the end of 2020, these facilities
pandemic are still operational. The Commercial Paper brought rapid improvements to credit markets, with
Funding Facility (CPFF), the Money Market Mutual only modest direct interventions. The Main Street
Fund Liquidity Facility (MMLF), and the Primary Dealer Lending Program (Main Street) expired at the beginning
Credit Facility (PDCF) stabilized short-term funding of January 2021. In its period of operation, Main Street
markets and improved the flow of credit to households purchased about 1,800 loan participations, totaling
and businesses. Although balances in the PDCF, more than $16 billion, which helped small and
CPFF, and MMLF have fallen from their initial highs medium-sized businesses from some of the hardest-
to low levels, the facilities will continue to serve as hit areas of the country and covered a wide range of
important backstops against further market stress until industries.
their scheduled expiration at the end of March 2021.
35. Commercial and industrial loan growth Bank credit contracted, while bank
profitability improved
Monthly Percent
40 In contrast with strong debt issuance through

30 securities markets, outstanding bank loan
20
balances across most major loan categories
have contracted since mid-June amid generally
10
+ weak borrower demand and tight lending
0
_ standards. Commercial and industrial (C&I)
10 loans at banks declined sharply in the second
20 half of 2020, reflecting the repayment of
30 large credit-line draws made earlier in the
year and the forgiveness of some loans under
2007 2009 2011 2013 2015 2017 2019 2021
the Paycheck Protection Program, as well as
NOTE: Data are calculated as monthly year-over-year growth rates.
SOURCE: Federal Reserve Board, Statistical Release H.8, “Assets and generally weak borrower demand for such
Liabilities of Commercial Banks in the United States.” loans and tighter bank lending standards.
However, overall C&I loan balances at banks
36. Profitability of bank holding companies
remained higher compared with a year earlier
Percent, annual rate Percent, annual rate (figure 35). Measures of bank profitability,
such as return on assets and return on
2.0 30
Return on assets equity, rebounded in the second half of 2020
1.5
20 following very low readings in the second
1.0
10 quarter, when banks significantly increased
.5
+ + their loan loss provisions, but have remained
0_ 0_
Return on equity
below pre-pandemic levels (figure 36).
.5 10 Delinquency rates on bank loans remained
1.0
20 low, as banks’ loss-mitigation and forbearance
1.5
30
programs allowed many borrowers to stay
2.0
current on their loans. Large banks posted
2004 2006 2008 2010 2012 2014 2016 2018 2020 higher-than-expected earnings in the fourth
NOTE: The data are quarterly, extend through 2020:Q3, and are quarter, bolstered by capital market activity
seasonally adjusted.
SOURCE: Federal Reserve Board, Form FR Y-9C, Consolidated
and loan loss reserve releases, while low rates
Financial Statements for Bank Holding Companies. continued to weigh on profit margins.
37. Foreign real gross domestic product
Quarterly 2005 average = 100 International Developments

160
Economic activity abroad snapped back
150
in the third quarter . . .
140
130 As in the United States, foreign GDP partially

120 rebounded in the third quarter of 2020
110 (figure 37). Nonetheless, foreign economic
100
90
2006 2008 2010 2012 2014 2016 2018 2020

NOTE: The data extend through 2020:Q3. Foreign GDP computed on
a representative sample of 40 countries and aggregated using U.S. trade
weights.
SOURCE: Federal Reserve Bank of Dallas, Database of Global
Economic Indicators, https://www.dallasfed.org/institute/dgei/gdp.aspx.
activity remains well below its pre-pandemic 38. Services purchasing managers index in
level, as a resurgence of infections in many selected foreign economies
economies has recently led to renewed social- Monthly Index
distancing restrictions. The accompanying
65
slowdown in economic activity appears to Euro area
China
60
have been less dramatic than that in the 55
spring, as economies have adjusted to function 50
Japan 45
better under social-distancing restrictions. In
40
addition, many current containment measures 35
have been less stringent relative to those in 30
the spring, and fiscal and monetary policies 25
20
continue to support the path to recovery.
15
10
Since last spring, manufacturing has generally
2016 2017 2018 2019 2020 2021
recovered more than services, which remain
NOTE: For the foreign services output purchasing managers index
depressed because consumers have avoided (PMI), values greater than (less than) 50 indicate better (worse) business
socially intensive activities, especially in the conditions, on average, for the participants surveyed relative to
conditions at the time of the previous survey.
hospitality and leisure sectors (figure 38). SOURCE: IHS Markit, Global Sector PMI.
Some higher-income Asian economies, where
infections are more under control, experienced 39. Real gross domestic product in selected
relatively better GDP growth than many foreign economies
advanced economies and benefited from Percent change from year earlier
increased export demand in the second half
of 2020. Most notably, China’s GDP was 8
6.5 percent higher in the fourth quarter of 2020 6
compared with a year ago. In many Latin 4
American countries and advanced foreign 2

+
economies (AFEs), fourth-quarter GDP 0
_
contracted relative to a year earlier (figure 39). 2
4
Although the ongoing spread of the virus— 6
including new variants—is concerning, 8
many AFEs have already started immunizing
Euro area Canada China Mexico South Korea
their populations and have commitments
NOTE: The data are for 2020:Q4. For Canada, the euro area, and
to purchase substantial stocks of vaccines. Mexico, the values correspond to flash estimates of GDP. For South
Controlling the virus globally, however, will be Korea, the value is the advance GDP estimate. For China, the value
corresponds to preliminary GDP.
challenging, in part because many emerging SOURCE: For the euro area, Eurostat; for Canada, Statistics Canada;
for China, National Bureau of Statistics of China; for Mexico, Instituto
market economies (EMEs) have more limited Nacional de Estadística y Geografía; for South Korea, Bank of Korea;
access to vaccines and face greater distribution all via Haver Analytics.
challenges.
40. 24-month policy expectations for selected advanced . . . with considerable policy support and
foreign economies subdued inflation
Weekly Basis points
Efforts to contain the virus’s resurgence in
the fourth quarter prompted some foreign
150
central banks and fiscal authorities to
United Kingdom 100 provide additional support to households
and businesses, particularly in the AFEs.
50
+
High debt levels limited the fiscal space in
Japan
0_ some EMEs, and emergency aid to sustain
50
employment and household spending
Euro area expired in some EMEs with elevated fiscal
100 concerns. Monetary policy across foreign
economies was highly accommodative, and
2016 2017 2018 2019 2020 2021
financing conditions remained supportive of
NOTE: The data are weekly averages of daily 24-month market-implied
central bank policy rates. The 24-month policy rates are implied by
growth, with a few major AFE central banks
quotes on overnight index swaps tied to the policy rates. The data begin introducing new stimulus measures late last
on Thursdays and extend through February 10, 2021.
SOURCE: Bloomberg; Federal Reserve Board staff estimations. year. Indeed, market-implied policy paths
for the Japanese, U.K., and European central
banks signal a prolonged period of monetary
41. Unemployment rate in selected advanced economies
accommodation (figure 40).
Monthly Percent
Even with substantial policy support, AFE

16
unemployment rates at the end of 2020 are
14
United States higher than they were before the pandemic.
12
Unemployment rates in Europe and Japan
Euro area
10 rose moderately during the spring and have
Canada
8 remained relatively unchanged (figure 41).
6 Canada, however, endured a large and rapid
4 increase in unemployment during the spring
United Kingdom Japan 2
and a commensurate decline by year-end,
similar to the U.S. experience. The country-
2005 2007 2009 2011 2013 2015 2017 2019 2021 specific dynamics of unemployment partly
NOTE: The data for the United Kingdom extend through October reflect differences in labor market structures,
2020 and are centered 3-month averages of monthly data. The data for
the euro area and Japan extend through December 2020. employment protection regulations, and the
SOURCE: For the United Kingdom, Office for National Statistics; for
Japan, Ministry of Health, Labour, and Welfare; for the euro area, expansion of wage subsidy programs. In
Statistical Office of the European Communities; for Canada, Statistics general, unemployment rates in the EMEs
Canada; for the United States, Bureau of Labor Statistics; all via Haver
Analytics. increased since the start of the pandemic, and
some Asian economies adopted direct wage
subsidies to avert large dislocations in their
labor markets.
Despite the recovery in activity and 43. Nominal 10-year government bond yields in
employment in some sectors of the economy, selected advanced economies
lower overall demand and continued Weekly Percent
uncertainty about the path of the virus helped
keep inflation subdued abroad. In many 6
foreign economies, inflation remains below United Kingdom 5
central banks’ targets. In the euro area and United States

4
Japan, the consumer price index fell in 2020, Germany 3
reflecting subdued inflation expectations and 2
persistent economic slack (figure 42). 1
Japan
+
_0
Longer-term sovereign yields remained
1
low, while risk sentiment improved . . .
Longer-term sovereign yields in major 2005 2007 2009 2011 2013 2015 2017 2019 2021
AFEs have moved up, on net, but remained NOTE: The data are weekly averages of daily benchmark yields. The
data begin on Thursdays and extend through February 10, 2021.
near historically low levels amid continued SOURCE: Bloomberg.
monetary policy accommodation (figure 43).
Foreign equity markets rebounded in the
44. Equity indexes for selected advanced economies
second half of 2020, reflecting not only
supportive monetary and fiscal policies, but Weekly Week ending January 6, 2016 = 100
also the development of effective vaccines.

200
Although AFE stock markets largely
recovered, they still underperformed U.S. 180
equities, with greater restrictions on activity 160

United States
abroad and a lower share of companies that
140
benefited from the digital economy (figure 44).
120
Euro area 100

42. Consumer price inflation in selected advanced United
Kingdom
foreign economies Japan 80
Monthly 12-month percent change

2016 2017 2018 2019 2020 2021
4
Thursdays and extend through February 10, 2021.
United Kingdom SOURCE: For euro area, DJ Euro Stoxx Index; for Japan, TOPIX
3 Stock Index; for United Kingdom, FTSE 100 Stock Index; for United
States, S&P 500 Index; all via Bloomberg. (For Dow Jones Indices
Canada 2 licensing information, see the note on the Contents page.)
1
Japan +
0_
Euro area 1
2016 2017 2018 2019 2020

SOURCE: For the United Kingdom, Office for National Statistics; for
Japan, Ministry of Internal Affairs and Communications; for the euro
area, Statistical Office of the European Communities; for Canada,
Statistics Canada; all via Haver Analytics.
45. Emerging market mutual fund flows and spreads EME equity markets have recovered since
Basis points Billions of dollars
the spring, with recent strong capital inflows
Equity fund flows (right scale)
(figure 45). Asian equity indexes rose well
900 Bond fund flows (right scale)
100
above pre-pandemic levels, while those in Latin
600
EMBI+ (left scale) 75
America posted modest gains relative to a year
50
300
ago, largely reflecting Asian economies’ lower
25
+ + infection rates, better fundamentals, and larger
0_ 0_
fiscal space to provide additional stimulus
25
300
Jan. (figure 46). Along with the improvement in
50
600 equity markets, sovereign borrowing spreads
75
900
generally narrowed, although they are still
100
above pre-pandemic levels.
2007 2009 2011 2013 2015 2017 2019 2021
NOTE: The bond and equity fund flows data are semiannual sums of
weekly data from December 28, 2006, to December 30, 2020, and a monthly . . . and the broad dollar depreciated
sum of weekly data from December 31, 2020, to January 26, 2021. Weekly
data span Thursday through Wednesday, and the semiannual and monthly
values are sums over weekly data for weeks ending in that half year or
The broad dollar index—a measure of the
month. The fund flows data exclude funds located in China. The J.P. trade-weighted value of the dollar against
Morgan Emerging Markets Bond Index Plus (EMBI+) data are weekly
averages of daily data. The weekly data begin on Thursdays and extend
through February 10, 2021. The EMBI+ data exclude Venezuela.
SOURCE: For bond and equity fund flows, EPFR Global; for EMBI+, J.P.
Morgan Emerging Markets Bond Index Plus via Bloomberg.
46. Equity indexes for selected emerging market

economies
Weekly Week ending January 6, 2016 = 100
300
250
Brazil
Taiwan 200
South Korea 150
100
China Mexico
50
2016 2017 2018 2019 2020 2021

Thursdays and extend through February 10, 2021.
SOURCE: For China, Shanghai Composite Index; for Brazil, Bovespa
Index; for South Korea, Korean Composite Index; for Mexico, IPC
Index; for Taiwan, TAIEX; all via Bloomberg.
foreign currencies—fell in the second half of 47. U.S. dollar exchange rate indexes
last year. Both the continued improvement Weekly Week ending January 6, 2016 = 100
in market conditions following the stresses
of last March and highly accommodative Dollar appreciation AFE dollar index 120
U.S. monetary policy contributed to dollar 115
depreciation. On balance, the dollar has
Broad dollar index 110
depreciated about 3.5 percent relative to a year
ago (figure 47). The dollar broadly weakened 105
against AFE currencies, notably the euro. The 100
dollar also fell against some Asian emerging
95
market currencies, particularly the Chinese EME dollar index
renminbi and Korean won (figure 48). 90
2016 2017 2018 2019 2020 2021
NOTE: The data, which are in foreign currency units per dollar, are
weekly averages of daily values of the broad dollar index, advanced
foreign economies (AFE) dollar index, and emerging market economies
(EME) dollar index. The data begin on Thursdays and extend through
February 10, 2021. As indicated by the leftmost arrow, increases in the
data reflect U.S. dollar appreciation and decreases reflect U.S. dollar
depreciation.
SOURCE: Federal Reserve Board, Statistical Release H.10, “Foreign
Exchange Rates.”
48. Exchange rate indexes for selected emerging market

economies
Weekly Week ending January 6, 2016 = 100
Dollar appreciation 150

140
Chinese renminbi
130
Mexican peso
120
110
100
90
Korean won
80
Brazilian real 70
2016 2017 2018 2019 2020 2021

NOTE: The data, which are in foreign currency units per dollar, are
weekly averages of daily data. The weekly data begin on Thursdays and
extend through February 10, 2021. As indicated by the leftmost arrow,
increases in the data reflect U.S. dollar appreciation and decreases reflect
U.S. dollar depreciation.
SOURCE: Federal Reserve Board, Statistical Release H.10, “Foreign
Exchange Rates.”
39
Part 2
Monetary Policy
The Federal Open Market Committee appropriate monetary policy will likely
maintained the federal funds rate near aim to achieve inflation moderately above
zero as it seeks to achieve maximum 2 percent for some time” so that inflation
employment and inflation at the rate of averages 2 percent over time and longer-term
2 percent over the longer run . . . inflation expectations remain well anchored
In light of the effects of the continuing at 2 percent. (See the box “The FOMC’s
public health crisis on the economy and the Revised Statement on Longer-Run Goals and
associated risks to the outlook, the Federal Monetary Policy Strategy.”) The Committee
Open Market Committee (FOMC) has expects to maintain an accommodative stance
maintained the target range for the federal of monetary policy until these outcomes are
funds rate at 0 to ¼ percent since March 2020, achieved and has indicated that it expects
when the global pandemic led the Committee it will be appropriate to maintain the target
to quickly lower the target range to the range for the federal funds rate at 0 to
effective lower bound (figure 49).15 In its ¼ percent until labor market conditions have
revised Statement on Longer-Run Goals and reached levels consistent with the Committee’s
Monetary Policy Strategy, issued in August, assessments of maximum employment and
the Committee reaffirmed its commitment to inflation has risen to 2 percent and is on track
achieving maximum employment and inflation to moderately exceed 2 percent for some time.
at the rate of 2 percent over the longer run and
noted that “following periods when inflation . . . and the Committee increased the
has been running persistently below 2 percent, holdings of Treasury securities and agency
mortgage-backed securities in the System
15. See the FOMC statements issued since the Open Market Account
March meetings, which are available (along with other
postmeeting statements) on the Monetary Policy portion
In addition, the Federal Reserve has continued
of the Board’s website at https://www.federalreserve.gov/ to expand its holdings of Treasury securities
monetarypolicy.htm. by $80 billion per month and its holdings of
49. Selected interest rates
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
The FOMC’s Revised Statement on Longer-Run Goals and

Monetary Policy Strategy
On August 27, 2020, the Federal Open Market the Congress to promote maximum employment, price
Committee (FOMC) issued a revised Statement on stability, and moderate long-term interest rates. It also
Longer-Run Goals and Monetary Policy Strategy.1 This describes the benefits of explaining policy actions to
document, first released in January 2012, lays out the public as clearly as possible. The statement then
the Committee’s goals, articulates its framework for outlines important changes to the characterization of
monetary policy, and serves as the foundation for its the Committee’s policy framework for achieving its
policy actions. The revised statement encapsulates the dual-mandate goals of maximum employment and
key conclusions from the Federal Reserve’s review of price stability. After stating that economic variables
the monetary policy strategy, tools, and communication fluctuate in response to disturbances and that monetary
practices it uses to pursue its statutory dual-mandate policy plays an important role in stabilizing the
goals of maximum employment and price stability. economy, the statement notes that the Committee’s
The review, which commenced in early 2019, was primary means of adjusting policy is through changes in
undertaken because the U.S. economy has changed the policy interest rate (the target range for the federal
in ways that matter for monetary policy. In particular, funds rate). Furthermore, because the neutral level of
the neutral level of the policy interest rate—the policy the policy rate is now lower than its historical average,
rate consistent with the economy operating at full “the federal funds rate is likely to be constrained by
strength and with stable inflation—has fallen over its effective lower bound more frequently than in the
recent decades in the United States and abroad. This past.” Therefore, “the Committee judges that downward
decline in the neutral policy rate increases the risk risks to employment and inflation have increased.” The
that the effective lower bound (ELB) on interest rates statement then notes that the “Committee is prepared
will constrain central banks from reducing their policy to use its full range of tools to achieve its maximum
interest rates enough to effectively support economic employment and price stability goals,” indicating that
activity during downturns. In addition, during the it could deploy other policy tools, such as forward
economic expansion that followed the Global Financial guidance and asset purchases, when the policy rate is
Crisis—the longest U.S. expansion on record—the at its ELB.
unemployment rate hovered near 50-year lows for In its revised statement, the Committee characterizes
roughly 2 years, resulting in new jobs and opportunities maximum employment as a “broad-based and inclusive
for many who have typically been left behind. At the goal” in addition to saying—as it did in the 2012
same time, with brief exceptions, inflation ran below statement—that maximum employment is not directly
the Committee’s 2 percent objective. measurable and that it changes over time and depends
The revised statement begins by reaffirming the largely on nonmonetary factors. During the Fed Listens
Committee’s commitment to its statutory mandate from events that were a pillar of the review of monetary
policy strategy, tools, and communication practices,
policymakers heard from a broad range of stakeholders
in the U.S. economy about how monetary policy affects
1. The FOMC’s revised Statement on Longer-Run Goals peoples’ daily lives and livelihoods.2
and Monetary Policy Strategy, which was unanimously (continued)
reaffirmed at the FOMC’s January 2021 meeting, appears in
the front matter of this report. Additional information about
the Federal Reserve’s review of monetary policy strategy, tools,
and communication practices and the revised statement is 2. Between February 2019 and May 2020, the Federal
available on the Board’s website at https://www.federalreserve. Reserve System hosted 15 Fed Listens events with
gov/monetarypolicy/review-of-monetary-policy-strategy-tools- representatives of the public. See Board of Governors of the
and-communications.htm. Federal Reserve System (2020), Fed Listens: Perspectives
A key takeaway from these events was that a strong the FOMC’s policy actions to achieve maximum
labor market during the late stages of an economic employment and price stability will be most effective
expansion—conditions that were in effect in 2019 and if longer-term inflation expectations remain well
early 2020—offers significant benefits to residents of anchored at 2 percent. However, if inflation runs
low- and moderate-income communities, primarily by below 2 percent following economic downturns but
providing employment opportunities for people who never moves above 2 percent even when the economy
have had difficulty finding jobs in the past. is strong, then, over time, inflation will average less
The revised statement says that “the Committee’s than 2 percent. Households and businesses will
policy decisions must be informed by assessments of come to expect this result, meaning that inflation
the shortfalls [emphasis added] of employment from expectations would tend to move below the 2 percent
its maximum level” rather than by “deviations”— inflation goal and pull down realized inflation. Lower
the word used in the earlier statement.3 In previous inflation expectations also pull down the level of
decades, inflation tended to rise noticeably in response nominal interest rates, further diminishing the scope
to a strengthening labor market. It was sometimes for monetary policy to reduce the policy rate during a
appropriate for the Fed to tighten monetary policy as downturn and further worsening economic outcomes.
employment rose toward its estimated maximum level To prevent inflation expectations from falling below
in order to stave off an unwelcome rise in inflation. 2 percent and the adverse cycle that could ensue,
The change to “shortfalls” clarifies that, in the the statement indicates that “the Committee seeks to
future, the Committee will not have concerns when achieve inflation that averages 2 percent over time,
employment runs at or above real-time estimates of and therefore judges that, following periods when
its maximum level unless accompanied by signs of inflation has been running persistently below 2 percent,
unwanted increases in inflation or the emergence of appropriate monetary policy will likely aim to achieve
other risks that could impede the attainment of the inflation moderately above 2 percent for some time.”
dual-mandate goals. The revised statement acknowledges that
The Committee’s longer-run goal for inflation “sustainably achieving maximum employment and
remains 2 percent, unchanged from the 2012 price stability depends on a stable financial system.”
statement.4 The revised statement emphasizes that Therefore, as with the 2012 statement, the Committee’s
policy decisions will take into account “its assessments
of the balance of risks, including risks to the financial
from the Public (Washington: Board of Governors,
June), https://www.federalreserve.gov/publications/files/ system that could impede the attainment” of the
fedlistens-report-20200612.pdf. In addition, see the box statutory goals.
“Federal Reserve Review of Monetary Policy Strategy, Tools, The Committee concludes its revised statement by
and Communication Practices” in Board of Governors indicating its intention to undertake a review of the
of the Federal Reserve System (2020), Monetary Policy
Federal Reserve’s monetary policy strategy, tools, and
Report (Washington: Board of Governors, February),
pp. 40–41, https://www.federalreserve.gov/monetarypolicy/ communication practices roughly every five years.
files/20200207_mprfullreport.pdf. Conducting a review at regular intervals is a good
3. The most recent version of the 2012 statement is institutional practice, provides valuable feedback, and
available on the Board’s website at https://www.federalreserve. enhances transparency and accountability.
gov/monetarypolicy/files/FOMC_LongerRunGoals_201901.pdf.
4. The inflation goal is measured by the annual change
in the price index for personal consumption expenditures.
The statement says: “The Committee reaffirms its judgment
that inflation at the rate of 2 percent, as measured by the expenditures, is most consistent over the longer run with the
annual change in the price index for personal consumption Federal Reserve’s statutory mandate.”
agency mortgage-backed securities (MBS) by gathered from business contacts and other
$40 billion per month. These asset purchases informed parties around the country,
help foster smooth market functioning and policymakers routinely consult prescriptions
accommodative financial conditions, thereby for the policy interest rate provided by various
supporting the flow of credit to households monetary policy rules. Such prescriptions can
and businesses. The Committee’s current provide useful benchmarks for the FOMC.
guidance regarding asset purchases indicates Although simple rules cannot capture the
that increases in the holdings of Treasury complexities of monetary policy and many
securities and agency MBS in the System Open practical considerations make it undesirable
Market Account will continue at least at this for the FOMC to adhere strictly to the
pace until substantial further progress has been prescriptions of any specific rule, some
made toward its maximum-employment and principles of good monetary policy can be
price-stability goals. In addition, the minutes illustrated by these policy rules (see the box
of the January 2021 FOMC meeting noted the “Monetary Policy Rules and Shortfalls from
importance attached to clear communications Maximum Employment”).
about the Committee’s assessment of progress
toward its longer-run goals well in advance The size of the Federal Reserve’s balance
of the time when progress could be judged sheet has grown since the end of June,
substantial enough to warrant a change in the reflecting continued asset purchases
pace of purchases.16 of U.S. Treasury securities and agency
mortgage-backed securities
The FOMC is committed to using its full The Federal Reserve’s balance sheet has grown
range of tools to promote maximum to $7.4 trillion from $7 trillion at the end of
employment and price stability June, reflecting continued asset purchases to
The ongoing public health crisis continues to help foster accommodative financial conditions
weigh on economic activity, employment, and and smooth market functioning, thereby
inflation, and it poses considerable risks to supporting the flow of credit to households
the economic outlook. The Federal Reserve is and businesses (figure 50). The Federal
committed to using its full range of tools to Reserve has continued rolling over at auction
all principal payments from its holdings
support the U.S. economy in this challenging
of Treasury securities. Principal payments
time, thereby promoting its maximum-
received from agency MBS and agency
employment and price-stability goals. The
debt continue to be reinvested into agency
Committee will continue to monitor the
MBS. Agency commercial mortgage-backed
implications of incoming information for the
securities purchases have also continued, but in
economic outlook and is prepared to adjust
very small amounts.
the stance of monetary policy as appropriate if
risks emerge that could impede the attainment The increase in asset holdings on the Federal
of the Committee’s goals. The Committee’s Reserve’s balance sheet due to Treasury
assessments will take into account a wide securities and agency MBS purchases has been
range of information, including readings partially offset by declines in several other
on public health, labor market conditions, asset categories. Outstanding balances at many
inflation pressures and inflation expectations, of the Federal Reserve’s emergency liquidity
and financial and international developments. and credit facilities have declined since June.17
In addition to evaluating a wide range of
economic and financial data and information 17. A list of funding, credit, liquidity, and loan
facilities established by the Federal Reserve in response to
16. The minutes for the January 2021 FOMC meeting COVID-19 is available on the Board’s website at
are available on the Board’s website at https://www. https://www.federalreserve.gov/funding-credit-liquidity-
federalreserve.gov/monetarypolicy/fomccalendars.htm. and-loan-facilities.htm.
50. Federal Reserve assets and liabilities
Weekly Trillions of dollars
Other assets
8
Credit and liquidity
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 February 10, 2021. Key
identifies shaded areas in order from top to bottom.
SOURCE: Federal Reserve Board, Statistical Release H.4.1, “Factors Affecting Reserve Balances.”
In particular, outstanding balances for the

Primary Dealer Credit Facility, Commercial
Paper Funding Facility, and Money Market
51. Federal Reserve open market operations
Mutual Fund Liquidity Facility have all fallen
to near zero. Draws on central bank liquidity Daily Billions of dollars
swap lines have decreased substantially, and, Overnight repos

4,500
Outstanding term repos
despite continued large-scale offerings, usage Cumulative MBS purchases 4,000
of repurchase operations has been essentially Cumulative coupon purchases
3,500
Cumulative bill purchases
zero since their minimum bid rate was 3,000
increased in mid-June (figure 51). 2,500
2,000
The expansion in the balance sheet was 1,500
accompanied by a substantial increase in 1,000
Federal Reserve liabilities, including reserve 500
balances held by depository institutions as well Feb. May Aug. Nov. Feb.
as nonreserve liabilities such as currency and 2020 2021
other deposits. NOTE: The data are at a business-day frequency, excluding federal
holidays. The data begin January 1, 2020. Repo is repurchase agreement.
MBS is mortgage-backed security. Key identifies bars in order from top
The Federal Reserve concluded the to bottom.
SOURCE: Federal Reserve Bank of New York; Federal Reserve Board
review of its strategic framework for staff calculations.
monetary policy in the second half

of 2020
Over 2019 and 2020, the Federal Reserve
conducted a broad review of the monetary
policy strategy, tools, and communication
practices it uses to pursue its statutory dual-
mandate goals of maximum employment and
price stability. In addition to the release of
the revised Statement on Longer-Run Goals to enhance the information provided to the
and Monetary Policy Strategy in August (see public. First, the release of the full set of
the box “The FOMC’s Revised Statement SEP exhibits was accelerated by three weeks:
on Longer-Run Goals and Monetary Policy Starting with the December 2020 meeting,
Strategy”), analytical work that was prepared the FOMC began releasing all SEP exhibits
by Federal Reserve System staff and that
on the day of the policy decision (following
served as background to the review was
the conclusion of an FOMC meeting) rather
released to the public.18
than with the release of the FOMC meeting
In December, two changes were made to the minutes. As such, the written summary of
Summary of Economic Projections (SEP) the projections that had been included as an
addendum to the minutes of the corresponding
18. A report on the Fed Listens initiative, a key FOMC meeting was discontinued. Second, two
component of the review process, was released in
June 2020 and is available on the Board’s website at
new exhibits were added that display a time
https://www.federalreserve.gov/publications/files/ series of diffusion indexes for participants’
fedlistens-report-20200612.pdf. The analytical materials judgments of uncertainty and risks. These
prepared by System staff are accessible from the Board’s
diffusion indexes illustrate how FOMC
main webpage on the review (https://www.federalreserve.
gov/monetarypolicy/review-of-monetary-policy-strategy- participants’ assessments of uncertainties and
tools-and-communications.htm). risks have evolved over time.
Monetary Policy Rules and Shortfalls from Maximum Employment

Simple interest rate rules relate a policy interest considerations, the Federal Open Market Committee’s
rate, such as the federal funds rate, to a small number (FOMC) revised Statement on Longer-Run Goals
of other economic variables—typically including and Monetary Policy Strategy refers to “shortfalls
the deviation of inflation from its target value of employment” from the Committee’s assessment
and a measure of resource slack in the economy. of its maximum level rather than the “deviations of
Policymakers consult policy rate prescriptions derived employment” used in the previous statement.2 This
from a variety of policy rules as part of their monetary change has important implications for the design of
policy deliberations without mechanically following the simple interest rate rules.
prescriptions of any particular rule. Most rules analyzed This discussion examines the prescriptions from
in the research literature respond to deviations—both a number of commonly studied monetary policy
positive and negative—of resource utilization from its rules, along with the prescriptions from a modified
longer-run level because their design was informed simple rule that, all else being equal, would not call
by historical periods and economic models in which for increasing the policy rate as employment moves
high resource utilization and a strong labor market higher and unemployment drops below its estimated
are accompanied by inflation pressure and in which longer-run level. This modified rule aims to illustrate,
policy rates remain well above the effective lower in a simple way, the Committee’s focus on shortfalls
bound (ELB). of employment from assessments of its maximum
Economic performance in recent decades, level. Other key changes to the Committee’s monetary
including during the previous economic expansion, policy strategy, including the aim of having inflation
has demonstrated that a strong labor market can be average 2 percent over time to ensure that longer-
sustained without inducing an unwanted increase in term inflation expectations remain well anchored, are
inflation. During that expansion, the unemployment not incorporated in the simple rules analyzed in this
rate fell to low levels—it remained at or below discussion.
4 percent from early 2018 until the start of the
pandemic—bringing many benefits to families and
communities that, all too often, had been left behind, Policy Rules: Some Key Design Principles
with no sign of excessive pressures on prices. The and Limitations
lack of undue inflation pressures during this period In many stylized models of the economy, desirable
illustrates that a strong labor market, by itself, need economic outcomes can be achieved by following a
not cause concern unless accompanied by signs of monetary policy rule that incorporates key principles
unwanted increases in inflation or the emergence of good monetary policy. One such principle is that
of other risks that could impede the attainment of monetary policy should respond in a predictable way to
the Committee’s goals. In addition, the expansion changes in economic conditions, thus fostering public
reinforced the view that assessments of the maximum understanding of policymakers’ goals and strategy.3
level of employment are imprecise and may change A second principle is that, to stabilize inflation, the
over time.1 Tightening monetary policy in the absence policy rate should be adjusted over time in response
of evidence of excessive inflation pressures may to persistent increases or decreases in inflation to an
result in an unwarranted loss of opportunity for extent sufficient to ensure a return of inflation to the
many Americans, whereas if an undue increase in longer-run objective.
inflation were to arise, policymakers would have the (continued on next page)
tools to address such an increase. Reflecting these
2. See the box “The FOMC’s Revised Statement on Longer-
Run Goals and Monetary Policy Strategy” (earlier in Part 2)
1. In recent years, forecasters covered by the Blue Chip for a discussion of this change and other changes made to the
Survey, as well as FOMC participants in the Summary of statement.
Economic Projections, have substantially reduced their 3. The effectiveness of monetary policy is enhanced when
implied estimates of the unemployment rate that is sustainable it is well understood by the public. For a discussion of how
in the longer run. For a discussion, see the box “Monetary the public’s understanding of monetary policy matters for the
Policy Rules and Uncertainty in Monetary Policy Settings” effectiveness of monetary policy, see Janet L. yellen (2012),
in Board of Governors of the Federal Reserve System (2020), “Revolution and Evolution in Central Bank Communications,”
Monetary Policy Report (Washington: Board of Governors, speech delivered at the Haas School of Business, University
February), pp. 33–37, https://www.federalreserve.gov/ of California, Berkeley, November 13, https://www.
monetarypolicy/files/20200207_mprfullreport.pdf. federalreserve.gov/newsevents/speech/yellen20121113a.htm.
Monetary Policy Rules (continued)

Simple monetary policy rules also have important Policy Rules: Historical Prescriptions
limitations. A first limitation is that many formulations
of simple rules do not recognize that the ELB limits the Economists have analyzed many monetary policy
extent that the policy rate can be lowered to support rules, including the well-known Taylor (1993) rule, the
the economy, which may impart a downward bias to “balanced approach” rule, the “adjusted Taylor (1993)”
both inflation and inflation expectations. As part of rule, and the “first difference” rule.6 In addition to these
the FOMC’s revised strategy to mitigate the challenges rules, figure A shows a “balanced approach (shortfalls)”
posed by the ELB and anchor longer-term inflation rule, which represents one simple way to illustrate
expectations at 2 percent, the Committee states that it the Committee’s focus on shortfalls from maximum
“seeks to achieve inflation that averages 2 percent over employment. All of the policy rules analyzed in this
time, and therefore judges that, following periods when discussion embody the key principles of good monetary
inflation has been running persistently below 2 percent, policy previously noted. They are also subject to the
appropriate monetary policy will likely aim to achieve associated limitations. Thus, the balanced-approach
inflation moderately above 2 percent for some time.” (shortfalls) rule, as is the case with all simple rules, does
None of the simple rules analyzed in this discussion not fully capture the monetary policy strategy that the
take into account average inflation performance or FOMC announced in August 2020.
developments in measures of inflation expectations. As All five rules feature the unemployment rate gap,
such, they do not reflect this important aspect of the measured as the difference between an estimate of the
FOMC’s monetary policy strategy.4 rate of unemployment in the longer run (utLR) and the
A second limitation is that simple rules respond current unemployment rate; the first-difference rule
to only a small set of economic variables and thus includes the change in the unemployment rate gap
necessarily abstract from many of the considerations rather than its level.7 All of the rules abstract from the
taken into account by the FOMC. For example, uncertainty affecting estimates of the unemployment
a simple rule might respond to movements in a rate gap. In addition, all of the rules include the
specific labor market indicator, such as the overall (continued)
unemployment rate. However, no single labor market
indicator can precisely capture the size of the shortfall 6. The Taylor (1993) rule was suggested in John B. Taylor
from maximum employment or identify when a strong (1993), “Discretion versus Policy Rules in Practice,” Carnegie-
labor market can be sustained without putting undue Rochester Conference Series on Public Policy, vol. 39
(December), pp. 195–214. The balanced-approach rule was
upward pressure on inflation.5 A third limitation of analyzed in John B. Taylor (1999), “A Historical Analysis of
simple rules for the policy rate is that they generally Monetary Policy Rules,” in John B. Taylor, ed., Monetary Policy
do not recognize the fact that the monetary policy Rules (Chicago: University of Chicago Press), pp. 319–41. The
toolkit includes other tools—notably, large-scale asset adjusted Taylor (1993) rule was studied in David Reifschneider
purchases and forward guidance, which are especially and John C. Williams (2000), “Three Lessons for Monetary
Policy in a Low-Inflation Era,” Journal of Money, Credit and
relevant when the policy rate is near or at the ELB. Banking, vol. 32 (November), pp. 936–66. The first-difference
rule is based on a rule suggested in Athanasios Orphanides
(2003), “Historical Monetary Policy Analysis and the Taylor
4. For a discussion of policy strategies that seek to make up Rule,” Journal of Monetary Economics, vol. 50 (July), pp. 983–
for past inflation shortfalls, see Jonas Arias, Martin Bodenstein, 1022. A review of policy rules is in John B. Taylor and John
Hess Chung, Thorsten Drautzburg, and Andrea Raffo (2020), C. Williams (2011), “Simple and Robust Rules for Monetary
“Alternative Strategies: How Do They Work? How Might They Policy,” in Benjamin M. Friedman and Michael Woodford,
Help?” Finance and Economics Discussion Series 2020-068 eds., Handbook of Monetary Economics, vol. 3B (Amsterdam:
(Washington: Board of Governors of the Federal Reserve North-Holland), pp. 829–59. The same volume of the
System, August), https://dx.doi.org/10.17016/FEDS.2020.068; Handbook of Monetary Economics also discusses approaches
and James Hebden, Edward P. Herbst, Jenny Tang, Giorgio other than policy rules for deriving policy rate prescriptions.
Topa, and Fabian Winkler (2020), “How Robust Are Makeup 7. The original Taylor (1993) rule represented slack in
Strategies to Key Alternative Assumptions?” Finance and resource utilization using an output gap (the difference
Economics Discussion Series 2020-069 (Washington: Board of between the current level of real gross domestic product
Governors of the Federal Reserve System, August), (GDP) and the level that GDP would be if the economy
https://dx.doi.org/10.17016/FEDS.2020.069. were operating at maximum employment, measured in
5. See Lael Brainard (2020), “Achieving a Broad-Based and percent of the latter). The rules in figure A represent slack in
Inclusive Recovery,” speech delivered at “Post-COvID—Policy resource utilization using the unemployment rate gap instead,
Challenges for the Global Economy,” Society of Professional because that gap better captures the FOMC’s statutory goal
Economists Annual Online Conference (via webcast), to promote maximum employment. However, movements in
October 21, https://www.federalreserve.gov/newsevents/ these alternative measures of resource utilization are highly
speech/brainard20201021a.htm. correlated. For more information, see the note below figure A.
A. Monetary policy rules
93 = + + 0.5( − )+( − )
Taylor (1993) rule
Balanced-approach rule = + + 0.5( − ) + 2( − )
Balanced-approach (shortfalls) rule S

= + + 0.5( − )+ 2 n {( − ) , 0}
93 93
Adjusted Taylor (1993) rule = { − , ELB}
First-difference rule = −1 + 0.5( − )+( − )−( −4 − −4)
Note: RtT93, RtBA, RtBAS, RtT93adj, and RtFD represent the values of the nominal federal funds rate prescribed by the Taylor
(1993), balanced-approach, balanced-approach (shortfalls), adjusted Taylor (1993), and first-difference rules, respectively.
Rt denotes the realized nominal federal funds rate for quarter t, πt is the four-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 FOMC’s 2 percent longer-run objective, denoted 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
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 gap. The rules are implemented as responding to core PCE inflation rather than to headline PCE inflation because current
and near-term core inflation rates tend to outperform headline inflation rates as predictors of the medium-term behavior of
headline inflation. Box note 6 provides references for the policy rules.
difference between inflation and the FOMC’s longer- Contrary to the other simple rules featured here,
run objective of 2 percent. All but the first-difference the adjusted Taylor (1993) rule recognizes that the
rule include an estimate of the neutral real interest rate federal funds rate cannot be reduced materially below
in the longer run (rtLR).8 the ELB. To make up for the cumulative shortfall in
By construction, the balanced-approach (shortfalls) accommodation following a recession during which
rule prescribes identical policy rates to those prescribed the federal funds rate has fallen to its ELB, the adjusted
by the balanced-approach rule at times when the Taylor (1993) rule prescribes only a gradual return of
unemployment rate is above its estimated longer-run the policy rate to the (positive) levels prescribed by the
level. However, when the unemployment rate is below standard Taylor (1993) rule after the economy begins
that level, the balanced-approach (shortfalls) rule is to recover.
more accommodative than the balanced-approach rule Figure B shows historical prescriptions for the
because it does not call for the policy rate to rise as the federal funds rate from the five rules. For each period,
unemployment rate drops further. the figure reports the policy rates prescribed by
the rules, taking as given the prevailing economic
8. The neutral real interest rate in the longer run (rtLR) is conditions and estimates of utLR and rtLR at the time.
the level of the real federal funds rate that is expected to be The four rules whose formulas do not impose the ELB
consistent, in the longer run, with maximum employment imply prescriptions of strongly negative policy rates in
and stable inflation. Like utLR, rtLR is determined largely by response to the pandemic-driven recession, well below
nonmonetary factors. The expression of the first-difference
rule shown in figure A does not involve an estimate of rtLR.
their respective troughs in the 2008–09 recession. These
However, this rule has its own shortcomings. For example, deeply negative prescribed policy rates show the extent
research suggests that this sort of rule often results in greater to which policymakers’ ability to support the economy
volatility in employment and inflation relative to what through cuts in the policy rate was constrained by
would be obtained under the Taylor (1993) and balanced-
approach rules. (continued on next page)
Monetary Policy Rules (continued)

B. Historical federal funds rate prescriptions from simple policy rules
Quarterly Percent
Taylor (1993) rule Balanced-approach rule

6
3
+
0_
3
Target federal funds rate Adjusted Taylor (1993) rule 6
Balanced-approach (shortfalls) rule
9
12
First-difference rule
15
18
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
NOTE: The rules use historical values of the federal funds rate, core personal consumption expenditure 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.
the ELB during the pandemic-driven recession—a Although these two rules prescribe identical
constraint that helped motivate the FOMC’s other policy rates over most of the period shown, including
policy actions at the time, including forward guidance departure from the ELB about two years before the
and asset purchases. actual departure in December 2015, one should not
Regarding the recovery from the 2008–09 recession, conclude that they generally offer a similar degree of
all of the simple rules shown here prescribe departure policy accommodation. Had the previous economic
from the ELB well before the FOMC determined expansion not been cut short by the pandemic, the
that it was appropriate to do so. The FOMC’s balanced-approach (shortfalls) rule would likely have
judgment that it was appropriate to maintain a more continued to prescribe a lower policy rate than the
accommodative path of the federal funds rate than balanced-approach rule. In addition, knowledge on the
prescribed by these rules was informed by a wide part of households and businesses that policymakers
range of information, including measures of labor will respond to shortfalls rather than deviations from
market conditions, indicators of inflation pressures and maximum employment can, in practice, help foster
inflation expectations, and readings on financial and more accommodative financial conditions even when
international developments. employment is below its maximum level because
The balanced-approach (shortfalls) rule calls for financial conditions are affected by the expected path
lower policy rates than the balanced-approach rule of the policy rate. Expectations of lower policy rates
at times when unemployment is below its estimated in the future—once employment has recovered—
longer-run level, thus providing somewhat more policy can reduce longer-term interest rates, support
accommodation during the 2006–07 period and from accommodative financial conditions, and encourage
late 2016 until the start of the pandemic. The fact that aggregate spending in the present. These observations
the policy rate prescriptions for the balanced-approach underline the importance of communication
and balanced-approach (shortfalls) rules coincide about future policy actions and demonstrate how
from the 2008–09 recession up to the end of 2016 a shift in focus to employment shortfalls, in the
reflects the slow recovery in this period, during which context of a simple rule, can provide more policy
unemployment remained above real-time estimates of accommodation—even during times like today when
its longer-run level. employment remains depressed.
49
Part 3
Summary of Economic Projections
The following material was released after the conclusion of the December 15–16, 2020, meeting of
the Federal Open Market Committee.
In conjunction with the Federal Open run projections represent each participant’s
Market Committee (FOMC) meeting held on assessment of the value to which each variable
December 15–16, 2020, meeting participants would be expected to converge, over time,
submitted their projections of the most likely under appropriate monetary policy and in the
outcomes for real gross domestic product absence of further shocks to the economy.
(GDP) growth, the unemployment rate, and “Appropriate monetary policy” is defined as
inflation for each year from 2020 to 2023 the future path of policy that each participant
and over the longer run. Each participant’s deems most likely to foster outcomes for
projections were based on information economic activity and inflation that best
available at the time of the meeting, together satisfy his or her individual interpretation of
with her or his assessment of appropriate the statutory mandate to promote maximum
monetary policy—including a path for the employment and price stability.
federal funds rate and its longer-run value—
and assumptions about other factors likely Beginning with the December 2020 FOMC
to affect economic outcomes. The longer- meeting, all Summary of Economic
Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their
individual assumptions of projected appropriate monetary policy, December 2020
Percent
Median1 Central tendency2 Range3
Variable
2020 2021 2022 2023 Longer Longer Longer
2020 2021 2022 2023 2020 2021 2022 2023
run run run
Change in real GDP. . . . -2.4 4.2 3.2 2.4 1.8 -2.5–-2.2 3.7–5.0 3.0–3.5 2.2–2.7 1.7–2.0 -3.3–-1.0 0.5–5.5 2.5–4.0 2.0–3.5 1.6–2.2
September projection. -3.7 4.0 3.0 2.5 1.9 -4.0–-3.0 3.6–4.7 2.5–3.3 2.4–3.0 1.7–2.0 -5.5–1.0 0.0–5.5 2.0–4.5 2.0–4.0 1.6–2.2
Unemployment rate. . . . 6.7 5.0 4.2 3.7 4.1 6.7–6.8 4.7–5.4 3.8–4.6 3.5–4.3 3.9–4.3 6.6–6.9 4.0–6.8 3.5–5.8 3.3–5.0 3.5–4.5
September projection 7.6 5.5 4.6 4.0 4.1 7.0–8.0 5.0–6.2 4.0–5.0 3.5–4.4 3.9–4.3 6.5–8.0 4.0–8.0 3.5–7.5 3.5–6.0 3.5–4.7
PCE inflation. . . . . . . . . . 1.2 1.8 1.9 2.0 2.0 1.2 1.7–1.9 1.8–2.0 1.9–2.1 2.0 1.1–1.4 1.2–2.3 1.5–2.2 1.7–2.2 2.0
September projection 1.2 1.7 1.8 2.0 2.0 1.1–1.3 1.6–1.9 1.7–1.9 1.9–2.0 2.0 1.0–1.5 1.3–2.4 1.5–2.2 1.7–2.1 2.0
Core PCE inflation4. . . . 1.4 1.8 1.9 2.0 1.4 1.7–1.8 1.8–2.0 1.9–2.1 1.3–1.5 1.5–2.3 1.6–2.2 1.7–2.2
September projection 1.5 1.7 1.8 2.0 1.3–1.5 1.6–1.8 1.7–1.9 1.9–2.0 1.2–1.6 1.5–2.4 1.6–2.2 1.7–2.1
Memo: Projected
appropriate policy path
Federal funds rate . . . . . 0.1 0.1 0.1 0.1 2.5 0.1 0.1 0.1 0.1–0.4 2.3–2.5 0.1 0.1 0.1–0.4 0.1–1.1 2.0–3.0
September projection 0.1 0.1 0.1 0.1 2.5 0.1 0.1 0.1 0.1–0.4 2.3–2.5 0.1 0.1 0.1–0.6 0.1–1.4 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 September projections were made in conjunction with the meeting of
the Federal Open Market Committee on September 15–16, 2020. One participant did not submit longer-run projections for the change in real GDP, the unemployment rate, or
the federal funds rate in conjunction with the September 15–16, 2020, meeting, and one participant did not submit such projections in conjunction with the December 15–16,
2020, 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
Table 2. Average historical projection error ranges Projections charts and tables previously
Percentage points
released with the minutes of a meeting will be
Variable 2020 2021 2022 2023
released following the conclusion of an FOMC
Change in real GDP1. . . . . . . ±0.8 ±1.5 ±1.9 ±2.0
meeting. That is, the release of the distribution
Unemployment rate1 . . . . . . . ±0.1 ±0.8 ±1.4 ±1.9
of participants’ projections (Figures 3.A.
Total consumer prices . . . . . ±0.2 ±0.9 ±1.0 ±0.9
through 3.E.), participants’ assessments of
2
Short-term interest rates3. . . ±0.1 ±1.4 ±2.0 ±2.4

uncertainty and risks associated with the
Note: Error ranges shown are measured as plus or minus the root mean squared
error of projections for 2000 through 2019 that were released in the winter by var- projections (Figures 4.A. through 4.C. and
ious private and government forecasters. As described in the box “Forecast Un-
certainty,” under certain assumptions, there is about a 70 percent probability that Figure 5), and Table 2 and associated box,
actual outcomes for real GDP, unemployment, consumer prices, and the federal
funds rate will be in ranges implied by the average size of projection errors made
which describe projection error ranges, have
in the past. For more information, see David Reifschneider and Peter Tulip (2017),
“Gauging the Uncertainty of the Economic Outlook Using Historical Forecasting
been accelerated by three weeks. Two new
Errors: The Federal Reserve’s Approach,” Finance and Economics Discussion
Series 2017-020 (Washington: Board of Governors of the Federal Reserve System,
exhibits, Figures 4.D. and 4.E., have been
February), https://dx.doi.org/10.17016/FEDS.2017.020. added to further enhance the information
1. Definitions of variables are in the general note to table 1.
2. Measure is the overall consumer price index, the price measure that has been provided on uncertainty and risks by showing
most widely used in government and private economic forecasts. Projections are
percent changes on a fourth quarter to fourth quarter basis. how FOMC participants’ assessments of
3. For Federal Reserve staff forecasts, measure is the federal funds rate. For
other forecasts, measure is the rate on 3-month Treasury bills. Projection errors uncertainties and risks have evolved over time.
are calculated using average levels, in percent, in the fourth quarter.
Figure 1. Medians, central tendencies, and ranges of economic projections, 2020–23 and over the longer run
Percent
Change in real GDP
6
5
4
3
2
Actual 1
0
−1
Median of projections −2
Central tendency of projections −3
Range of projections −4
2015 2016 2017 2018 2019 2020 2021 2022 2023 Longer
run
Percent
Unemployment rate
8
7
6
5
4
3
2
1
2015 2016 2017 2018 2019 2020 2021 2022 2023 Longer
run
Percent
PCE inflation
3
2015 2016 2017 2018 2019 2020 2021 2022 2023 Longer
run
Percent
Core PCE inflation
3
2015 2016 2017 2018 2019 2020 2021 2022 2023 Longer
run
Note: Definitions of variables and other explanations are in the notes to table 1. The data for the actual values of the
variables are annual.
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
2020 2021 2022 2023 Longer run
Note: Each shaded circle indicates the value (rounded to the nearest 1/8 percentage point) of an individual participant’s
judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal
funds rate at the end of the specified calendar year or over the longer run. One participant did not submit longer-run projec-
tions for the federal funds rate.
Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2020–23 and over the longer run
Number of participants
18
2020 December projections 16
14
September projections 12
10
8
6
4
2
−5.8− −5.2− −4.6− −4.0− −3.4− −2.8− −2.2− −1.6− −1.0− −0.4− 0.2− 0.8− 1.4− 2.0− 2.6− 3.2− 3.8− 4.4− 5.0−
−5.7 −5.1 −4.5 −3.9 −3.3 −2.7 −2.1 −1.5 −0.9 −0.3 0.3 0.9 1.5 2.1 2.7 3.3 3.9 4.5 5.1
Percent range
18
2021 16
14
12
10
8
6
4
2
−5.8− −5.2− −4.6− −4.0− −3.4− −2.8− −2.2− −1.6− −1.0− −0.4− 0.2− 0.8− 1.4− 2.0− 2.6− 3.2− 3.8− 4.4− 5.0−
−5.7 −5.1 −4.5 −3.9 −3.3 −2.7 −2.1 −1.5 −0.9 −0.3 0.3 0.9 1.5 2.1 2.7 3.3 3.9 4.5 5.1
Percent range
18
2022 16
14
12
10
8
6
4
2
−5.8− −5.2− −4.6− −4.0− −3.4− −2.8− −2.2− −1.6− −1.0− −0.4− 0.2− 0.8− 1.4− 2.0− 2.6− 3.2− 3.8− 4.4− 5.0−
−5.7 −5.1 −4.5 −3.9 −3.3 −2.7 −2.1 −1.5 −0.9 −0.3 0.3 0.9 1.5 2.1 2.7 3.3 3.9 4.5 5.1
Percent range
18
2023 16
14
12
10
8
6
4
2
−5.8− −5.2− −4.6− −4.0− −3.4− −2.8− −2.2− −1.6− −1.0− −0.4− 0.2− 0.8− 1.4− 2.0− 2.6− 3.2− 3.8− 4.4− 5.0−
−5.7 −5.1 −4.5 −3.9 −3.3 −2.7 −2.1 −1.5 −0.9 −0.3 0.3 0.9 1.5 2.1 2.7 3.3 3.9 4.5 5.1
Percent range
18
Longer run 16
14
12
10
8
6
4
2
−5.8− −5.2− −4.6− −4.0− −3.4− −2.8− −2.2− −1.6− −1.0− −0.4− 0.2− 0.8− 1.4− 2.0− 2.6− 3.2− 3.8− 4.4− 5.0−
−5.7 −5.1 −4.5 −3.9 −3.3 −2.7 −2.1 −1.5 −0.9 −0.3 0.3 0.9 1.5 2.1 2.7 3.3 3.9 4.5 5.1
Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.
Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2020–23 and over the longer run
18
2020 December projections 16
14
10
8
6
4
2
2.8− 3.4− 4.0− 4.6− 5.2− 5.8− 6.4− 7.0− 7.6−

2.9 3.5 4.1 4.7 5.3 5.9 6.5 7.1 7.7
Percent range
18
2021 16
14
12
10
8
6
4
2
2.8− 3.4− 4.0− 4.6− 5.2− 5.8− 6.4− 7.0− 7.6−

2.9 3.5 4.1 4.7 5.3 5.9 6.5 7.1 7.7
Percent range
18
2022 16
14
12
10
8
6
4
2
2.8− 3.4− 4.0− 4.6− 5.2− 5.8− 6.4− 7.0− 7.6−

2.9 3.5 4.1 4.7 5.3 5.9 6.5 7.1 7.7
Percent range
18
2023 16
14
12
10
8
6
4
2
2.8− 3.4− 4.0− 4.6− 5.2− 5.8− 6.4− 7.0− 7.6−

2.9 3.5 4.1 4.7 5.3 5.9 6.5 7.1 7.7
Percent range
18
Longer run 16
14
12
10
8
6
4
2
2.8− 3.4− 4.0− 4.6− 5.2− 5.8− 6.4− 7.0− 7.6−

2.9 3.5 4.1 4.7 5.3 5.9 6.5 7.1 7.7
Percent range
Figure 3.C. Distribution of participants’ projections for PCE inflation, 2020–23 and over the longer run
2020 December projections
16
14
12
10
8
6
4
2
0.7− 0.9− 1.1− 1.3− 1.5− 1.7− 1.9− 2.1− 2.3−

0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4
Percent range
2021
18
16
14
12
10
8
6
4
2
0.7− 0.9− 1.1− 1.3− 1.5− 1.7− 1.9− 2.1− 2.3−

0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4
Percent range
2022
18
16
14
12
10
8
6
4
2
0.7− 0.9− 1.1− 1.3− 1.5− 1.7− 1.9− 2.1− 2.3−

0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4
Percent range
2023
18
16
14
12
10
8
6
4
2
0.7− 0.9− 1.1− 1.3− 1.5− 1.7− 1.9− 2.1− 2.3−

0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4
Percent range
Longer run
18
16
14
12
10
8
6
4
2
0.7− 0.9− 1.1− 1.3− 1.5− 1.7− 1.9− 2.1− 2.3−

0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4
Percent range
Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2020–23
16
14
12
10
8
6
4
2
0.9− 1.1− 1.3− 1.5− 1.7− 1.9− 2.1− 2.3−

1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4
Percent range
2021
18
16
14
12
10
8
6
4
2
0.9− 1.1− 1.3− 1.5− 1.7− 1.9− 2.1− 2.3−

1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4
Percent range
2022
18
16
14
12
10
8
6
4
2
0.9− 1.1− 1.3− 1.5− 1.7− 1.9− 2.1− 2.3−

1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4
Percent range
2023
18
16
14
12
10
8
6
4
2
0.9− 1.1− 1.3− 1.5− 1.7− 1.9− 2.1− 2.3−

1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4
Percent range
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, 2020–23 and over the longer run
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
2021
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
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
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
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
Figure 4.A. Uncertainty and risks in projections of GDP growth

Median projection and confidence interval based on historical forecast errors
Percent
Change in real GDP
Median of projections 6
70% confidence interval
5
4
3
2
Actual
1
0
−1
−2
−3
−4
2015 2016 2017 2018 2019 2020 2021 2022 2023

FOMC participants’ assessments of uncertainty and risks around their economic projections
Number of participants Number of participants

Uncertainty about GDP growth Risks to GDP growth
December projections December projections
September projections September projections
18 18
16 16
14 14
12 12
10 10
8 8
6 6
4 4
2 2
Lower Broadly Higher Weighted to Broadly Weighted to

similar downside balanced upside
Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the percent
change in real gross domestic product (GDP) from the fourth quarter of the previous year to the fourth quarter of the year
indicated. The confidence interval around the median projected values is assumed to be symmetric and is based on root mean
squared errors of various private and government forecasts made over the previous 20 years; more information about these data
is available in table 2. Because current conditions may differ from those that prevailed, on average, over the previous 20 years,
the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC
participants’ current assessments of the uncertainty and risks around their projections; these current assessments are 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 approximately
symmetric. For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.”
Figure 4.B. Uncertainty and risks in projections of the unemployment rate

Percent
Unemployment rate
Median of projections 8
70% confidence interval
7
6
5
Actual
4
3
2
1
2015 2016 2017 2018 2019 2020 2021 2022 2023


Uncertainty about the unemployment rate Risks to the unemployment rate
18 18
16 16
14 14
12 12
10 10
8 8
6 6
4 4
2 2

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.”
Figure 4.C. Uncertainty and risks in projections of PCE inflation

Percent
PCE inflation
Median of projections
70% confidence interval 3
Actual 1
2015 2016 2017 2018 2019 2020 2021 2022 2023

Uncertainty about PCE inflation Risks to PCE inflation
18 18
16 16
14 14
12 12
10 10
8 8
6 6
4 4
2 2

Uncertainty about core PCE inflation Risks to core PCE inflation
18 18
16 16
14 14
12 12
10 10
8 8
6 6
4 4
2 2

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.”
Figure 4.D. Diffusion indexes of participants’ uncertainty assessments

Diffusion index
Change in real GDP
1.00
0.75
0.50
0.25
0.00
−0.25
−0.50
−0.75
−1.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
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
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
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
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.
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
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
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
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
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.
Figure 5. Uncertainty and risks in projections of the federal funds rate

Percent
Federal funds rate
Midpoint of target range

Median of projections
70% confidence interval*
4
1
Actual
2015 2016 2017 2018 2019 2020 2021 2022 2023
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.
Forecast Uncertainty
The economic projections provided by the members reported in table 2 would imply a probability of about
of the Board of Governors and the presidents of 70 percent that actual GDP would expand within a
the Federal Reserve Banks inform discussions of range of 2.2 to 3.8 percent in the current year, 1.5 to
monetary policy among policymakers and can aid 4.5 percent in the second year, 1.1 to 4.9 percent in
public understanding of the basis for policy actions. the third year, and 1.0 to 5.0 percent in the fourth year.
Considerable uncertainty attends these projections, The corresponding 70 percent confidence intervals
however. The economic and statistical models and for overall inflation would be 1.8 to 2.2 percent in
relationships used to help produce economic forecasts the current year, 1.1 to 2.9 percent in the second
are necessarily imperfect descriptions of the real world, year, 1.0 to 3.0 percent in the third year, and 1.1 to
and the future path of the economy can be affected 2.9 percent in the fourth year. Figures 4.A through
by myriad unforeseen developments and events. Thus, 4.C illustrate these confidence bounds in “fan charts”
in setting the stance of monetary policy, participants that are symmetric and centered on the medians of
consider not only what appears to be the most likely FOMC participants’ projections for GDP growth, the
economic outcome as embodied in their projections, unemployment rate, and inflation. However, in some
but also the range of alternative possibilities, the instances, the risks around the projections may not
likelihood of their occurring, and the potential costs to be symmetric. In particular, the unemployment rate
the economy should they occur. cannot be negative; furthermore, the risks around a
Table 2 summarizes the average historical accuracy particular projection might be tilted to either the upside
of a range of forecasts, including those reported in or the downside, in which case the corresponding fan
past Monetary Policy Reports and those prepared chart would be asymmetrically positioned around the
by the Federal Reserve Board’s staff in advance of median projection.
meetings of the Federal Open Market Committee Because current conditions may differ from those
(FOMC). The projection error ranges shown in the that prevailed, on average, over history, participants
table illustrate the considerable uncertainty associated provide judgments as to whether the uncertainty
with economic forecasts. For example, suppose a attached to their projections of each economic variable
participant projects that real gross domestic product is greater than, smaller than, or broadly similar to
(GDP) and total consumer prices will rise steadily at typical levels of forecast uncertainty seen in the past
annual rates of, respectively, 3 percent and 2 percent. 20 years, as presented in table 2 and reflected in
If the uncertainty attending those projections is similar the widths of the confidence intervals shown in the
to that experienced in the past and the risks around top panels of figures 4.A through 4.C. Participants’
the projections are broadly balanced, the numbers (continued)
current assessments of the uncertainty surrounding rather are projections of participants’ individual
their projections are summarized in the bottom-left assessments of appropriate monetary policy and are
panels of those figures. Participants also provide on an end-of-year basis. However, the forecast errors
judgments as to whether the risks to their projections should provide a sense of the uncertainty around the
are weighted to the upside, are weighted to the future path of the federal funds rate generated by the
downside, or are broadly balanced. That is, while uncertainty about the macroeconomic variables as
the symmetric historical fan charts shown in the top well as additional adjustments to monetary policy that
panels of figures 4.A through 4.C imply that the risks to would be appropriate to offset the effects of shocks to
participants’ projections are balanced, participants may the economy.
judge that there is a greater risk that a given variable If at some point in the future the confidence interval
will be above rather than below their projections. These around the federal funds rate were to extend below
judgments are summarized in the lower-right panels of zero, it would be truncated at zero for purposes of
figures 4.A 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 on the uncertainty around the economic projections,
of the federal funds rate are quite wide. It should figure 1 provides information on the range of views
be noted, however, that these confidence intervals across FOMC participants. A comparison of figure 1
are not strictly consistent with the projections for with figures 4.A through 4.C shows that the dispersion
the federal funds rate, as these projections are not of the projections across participants is much smaller
forecasts of the most likely quarterly outcomes but than the average forecast errors over the past 20 years.
67
Abbreviations
AFE advanced foreign economy
BLS Bureau of Labor Statistics
CARES Act Coronavirus Aid, Relief, and Economic Security Act
CES Current Employment Statistics
C&I commercial and industrial
COVID-19 coronavirus disease 2019
CPFF Commercial Paper Funding Facility
CPI consumer price index
DPI disposable personal income
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
GDP gross domestic product
G-SIBs global systemically important banks
LFPR labor force participation rate
Main Street Main Street Lending Program
MBS mortgage-backed securities
MMLF Money Market Mutual Fund Lending Facility
OPEC Organization of the Petroleum Exporting Countries
PCE personal consumption expenditures
PDCF Primary Dealer Credit Facility
PPPLF Paycheck Protection Program Liquidity Facility
QSS Quarterly Services Survey
repo repurchase agreement
RRE residential real estate
SBA Small Business Administration
SEP Summary of Economic Projections
TIPS Treasury Inflation-Protected Securities
VIX implied volatility for the S&P 500 index
For use at 11:00 a.m. EST
February 19, 2021
Monetary Policy Report

February 19, 2021
Board of Governors of the Federal Reserve System

Monetary Policy Report

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For use at 11:00 a.m.

Monetary Policy Report

Board of Governors of the Federal Reserve System

Board of Governors of the

Washington, D.C., February 19, 2021

The President of the Senate

Jerome H. Powell, Chair

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

Part 2: Monetary Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Part 3: Summary of Economic Projections. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

The public health crisis spurred by the 150

spread of COVID-19 weighed on economic 145

households, businesses, and governments 130

November through January, while payroll 6

gains averaged just 29,000 per month, weighed 4

restrictions. SOURCE: Bureau of Labor Statistics.

2. Since the beginning of the pandemic, a substantial

All told, the incomplete recovery left the level

. . . and the harm has been substantial

Monitoring Economic Activity with Nontraditional

A. Estimates of private payroll employment growth

Millions of jobs, monthly rate Millions of jobs, monthly rate

Monitoring Economic Activity (continued)

B. Indicators of consumption growth

Retail goods spending Services spending

Percent change from year earlier Daily Year-over-year percent change

C. High-frequency indicators by official statistical agencies

New business applications Houshold expectations

Weekly Thousands Weekly Percent of households

4. Unemployment rate, by race and ethnicity

2005 2007 2009 2011 2013 2015 2017 2019 2021

in the employment-to‑population ratio

Compensation per hour, Atlanta Fed’s

during 2020, similar to the growth rate

As measured by the 12-month change in Trimmed mean 3.0

0.5 percent in April, as economic activity 1.5

Open Market Committee’s (FOMC) objective

inflation was 1.5 percent in December. An

3. Some other common wage measures are providing

Disparities in Job Loss during the Pandemic

B. Employment declines for low-, middle-, and C. Change in employment-to-population ratio, by

Weekly Week ending February 15, 2020 = 100

-20 -15 -10 -5 0

Disparities in Job Loss (continued)

from 2 percent a year earlier, a similar decrease

The low level of consumer price inflation

Prices of imports and oil have also

Prices of both agricultural commodities and 80 96

. . . and market-based measures of

and liquidity risks. Measures of longer-term 10. 5-to-10-year-forward inflation compensation

measures rebounded in the next couple of 1.0

months as liquidity improved, before drifting .5

up further through the remainder of 2020 and

The plunge and rebound in gross

and severity in the first half of 2020, gross 20

remains incomplete: At the end of 2020, GDP 14

5. As these measures are based on consumer price

pre-pandemic levels in the fourth quarter, and

Consumer spending, particularly on

6. The Consolidated Appropriations Act, 2021,

That said, these aggregate figures mask 32

back voluntarily on their activities, leading

substantial further boost to DPI in the first quarter of

products (figure 18). Overall, loan defaults 18. Mortgage rates