Monetary Policy Report
Monetary Policy Report
EST
February 19, 2021
The Board of Governors is pleased to submit its Monetary Policy Report pursuant to
section 2B of the Federal Reserve Act.
Sincerely,
The Federal Open Market Committee (FOMC) is firmly committed to fulfilling its statutory mandate from
the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The
Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity
facilitates well-informed decisionmaking by households and businesses, reduces economic and financial
uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability,
which are essential in a democratic society.
Employment, inflation, and long-term interest rates fluctuate over time in response to economic and financial
disturbances. Monetary policy plays an important role in stabilizing the economy in response to these
disturbances. The Committee’s primary means of adjusting the stance of monetary policy is through changes
in the target range for the federal funds rate. The Committee judges that the level of the federal funds rate
consistent with maximum employment and price stability over the longer run has declined relative to its
historical average. Therefore, the federal funds rate is likely to be constrained by its effective lower bound
more frequently than in the past. Owing in part to the proximity of interest rates to the effective lower bound,
the Committee judges that downward risks to employment and inflation have increased. The Committee is
prepared to use its full range of tools to achieve its maximum employment and price stability goals.
The maximum level of employment is a broad-based and inclusive goal that is not directly measurable
and changes over time owing largely to nonmonetary factors that affect the structure and dynamics of the
labor market. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the
Committee’s policy decisions must be informed by assessments of the shortfalls of employment from its
maximum level, recognizing that such assessments are necessarily uncertain and subject to revision. The
Committee considers a wide range of indicators in making these assessments.
The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee
has the ability to specify a longer-run goal for inflation. The Committee reaffirms its judgment that inflation
at the rate of 2 percent, as measured by the annual change in the price index for personal consumption
expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate. The
Committee judges that longer-term inflation expectations that are well anchored at 2 percent foster price
stability and moderate long-term interest rates and enhance the Committee’s ability to promote maximum
employment in the face of significant economic disturbances. In order to anchor longer-term inflation
expectations at this level, the Committee seeks to achieve inflation that averages 2 percent over time, and
therefore judges that, following periods when inflation has been running persistently below 2 percent,
appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.
Monetary policy actions tend to influence economic activity, employment, and prices with a lag. In setting
monetary policy, the Committee seeks over time to mitigate shortfalls of employment from the Committee’s
assessment of its maximum level and deviations of inflation from its longer-run goal. Moreover, sustainably
achieving maximum employment and price stability depends on a stable financial system. Therefore, the
Committee’s policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments
of the balance of risks, including risks to the financial system that could impede the attainment of the
Committee’s goals.
The Committee’s employment and inflation objectives are generally complementary. However, under
circumstances in which the Committee judges that the objectives are not complementary, it takes into account
the employment shortfalls and inflation deviations and the potentially different time horizons over which
employment and inflation are projected to return to levels judged consistent with its mandate.
The Committee intends to review these principles and to make adjustments as appropriate at its annual
organizational meeting each January, and to undertake roughly every 5 years a thorough public review of its
monetary policy strategy, tools, and communication practices.
Contents
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Economic and Financial Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Monetary Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Special Topics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
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
Aggregate payroll employment growth Payroll employment growth in leisure and hospitality
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).
8 Part 1: Recent Economic and Financial Developments
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.
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.
MONETARY POLICY REPORT: FEBRUARY 2021 9
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.
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.
10 Part 1: Recent Economic and Financial Developments
Monthly Percent
20
18
Black or African American
16
14
12
Hispanic or Latino
10
White 8
6
Asian
4
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.
14 Part 1: Recent Economic and Financial Developments
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.
MONETARY POLICY REPORT: FEBRUARY 2021 15
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
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.
16 Part 1: Recent Economic and Financial Developments
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.
After contracting with unprecedented speed Quarterly Billions of chained 2012 dollars
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
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
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.
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.”
MONETARY POLICY REPORT: FEBRUARY 2021 21
remains unclear. 2006 2008 2010 2012 2014 2016 2018 2020
NOTE: The data extend through December 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
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.
22 Part 1: Recent Economic and Financial Developments
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.
SOURCE: Bureau of Economic Analysis via Haver Analytics.
moreover, firms likely remain uncertain about
future demand for many types of structures in
the wake of the pandemic.
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
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
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
MONETARY POLICY REPORT: FEBRUARY 2021 25
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
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.
. . . while spreads of other long-term debt 31. Yield and spread on agency mortgage-backed
to Treasury securities narrowed . . . securities
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
28 Part 1: Recent Economic and Financial Developments
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.
MONETARY POLICY REPORT: FEBRUARY 2021 29
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.
30 Part 1: Recent Economic and Financial Developments
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.
32 Part 1: Recent Economic and Financial Developments
35. Commercial and industrial loan growth Bank credit contracted, while bank
profitability improved
Monthly Percent
90
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
challenges.
34 Part 1: Recent Economic and Financial Developments
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
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
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
1
Japan +
0_
Euro area 1
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.
300
250
Brazil
Taiwan 200
100
China Mexico
50
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
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.”
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
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
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.”
42 Part 2: Monetary Policy
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.
MONETARY POLICY REPORT: FEBRUARY 2021 43
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.”
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.
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 REPORT: FEBRUARY 2021 45
93 = + + 0.5( − )+( − )
Taylor (1993) rule
93 93
Adjusted Taylor (1993) rule = { − , ELB}
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)
48 Part 2: Monetary Policy
Quarterly Percent
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
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.
52 Part 3: Summary of Economic Projections
Figure 2. FOMC participants’ assessments of appropriate monetary policy: Midpoint of target range or target
level for the federal funds rate
Percent
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Note: Each shaded circle indicates the value (rounded to the nearest 1/8 percentage point) of an individual participant’s
judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal
funds rate at the end of the specified calendar year or over the longer run. One participant did not submit longer-run projec-
tions for the federal funds rate.
MONETARY POLICY REPORT: FEBRUARY 2021 53
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
Number of participants
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
Number of participants
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
Number of participants
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
Number of participants
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.
54 Part 3: Summary of Economic Projections
Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2020–23 and over the longer run
Number of participants
18
2020 December projections 16
14
September projections 12
10
8
6
4
2
Number of participants
18
2021 16
14
12
10
8
6
4
2
Number of participants
18
2022 16
14
12
10
8
6
4
2
Number of participants
18
2023 16
14
12
10
8
6
4
2
Number of participants
18
Longer run 16
14
12
10
8
6
4
2
Note: Definitions of variables and other explanations are in the notes to table 1.
MONETARY POLICY REPORT: FEBRUARY 2021 55
Figure 3.C. Distribution of participants’ projections for PCE inflation, 2020–23 and over the longer run
Number of participants
2020 December projections
September projections 18
16
14
12
10
8
6
4
2
Note: Definitions of variables and other explanations are in the notes to table 1.
56 Part 3: Summary of Economic Projections
Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2020–23
Number of participants
2020 December projections
September projections 18
16
14
12
10
8
6
4
2
Note: Definitions of variables and other explanations are in the notes to table 1.
MONETARY POLICY REPORT: FEBRUARY 2021 57
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
Number of participants
2020 December projections
September projections 18
16
14
12
10
8
6
4
2
0.13− 0.38− 0.63− 0.88− 1.13− 1.38− 1.63− 1.88− 2.13− 2.38− 2.63− 2.88−
0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12
Percent range
Number of participants
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
Number of participants
2022
18
16
14
12
10
8
6
4
2
0.13− 0.38− 0.63− 0.88− 1.13− 1.38− 1.63− 1.88− 2.13− 2.38− 2.63− 2.88−
0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12
Percent range
Number of participants
2023
18
16
14
12
10
8
6
4
2
0.13− 0.38− 0.63− 0.88− 1.13− 1.38− 1.63− 1.88− 2.13− 2.38− 2.63− 2.88−
0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12
Percent range
Number of participants
Longer run
18
16
14
12
10
8
6
4
2
0.13− 0.38− 0.63− 0.88− 1.13− 1.38− 1.63− 1.88− 2.13− 2.38− 2.63− 2.88−
0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12
Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.
58 Part 3: Summary of Economic Projections
Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the percent
change in real gross domestic product (GDP) from the fourth quarter of the previous year to the fourth quarter of the year
indicated. The confidence interval around the median projected values is assumed to be symmetric and is based on root mean
squared errors of various private and government forecasts made over the previous 20 years; more information about these data
is available in table 2. Because current conditions may differ from those that prevailed, on average, over the previous 20 years,
the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC
participants’ current assessments of the uncertainty and risks around their projections; these current assessments are summa-
rized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as “broadly
similar” to the average levels of the past 20 years would view the width of the confidence interval shown in the historical fan
chart as largely consistent with their assessments of the uncertainty about their projections. Likewise, participants who judge the
risks to their projections as “broadly balanced” would view the confidence interval around their projections as approximately
symmetric. For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.”
MONETARY POLICY REPORT: FEBRUARY 2021 59
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.”
60 Part 3: Summary of Economic Projections
Actual 1
FOMC participants’ assessments of uncertainty and risks around their economic projections
Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the 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.”
MONETARY POLICY REPORT: FEBRUARY 2021 61
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.
62 Part 3: Summary of Economic Projections
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.
MONETARY POLICY REPORT: FEBRUARY 2021 63
1
Actual
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.
64 Part 3: Summary of Economic Projections
Forecast Uncertainty
The economic projections provided by the members reported in table 2 would imply a probability of about
of the Board of Governors and the presidents of 70 percent that actual GDP would expand within a
the Federal Reserve Banks inform discussions of range of 2.2 to 3.8 percent in the current year, 1.5 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)
MONETARY POLICY REPORT: FEBRUARY 2021 65
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