Onetary Olicy Eport: July 9, 2021

For use at 11:00 a.m.
EDT
July 9, 2021
Monetary Policy Report

July 9, 2021
Board of Governors of the Federal Reserve System

Letter of Transmittal
Board of Governors of the

Federal Reserve System
Washington, D.C., July 9, 2021
The President of the Senate

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

Statement on Longer-Run Goals and Monetary Policy Strategy
Adopted effective January 24, 2012; as amended effective January 26, 2021
The Federal Open Market Committee (FOMC) is firmly committed to fulfilling its statutory mandate from
the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The
Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity
facilitates well-informed decisionmaking by households and businesses, reduces economic and financial
uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability,
which are essential in a democratic society.
Employment, inflation, and long-term interest rates fluctuate over time in response to economic and financial
disturbances. Monetary policy plays an important role in stabilizing the economy in response to these
disturbances. The Committee’s primary means of adjusting the stance of monetary policy is through changes
in the target range for the federal funds rate. The Committee judges that the level of the federal funds rate
consistent with maximum employment and price stability over the longer run has declined relative to its
historical average. Therefore, the federal funds rate is likely to be constrained by its effective lower bound
more frequently than in the past. Owing in part to the proximity of interest rates to the effective lower bound,
the Committee judges that downward risks to employment and inflation have increased. The Committee is
prepared to use its full range of tools to achieve its maximum employment and price stability goals.
The maximum level of employment is a broad-based and inclusive goal that is not directly measurable
and changes over time owing largely to nonmonetary factors that affect the structure and dynamics of the
labor market. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the
Committee’s policy decisions must be informed by assessments of the shortfalls of employment from its
maximum level, recognizing that such assessments are necessarily uncertain and subject to revision. The
Committee considers a wide range of indicators in making these assessments.
The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee
has the ability to specify a longer-run goal for inflation. The Committee reaffirms its judgment that inflation
at the rate of 2 percent, as measured by the annual change in the price index for personal consumption
expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate. The
Committee judges that longer-term inflation expectations that are well anchored at 2 percent foster price
stability and moderate long-term interest rates and enhance the Committee’s ability to promote maximum
employment in the face of significant economic disturbances. In order to anchor longer-term inflation
expectations at this level, the Committee seeks to achieve inflation that averages 2 percent over time, and
therefore judges that, following periods when inflation has been running persistently below 2 percent,
appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.
Monetary policy actions tend to influence economic activity, employment, and prices with a lag. In setting
monetary policy, the Committee seeks over time to mitigate shortfalls of employment from the Committee’s
assessment of its maximum level and deviations of inflation from its longer-run goal. Moreover, sustainably
achieving maximum employment and price stability depends on a stable financial system. Therefore, the
Committee’s policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments
of the balance of risks, including risks to the financial system that could impede the attainment of the
Committee’s goals.
The Committee’s employment and inflation objectives are generally complementary. However, under
circumstances in which the Committee judges that the objectives are not complementary, it takes into account
the employment shortfalls and inflation deviations and the potentially different time horizons over which
employment and inflation are projected to return to levels judged consistent with its mandate.
The Committee intends to review these principles and to make adjustments as appropriate at its annual
organizational meeting each January, and to undertake roughly every 5 years a thorough public review of its
monetary policy strategy, tools, and communication practices.
Contents
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Recent Economic and Financial Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Monetary Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Special Topics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Part 1: Recent Economic and Financial Developments . . . . . . . . . . . . . . . . . . . . . 5

Domestic Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Financial Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
International Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Part 2: Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Part 3: Summary of Economic Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
List of Boxes
The Uneven Recovery in Labor Force Participation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Recent Inflation Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Supply Chain Bottlenecks in U.S. Manufacturing and Trade . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Assessing the Recent Rise in Inflation Expectations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Developments Related to Financial Stability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Monetary Policy Rules, the Effective Lower Bound, and the Economic Recovery . . . . . . . . . . 42
Developments in the Federal Reserve’s Balance Sheet and Money Markets. . . . . . . . . . . . . . . 46
Forecast Uncertainty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Note: This report reflects information that was publicly available as of noon EDT on July 7, 2021.
Unless otherwise stated, the time series in the figures extend through, for daily data, July 6, 2021; for monthly data,
May 2021; and, for quarterly data, 2021:Q1. In bar charts, except as noted, the change for a given period is measured to
its final quarter from the final quarter of the preceding period.
For figures 20, 32, and 44, note that the S&P/Case-Shiller U.S. National Home Price Index, the S&P 500 Index, and the Dow Jones Bank Index are
products of S&P Dow Jones Indices LLC and/or its affiliates and have been licensed for use by the Board. Copyright © 2021 S&P Dow Jones Indices LLC,
a division of S&P Global, and/or its affiliates. All rights reserved. Redistribution, reproduction, and/or photocopying in whole or in part are prohibited
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
Over the first half of 2021, progress on Inflation. Consumer price inflation, as
vaccinations has led to a reopening of the measured by the 12-month change in the
economy and strong economic growth, PCE price index, moved up from 1.2 percent
supported by accommodative monetary at the end of last year to 3.9 percent in May.
and fiscal policy. However, the effects of the The 12-month measure of inflation that
COVID-19 pandemic have continued to weigh excludes food and energy items (so-called
on the U.S. economy, and employment has core inflation) was 3.4 percent in May, up
remained well below pre-pandemic levels. from 1.4 percent at the end of last year.
Furthermore, shortages of material inputs Some of the strength in recent 12-month
and difficulties in hiring have held down inflation readings reflects the comparison
activity in a number of industries. In part of current prices with prices that sank at
because of these bottlenecks and other largely the onset of the pandemic as households
transitory factors, PCE (personal consumption curtailed spending—a transitory result of
expenditures) prices rose 3.9 percent over the “base effects.” More lasting but likely still
12 months ending in May. temporary upward pressure on inflation has
come from prices for goods experiencing
Over the first half of the year, the Federal supply chain bottlenecks, such as motor
Open Market Committee (FOMC) held vehicles and appliances. In addition, prices
its policy rate near zero and continued to for some services, such as airfares and
purchase Treasury securities and agency lodging, have moved up sharply in recent
mortgage-backed securities to support the months toward more normal levels as
economic recovery. These measures, along with demand has recovered. Both survey-based
the Committee’s guidance on interest rates and market-based measures of longer-term
and the Federal Reserve’s balance sheet, will inflation expectations have risen since the end
help ensure that monetary policy continues to of last year, largely reversing the downward
deliver powerful support to the economy until drift in those measures in recent years, and
the recovery is complete. are in a range that is broadly consistent with
the FOMC’s longer-run inflation objective.
Recent Economic and Financial
Developments Economic activity. In the first quarter, real
gross domestic product (GDP) increased
The labor market. The labor market continued 6.4 percent, propelled by a surge in household
to recover over the first six months of 2021. consumption and a solid increase in business
Job gains averaged 540,000 per month, and investment but restrained by a substantial
the unemployment rate moved down from drawdown in inventories as firms contended
6.7 percent in December to 5.9 percent in with production bottlenecks. Data for the
June. Although labor market improvement has second quarter suggest a further robust
been rapid, the unemployment rate remained increase in demand. Against a backdrop of
elevated in June, and labor force participation elevated household savings, accommodative
has not moved up from the low rates that financial conditions, ongoing fiscal support,
have prevailed for much of the past year. A and the reopening of the economy, the
surge in labor demand that has outpaced the strength in household spending has persisted,
recovery in labor supply has resulted in a jump reflecting continued strong spending on
in job vacancies and a step-up in wage gains in durable goods and solid progress toward more
recent months. normal levels of spending on services.
2 Summary
Financial conditions. Since mid-February, quarter, but structural vulnerabilities persist at

equity prices and yields on nominal Treasury some types of money market funds and bank-
securities at longer maturities increased, loan and bond mutual funds. (See the box
as the rapid deployment of highly effective “Developments Related to Financial Stability”
COVID-19 vaccines in the United States and in Part 1.)
the support provided by fiscal policy boosted
optimism regarding the economic outlook. International developments. Foreign GDP
Despite having increased since February, growth moderated at the start of the year,
mortgage rates for households remain near as some countries tightened public health
historical lows. Overall financing conditions for restrictions to contain renewed COVID-19
businesses and households eased further since outbreaks. Compared with last spring, many
February, as market-based lending conditions foreign economies exhibited greater resilience
remained accommodative and bank-lending to public-health-related restrictions, and their
conditions eased markedly. Large firms, as governments have continued to provide fiscal
well as those households that have solid credit support. Recent indicators suggest a pickup
ratings, continued to experience ample access in activity in advanced foreign economies this
to financing. However, financing conditions spring following an increase in vaccination
remained tight for small businesses and rates and an easing of restrictions. However,
households with low credit scores. conditions in emerging market economies are
more mixed, in part dependent on their success
Financial stability. While some financial in containing outbreaks and the availability
vulnerabilities have increased since the of vaccines. Inflation has been rising in many
previous Monetary Policy Report, the economies, as the price declines seen last
institutions at the core of the financial spring reversed and commodity prices ramped
system remain resilient. Asset valuations have up. Monetary and fiscal policies continue to
generally risen across risky asset classes with be supportive, but some foreign central banks
improving fundamentals as well as increased are adopting or signaling less-accommodative
investor risk appetite, including in equity policy stances.
and corporate bond markets. Vulnerabilities
from both business and household debt have Foreign financial conditions generally
continued to decline in the first quarter of improved or held steady. Equity prices and
2021, reflecting a slower pace of business longer-term sovereign yields increased across
borrowing, an improvement in business advanced foreign economies, boosted by
earnings, and government programs that have their ongoing reopening. Equity markets in
supported business and household incomes. emerging market economies were mixed, and
Even so, business-sector debt outstanding flows into dedicated emerging market funds
remains high relative to income, and some slowed. After trending lower since the spring
businesses and households are still under of 2020, the foreign exchange value of the
considerable strain. In the financial sector, dollar has changed little on net since the start
leverage at banks and broker-dealers remains of the year.
low, while available measures of leverage at
hedge funds increased into early 2021 and Monetary Policy
are high. Issuance volumes of collateralized
loan obligations and asset-backed securities Interest rate policy. To continue to support
recovered strongly through the first quarter the economic recovery, the FOMC has kept
of 2021, while issuance of non-agency the target range for the federal funds rate near
commercial mortgage-backed securities zero and has maintained the monthly pace of
was weak in that quarter. Funding risks at its asset purchases. The Committee expects
domestic banks continued to be low in the first it will be appropriate to maintain the current
MONETARY POLICY REPORT: JULY 2021 3
target range for the federal funds rate until surge in retirements, increased caregiving
labor market conditions have reached levels responsibilities, and individuals’ fear of
consistent with its assessments of maximum contracting COVID-19; expansions to
employment and inflation has risen to the availability, duration, and level of
2 percent and is on track to moderately exceed unemployment insurance benefits may also
that rate for some time. have supported individuals who withdrew from
the labor force. Many of these factors should
Balance sheet policy. With the federal funds have a diminishing effect on participation in
rate near zero, the Federal Reserve has also the coming months as public health conditions
continued to undertake asset purchases, continue to improve and as expanded
increasing its holdings of Treasury securities unemployment insurance expires. (See the
by $80 billion per month and its holdings box “The Uneven Recovery in Labor Force
of agency mortgage-backed securities by Participation” in Part 1.)
$40 billion per month. These purchases
help foster smooth market functioning and Recent inflation developments. Consumer price
accommodative financial conditions, thereby inflation has increased notably this spring
supporting the flow of credit to households as a surge in demand has run up against
and businesses. The Committee expects these production bottlenecks and hiring difficulties.
purchases to continue at least at this pace As these extraordinary circumstances pass,
until substantial further progress has been supply and demand should move closer to
made toward its maximum-employment and balance, and inflation is widely expected to
price-stability goals. In coming meetings, move down. (See the box “Recent Inflation
the Committee will continue to assess the Developments” in Part 1.)
economy’s progress toward these goals since
the Committee adopted its asset purchase Supply chain bottlenecks in U.S. manufacturing
guidance last December. and trade. Supply chain bottlenecks have
hampered U.S. manufacturers’ ability to
In assessing the appropriate stance of procure the inputs needed to meet the surge
monetary policy, the Committee will continue in demand that followed widespread factory
to monitor the implications of incoming shutdowns during the first half of last year.
information for the economic outlook. The Additionally, a massive influx of goods
Committee is prepared to adjust the stance of has exceeded the capacity of U.S. ports,
monetary policy as appropriate if risks emerge extending manufacturers’ wait times for
that could impede the attainment of the imported parts. The stress on supply chains
Committee’s goals. is reflected in historically high order backlogs
and historically low customer inventories;
Special Topics these stresses, together with strong demand,
have led to increased price pressures. When
The uneven recovery in labor force participation. these bottlenecks will resolve is uncertain, as
The labor force participation rate (LFPR) they reflect the global supply chain as well
has improved very little since early in the as industry-specific factors, but for some
recovery and remains well below pre-pandemic goods, such as lumber, the previous sharp
levels. Relative to its February 2020 level, the increases in prices have begun to reverse. (See
LFPR remains especially low for individuals the box “Supply Chain Bottlenecks in U.S.
without a college education, for individuals Manufacturing and Trade” in Part 1.)
aged 55 and older, and for Hispanics and
Latinos. Factors likely contributing both Inflation expectations. To avoid sustained
to the incomplete recovery of the LFPR periods of unusually low or high inflation, a
and to differences across groups include a fundamental aspect of the FOMC’s monetary
4 Summary
policy framework is for longer-term inflation critical for providing the necessary support to
expectations to be well anchored at the the economy through this challenging period.
Committee’s 2 percent longer-run inflation (See the box “Monetary Policy Rules, the
objective. Even though the pace of price Effective Lower Bound, and the Economic
increases has jumped in the first half of this Recovery” in Part 2.)
year, recent readings on various measures of
inflation expectations indicate that inflation is The Federal Reserve’s balance sheet. Since
expected to return to levels broadly consistent January, the growth in reserves, the drawdown
with the FOMC’s 2 percent longer-run of the Treasury General Account, and the
inflation objective after a period of temporarily surge in usage of the overnight reverse
higher inflation. That said, upside risks to repurchase agreement (ON RRP) facility
the inflation outlook in the near term have have significantly affected the composition
increased. (See the box “Assessing the Recent of the Federal Reserve’s liabilities. Against a
Rise in Inflation Expectations” in Part 1.) backdrop of low short-term market interest
rates and ample liquidity, the use of the
Monetary policy rules. Simple monetary policy ON RRP facility has increased substantially
rules, which relate a policy interest rate to a since April and has reached a recent high of
small number of other economic variables, nearly $1 trillion, compared with usage near
can provide useful guidance to policymakers. zero in February. Factors contributing to this
Many of the rules have prescribed strongly increase included the decline in Treasury bill
negative values of the federal funds rate since supply, downward pressure on money market
the start of the pandemic-driven recession. rates, and the recent technical adjustment
Because of the effective lower bound for the to the Federal Reserve’s administered rates.
federal funds rate, the Federal Reserve’s other (See the box “Developments in the Federal
monetary policy tools—namely, forward Reserve’s Balance Sheet and Money Markets”
guidance and asset purchases—have been in Part 2.)
5
Part 1
Recent Economic and Financial Developments
Domestic Developments 1. Nonfarm payroll employment
Monthly Millions of jobs

The labor market improved substantially
in the first half of the year as the 155
economy reopened and activity
150
rebounded
145
Payroll employment increased by 3.2 million
140
jobs in the first half of 2021, driven
by a 1.6 million job gain in the leisure 135
and hospitality sector, where the largest 130

employment losses occurred last year. Despite
125
the substantial improvement in the labor
market, employment remained well below 2005 2007 2009 2011 2013 2015 2017 2019 2021
its pre-pandemic level (figure 1). In addition, NOTE: The data extend through June 2021.
although the unemployment rate declined SOURCE: Bureau of Labor Statistics via Haver Analytics.
0.8 percentage point in the first half of the 2. Civilian unemployment rate
year, to 5.9 percent in June, it remained well
Monthly Percent
above its pre-pandemic level (figure 2). This
figure understates the shortfall in employment, 16
particularly as factors related to the pandemic 14
appear to be weighing on participation in the 12
labor market.
10
A brisk increase in labor demand 8
outpaced the return of labor supply . . . 6
4
With economic activity rebounding, labor
2
demand rose briskly in the spring, while
the supply of labor struggled to keep up. 2005 2007 2009 2011 2013 2015 2017 2019 2021
Employers reported widespread hiring NOTE: The data extend through June 2021.
difficulties, job openings jumped to about SOURCE: Bureau of Labor Statistics via Haver Analytics.
30 percent above the average level for 2019, 3. Ratio of job openings to job seekers
and the ratio of job openings to job seekers
Monthly Ratio
surged (figure 3). With a dwindling pool of
temporarily laid-off workers to recall, hiring 1.5
increasingly involved reallocation of workers
across firms and industries, a more time- 1.2
consuming process. In addition, enhanced .9

unemployment benefits have allowed potential
workers to be more selective and reduce the .6
intensity of their job search. Faced with a .3

challenging environment for hiring, many
0
employers raised wages to attract new workers
and lengthened the workweeks of existing
2005 2007 2009 2011 2013 2015 2017 2019 2021
employees.
NOTE: The data are the ratio of job openings to unemployed excluding
temporary layoffs.
SOURCE: Bureau of Labor Statistics, Job Openings and Labor
Turnover Survey.
6 Part 1: Recent Economic and Financial Developments
4. Labor force participation rate and . . . which was restrained by ongoing

employment-to-population ratio effects of the pandemic . . .
Monthly Percent
Several pandemic-related factors continued
68 to weigh on labor supply in the spring. The
Labor force participation rate 66 share of working-age adults either employed
64 or actively seeking work—the labor force
Employment-to-
62 participation rate—has remained low after
population ratio 60 falling dramatically with the onset of the
58
pandemic and stood at 61.6 percent in
56
June (figure 4). With less than half of the
54
population fully vaccinated for COVID-19
52
50
and inoculation rates far lower in some
places, safety in the workplace remained
2005 2007 2009 2011 2013 2015 2017 2019 2021 a salient issue for many potential workers,
NOTE: The labor force participation rate and the employment-
to-population ratio are percentages of the population aged 16 and over
and caregiving demands were still elevated
and extend through June 2021. for many households. Furthermore, a surge
SOURCE: Bureau of Labor Statistics via Haver Analytics.
in retirements both last year and this year,
possibly in response to health-related concerns
5. Employment-to-population ratio, by age
or job loss induced by the pandemic, reduced
Percent Percent the pool of potential hires for employers
(figure 5).
60 82
Ages 25–54
55
78
. . . and much slack remains in the
50
labor market . . .
74
45 Ages 16–24 Although the unemployment rate has moved
70 down sharply from its pandemic high, broad
40
66
measures of labor conditions continue to
Ages 55+
35
point to substantial slack in the labor market.
30 62 The employment-to-population ratio, which
encompasses both unemployment and labor
2014 2015 2016 2017 2018 2019 2020 2021
force participation, remains well below the
NOTE: The data are monthly, extend through June 2021, and are
seasonally adjusted.
trend observed in recent years, at 58.0 percent
SOURCE: Bureau of Labor Statistics via Haver Analytics. in June. Adjusted to include workers who
have exited the labor force since the start of
the pandemic and workers on temporary
layoff misclassified as nonparticipants, the
unemployment rate was about 8.7 percent
in June.1
1. Since the beginning of the pandemic, some

people on temporary layoff, who should be counted as
unemployed, have instead been recorded as “employed
but not at work.” Had these workers been correctly
classified, the Bureau of Labor Statistics estimates that
the unemployment rate in June would have been as much
as 0.2 percentage point above the reported rate.
. . . especially for some groups that have

been particularly hard hit by the crisis
Further progress has been made since the turn
of the year in reversing the pandemic-induced
spike in unemployment for all racial and ethnic
groups (figure 6). That said, improvement in
the labor market has been uneven. The effect
of the pandemic on employment was largest
for workers with lower wages, for workers with
lower educational attainment, and for African
Americans and Hispanics, and these hard-
hit groups still have the most ground left to
regain. And the pandemic seems to have taken
a particularly large toll on the labor force
participation of mothers, especially Hispanic
mothers. (See the box “The Uneven Recovery
in Labor Force Participation.”)
Wages have risen sharply as the economy

has reopened . . .
Amid the transition to a more normal pace of
economic activity, labor market pressures have
led to a step-up in wage gains so far this year.
Total hourly compensation as measured by
the employment cost index rose at an annual
rate of 4.0 percent over the first three months
6. Unemployment rate, by race and ethnicity
Monthly Percent
20
18
Black or African American
16
14
12
Hispanic or Latino
10
White 8
6
Asian
4
2005 2007 2009 2011 2013 2015 2017 2019 2021

NOTE: The data extend through June 2021. Unemployment rate measures total unemployed as a percentage of the labor force. Persons whose
ethnicity is identified as Hispanic or Latino may be of any race. Small sample sizes preclude reliable estimates for Native Americans and other groups for
which monthly data are not reported by the Bureau of Labor Statistics.
The Uneven Recovery in Labor Force Participation

By many measures, the labor market has only A. Change in employment-to-population ratio, by
partially recovered from the depths of the pandemic- demographic group
driven recession. This discussion presents comparisons
of recent readings on labor market conditions to those
just before the pandemic. However, the reactions of Nonparticipation Unemployment
businesses and workers to the pandemic may have
long-lasting effects on the structure of the labor Overall
market. For example, the pandemic seems to have
Men
accelerated the adoption of new technologies by
Women
firms and the pace of retirements by workers. The
post-pandemic labor market and the characteristics Less than a high school diploma
of maximum employment may well be different from High school graduates, no college
those of early 2020. Some college or associate’s degree
As shown in the top bar of figure A, in June the Bachelor’s degree and higher
percentage of the population aged 16 and older that
is employed—or the employment-to-population 16–24
(EPOP) ratio—was about 3 percentage points below 25–54
its pre-pandemic (February 2020) level. This figure 55+
decomposes the decline in the EPOP ratio into the

White
amount attributable to a decline in the percentage of
Black or African American
the population working or actively looking for work, or Asian
the labor force participation rate (LFPR, light-blue bar), Hispanic or Latino
and an increase in unemployment (dark-blue bar).1
About one-half of the decline in the EPOP ratio since
6 5 4 3 2 1 – 0 +
February 2020 reflects a decline in the LFPR, which in Percentage points
June was 1¾ percentage points below its pre-pandemic NOTE: The data are seasonally adjusted and extend from February 2020
level, while the rest is due to elevated unemployment. to June 2021. Small sample sizes preclude reliable estimates for Native
Americans and other groups for which monthly data are not reported by
Differences in these measures across various
the Bureau of Labor Statistics.
demographic groups existed even before the recession, SOURCE: Bureau of Labor Statistics via Haver Analytics.
and they widened after the start of the pandemic. While
they have generally narrowed somewhat over the past market conditions. The LFPRs for most of the groups
year, the figure illustrates that differences across groups shown in figure A also remain well below pre-pandemic
relative to pre-pandemic levels remain significant: levels. The rest of this discussion covers three reasons
EPOP ratios are more depressed for those without a why the recovery in the LFPR remains incomplete, and
college education relative to the college educated and that also may help explain why the recovery has been
for Hispanics relative to others, with much of these weaker for some groups than others—namely, a surge in
differences reflecting larger declines in the LFPRs of retirements, heightened caregiving responsibilities, and
these groups.2 The EPOP ratio is depressed more for individuals’ fears of contracting COvID-19. In addition,
those aged 25 to 54 relative to other ages, while the expansions to the availability, amount, and duration of
LFPR has fallen by more for those aged 55 or older. unemployment insurance (UI) benefits have given many
While the unemployment rate has moved down individuals the financial means to be more selective
gradually but steadily since peaking in April 2020, when finding a new job, especially if pandemic- or
improvements in the LFPR have been less consistent, individual-specific factors have limited their ability to
and since August 2020, the LFPR has fluctuated in a quickly reenter the labor force.
narrow, low range despite broader improvement in labor Retirements: Even in the absence of the pandemic,
the aging of the baby boomer cohort would likely have
1. The unemployment series in figure A shows changes in implied an increase in the share of the population that
the number of unemployed workers as a percentage of the is retired relative to pre-pandemic levels of around
civilian population aged 16 or older. This measure differs from 0.3 percentage point.3 However, the share of the
the unemployment rate, which is the number of unemployed population in the Current Population Survey (CPS) that
individuals as a percentage of the civilian labor force.
2. For further discussion of factors contributing to these (continued)
differences, see the box “Disparities in Job Loss during the
Pandemic” in Board of Governors of the Federal Reserve 3. For estimates of the effect of population aging on the
System (2021), Monetary Policy Report (Washington: Board of LFPR in the decade before the start of the pandemic, see, for
Governors, February), pp. 12–14, https://www.federalreserve. example, Joshua Montes (2018), “CBO’s Projection of Labor
gov/monetarypolicy/files/20210219_mprfullreport.pdf. Force Participation Rates,” Working Paper 2018-04
B. Percent of the population not in the labor force and C. Percent of the population not in the labor
retired, change from January and February 2020 force and caregiving, change from January and
to April and May 2021 February 2020 to April and May 2021
Not in the Not in the labor Not in the
Group Not in the
labor force force and retired Group labor force and
labor force caregiving
All individuals aged 16 1.7 1.0
and older All individuals aged 16 1.7 .7
and older
Aged 55 and older 1.7 1.9
Women aged 25 to 54 without 1.8 1.0
Men 1.9 1.8 children
Women 1.5 2.0 Mothers aged 25 to 54 with 1.4 1.4
White 1.8 1.8 only children aged 5 and
younger
Black or African American .9 1.8
Mothers aged 25 to 54 with 2.6 2.6
Asian 3.8 4.2 children aged 6 to 17
Hispanic or Latino 2.5 2.9 White 2.7 2.5
Note: Federal Reserve Board staff estimates from microdata in the Current Black or African American 2.8 3.6
Population Survey (CPS). Estimates are not seasonally adjusted. Small sample
sizes preclude reliable estimates for Native Americans and other groups not Asian 2.3 1.3
included in the table.
SourCe: Census Bureau, CPS. Hispanic or Latino 5.0 4.0
Fathers aged 25 to 54 with .7 .6
children aged 6 to 17
indicates being out of the labor force and retired jumped Note: Federal Reserve Board staff estimates from microdata in the Current
at the start of the pandemic and, as shown in figure B, Population Survey (CPS). Estimates are not seasonally adjusted. Individuals
not in the labor force and caregiving are those who are not in the labor force and
has increased by 1 percentage point since early 2020— report “taking care of house or family” as their current situation. Small sample
accounting for more than one-half of the 1.7 percentage sizes preclude reliable estimates for Native Americans and other groups not
included in the table.
point decline in the aggregate LFPR over this period.4 SourCe: Census Bureau, CPS.
Among individuals aged 55 and older, the increase
has been larger for women than for men and larger for Consistent with a considerable effect from students’
Hispanics and Asians than for whites and Blacks. virtual education, estimates from the figure also show
Caregiving responsibilities: Figure C shows that that the increase in nonparticipation for caregiving
nonparticipation in the labor force associated with reasons has been larger for mothers aged 25 to 54
caregiving has increased 0.7 percentage point.5 This with children aged 6 to 17 (2.6 percentage points)
increase likely reflects in part the difficulties imposed than for women without their own children in the
on parents and other caregivers from in-person home (1.0 percentage point), women who only have
education not being fully available to many K–12 children aged 5 and younger (1.4 percentage points),
students, and some of these parents may have decided and fathers (0.6 percentage point) and accounts for all
to stop working or looking for work to help care for of the decline in the LFPR for mothers.7 The increase
their children and facilitate their virtual education.6 in nonparticipation for caregiving has been especially
large for Black and Hispanic mothers, and it accounts for
much of the larger decline in the LFPR for these groups.8
(Washington: Congressional Budget Office, March), https://
www.cbo.gov/system/files/115th-congress-2017-2018/ (continued on next page)
workingpaper/53616-wp-laborforceparticipation.pdf.
4. The Federal Reserve Board staff estimates presented in 7. The increase in nonparticipation due to caregiving
figures B and C are derived from non–labor force participants’ concerns for women with younger children may reflect
responses in the CPS to the question “What best describes the lack of available childcare facilities during much of the
your current situation at this time?”; some possible responses pandemic. For adults without their own school-age children,
include “in retirement,” “disabled,” “in school,” and “taking the increase may reflect that some of these individuals have
care of house or family.” These figures do not correspond also likely had to stop working or looking for work in order
exactly with figure A because figures B and C use data through to assist with children of relatives or with elderly or disabled
May 2021 (which is the latest month for which CPS microdata relatives rather than risk care outside of the home. Indeed,
were available at the time of writing) and show data that are the increase in nonparticipation for caregiving reasons among
not seasonally adjusted. Figures B and C display two-month women who are not mothers is larger for those with other
averages because these data can have considerable noise at adult household members who report being disabled or are
monthly frequency. aged 65 or older.
5. Nonparticipation in the labor force associated with 8. These differences may in part reflect that the groups
caregiving is measured as nonparticipants in the CPS who with larger increases in nonparticipation due to caregiving
report “taking care of house or family” as their current were less likely to work in telecommute-capable occupations
situation. before COvID-19; for example, based on May 2021 Federal
6. Indeed, according to the Return to Learn Tracker (R2L), Reserve Board staff estimates from the CPS, 19 percent of
even as of June 7, 2021, only 54 percent of districts provided white mothers aged 25 to 54 with kids aged 6 to 17 report
fully in-person education. More information is available on the telecommuting due to COvID, compared with 15 percent of
R2L website at https://www.returntolearntracker.net. Black mothers and 12 percent of Hispanic mothers. It may also
Uneven Recovery (continued)
Fear of the COVID-19 virus: Individuals’ fears of at the start of the pandemic by temporarily suspending
contracting the COvID-19 virus are likely also still work search requirements and relaxing other eligibility
depressing labor force participation somewhat and criteria. While the income support from expanded UI
may in part be reflected in the factors previously and other fiscal stimulus likely led some jobseekers
discussed; COvID-19 fears may be especially relevant to search less intensively or to be more selective in
for those who would otherwise be working on-site in accepting job offers, the effects of these programs on
high-contact industries and occupations—and even for labor force participation are not clear.11 The support
some fully vaccinated individuals, such as older and from enhanced UI has been especially consequential
immunocompromised workers who are at higher risk for lower-wage workers, who have borne the brunt of
for severe illness or death from COvID-19. Consistent recent job losses and who have benefited most from
with the importance of this reason, data from the broader coverage and higher benefit levels.12
Census Bureau’s Household Pulse Survey show that The path ahead: Many of the factors constraining
between May 26 and June 7, 2021, about 1 percent of labor force participation should gradually abate in
the population reported not working or having recently the coming months, and, as they do, the overall
looked for work because of fears of COvID-19.9 This participation rate should rise and the demographic
share was higher for Blacks and Hispanics, those aged disparities in labor force participation that widened
18 to 24, and individuals with no college education, during the pandemic will likely continue to narrow.
which aligns with demographic differences in the share Fears of getting or spreading COvID-19 are likely
of individuals employed in high-contact industries to recede if vaccination rates continue to climb and
before COvID-19 and with differences in individuals’ if caseloads continue to diminish, and caregiving
ability to work from home. responsibilities should ease if most students return to
Expanded unemployment insurance: The pandemic in-person instruction in the fall. With federal pandemic
recession prompted an unprecedented expansion UI programs slated to end in September and many
in the availability and level of support of UI. A suite states withdrawing from them in advance of their
of federal programs has extended benefits to groups nationwide expiration, any effects of enhanced UI
normally ineligible for UI, increased the potential benefits on labor force participation will likely wane
duration of benefits, and boosted the weekly benefit soon as well. The spate of retirements spurred by
amounts received by UI claimants.10 Complementing the pandemic will continue to weigh on labor force
the new programs, many states broadened UI eligibility participation for some time, but this factor should leave
a gradually diminishing imprint over the next few years,
because these workers were likely poised to retire soon
reflect that in-person education was less common in school even in the absence of the pandemic. The full effect
districts with a larger share of Black and Hispanic students; of the pandemic on the structure of the labor market
for example, data from the Return to Learn Tracker for June 7
show that fully in-person education was more common in remains to be seen, and the characteristics of maximum
majority-white school districts than majority-Black or majority- employment may well be different from those of
Hispanic school districts. early 2020.
9. The data are Federal Reserve Board staff calculations
from week 31 of the Household Pulse Survey Public Use
File. The percentage not working due to fears of COvID-19
is measured as the percentage of respondents who say that 11. Research into the labor market effects of pandemic UI
their main reason for not working was concern about “getting policy has largely centered on FPUC, rather than the broader
or spreading the coronavirus.” The data can be found on the set of state and federal policy changes, and has focused on
Census Bureau’s website at https://www.census.gov/programs- employment rather than labor market participation. Several
surveys/household-pulse-survey/datasets.html. recent studies have found that $600 weekly benefit increases
10. These programs are Pandemic Unemployment under FPUC had at most a modest effect on employment
Assistance (PUA), which provides benefits to pandemic- last year, in part because UI generosity has less effect on
affected individuals with insufficient wage and salary earnings hiring when the labor market is slack. (See, for example,
to qualify for regular UI benefits; Pandemic Emergency Nicolas Petrosky-Nadeau and Robert G. valletta (2021), “UI
Unemployment Compensation (PEUC), which provides Generosity and Job Acceptance: Effects of the 2020 CARES
additional weeks of coverage to workers who exhaust their Act,” Working Paper Series 2021-13 (San Francisco: Federal
regular UI benefits; and Federal Pandemic Unemployment Reserve Bank of San Francisco, June), https://www.frbsf.org/
Compensation (FPUC), which currently provides $300 economic-research/files/wp2021-13.pdf.) Less is known
in supplemental benefits to all UI claimants, including about the possible effects of FPUC, PEUC, and PUA on labor
those in the PUA and PEUC programs. See Tomaz Cajner, force participation, particularly in the tighter labor market
Andrew Figura, Brendan M. Price, David Ratner, and conditions prevailing in 2021.
Alison Weingarden (2020), “Reconciling Unemployment 12. The $300 FPUC supplement to weekly UI benefits
Claims with Job Losses in the First Months of the COvID-19 replaces a larger portion of lost earnings for workers displaced
Crisis,” Finance and Economics Discussion Series 2020-055 from lower-wage jobs, while PUA has made benefits available
(Washington: Board of Governors of the Federal Reserve to self-employed workers, labor market entrants, and other
System, July), https://doi.org/10.17016/FEDS.2020.055. groups with limited earnings histories.
of the year, lifting the 12-month change up to 7. Measures of change in hourly compensation
2.8 percent (figure 7). More timely indicators Percent change from year earlier
show continuing large wage gains, though
swings in the composition of the workforce Compensation per hour, 10
business sector
make these difficult to interpret.2 In particular, 8
average hourly earnings exhibited very large Atlanta Fed’s
6
monthly increases in April, May, and June Wage Growth Tracker
despite being held down in those months 4

by large job gains in industries with below- 2
average wages. Compensation per hour in the +
_0
business sector, a broad-based but volatile Employment cost index, Average hourly earnings,
private sector private sector
measure of wages, salaries, and benefits, rose 2
8 percent through the first quarter, bolstered

2013 2015 2017 2019 2021
significantly by changes in the composition of
NOTE: Business-sector compensation is on a 4-quarter percent change
the workforce.3 basis. For the private-sector employment cost index, change is over the
12 months ending in the last month of each quarter; for private-sector
average hourly earnings, the data are 12-month percent changes and
. . . and price inflation has stepped up, extend through June 2021; for the Atlanta Fed’s Wage Growth Tracker,
the data are shown as a 3-month moving average of the 12-month
boosted by returning demand and by percent change.
supply bottlenecks . . . SOURCE: Bureau of Labor Statistics; Federal Reserve Bank of Atlanta,
Wage Growth Tracker; all via Haver Analytics.
As measured by the 12-month change in
the price index for personal consumption
8. Change in the price index for personal consumption
expenditures (PCE), inflation jumped from expenditures
1.2 percent in December 2020 to 3.9 percent
in May, well above the FOMC’s longer-run Monthly 12-month percent change
objective of 2 percent (figure 8). The closely 4.0

watched core PCE price index, which excludes 3.5
more volatile components, rose 3.4 percent Trimmed mean 3.0
over the 12 months ending in May. The Excluding food 2.5
price acceleration appears to have arisen and energy
2.0
largely from a small number of categories, as 1.5
suggested by muted movements in the Dallas 1.0
Total
trimmed mean index, which removes the
.5
largest price changes.4 For example, sharp price
0
2. Early in the pandemic, job losses were much 2013 2014 2015 2016 2017 2018 2019 2020 2021
larger for lower-wage workers, raising average wages
SOURCE: For trimmed mean, Federal Reserve Bank of Dallas; for all
and measured wage growth. This process is now being else, Bureau of Economic Analysis; all via Haver Analytics.
reversed as many lower-wage workers, particularly
in services, have been rehired, thus lowering average
wages and measured wage growth. Consequently, in the
12-month changes, large composition effects obscure the
underlying movements in wages of typical workers.
3. Over the same period, labor productivity in the
business sector is estimated to have increased 4 percent,
much faster than the pre-pandemic trend. Both
compensation and productivity have been affected by
changes in the composition of inputs and outputs that
may be largely transitory. Nevertheless, some of the
increases may reflect more persistent factors.
4. The trimmed mean omits the highest and lowest
price changes, removing products representing roughly
half of the PCE basket by consumption share.
increases for goods have been concentrated

among a subset of products experiencing
strong demand coupled with supply chain
9. Nonfuel import prices and industrial metals indexes bottlenecks. In addition, as demand for
Week ending January 3, 2014 = 100 January 2014 = 100 services has returned to normal, some prices
have bounced back from levels depressed
140
104 following the onset of the pandemic. (See the
130
Industrial metals
box “Recent Inflation Developments.”)
120
102
110
. . . with further upward pressure on
100 100
inflation from rising import prices
90
80
98 Increased import prices also contributed to the
70
96
step-up in consumer price inflation in the first
Nonfuel import prices
60 half of 2021, boosted by commodity prices,
which rose in response to strong demand for
2014 2015 2016 2017 2018 2019 2020 2021
goods. The effects of higher import prices
NOTE: The data for nonfuel import prices are monthly. The data for
industrial metals are weekly averages of daily data and extend through July have been exacerbated by bottlenecks abroad
2, 2021.
SOURCE: For nonfuel import prices, Bureau of Labor Statistics; for that have raised transport costs (figure 9). (See
industrial metals, S&P GSCI Industrial Metals Spot Index via Haver
Analytics.
the box “Supply Chain Bottlenecks in U.S.
Manufacturing and Trade.”)
10. Spot and futures prices for crude oil
After a sharp recovery in late 2020 and early
Weekly Dollars per barrel 2021, oil prices have risen over $10 per barrel
in the past few months, a substantial increase
160
but less dramatic than some of the increases
140
for nonfuel commodity prices. Even though
Brent spot price 120 oil consumption is still well below pre-
100 pandemic levels, oil production is also down,
80 and oil prices are now above pre-pandemic
24-month-ahead 60 levels (figure 10). Oil demand continues to be
futures contracts
40
held back by the slow recovery in travel and
commuting. Meanwhile, OPEC (Organization
20
of the Petroleum Exporting Countries)
2007 2009 2011 2013 2015 2017 2019 2021 and its partners, notably Russia, have only
NOTE: The data are weekly averages of daily data and extend through slowly increased their production toward
July 2, 2021.
SOURCE: ICE Brent Futures via Bloomberg.
pre-pandemic levels, offsetting the effect of
weak demand.
Survey-reported inflation expectations

and market-based inflation compensation
measures have moved up in recent months
Survey-based measures of inflation
expectations at medium- and longer-term
horizons have moved up over the first half of
the year. These measures, which exhibited a
downward drift in recent years, have returned
to levels last observed 5 to 10 years ago.
Similarly, market measures of longer-term
Recent Inflation Developments

Since the beginning of this year, personal A. Personal consumption expenditures price indexes
consumption expenditures (PCE) inflation—as
measured by 12-month percent changes—has Percent change from a year ago Percent change from a year ago
increased markedly, reaching 3.9 percent in May 30 7

Food and
(figure 8 in the main text). The sharp increase in 25 beverages 6
inflation this year reflects both a rebound in prices 20 Energy 5
from pandemic-induced price declines last spring and 15 Services
4
imbalances between demand and supply associated 10
ex. energy
with a strong increase in aggregate demand amid 3
5
supply chain bottlenecks, hiring difficulties, and other + 2
0
–
capacity constraints. 5
1
+
As global demand has surged, prices for crude 10 0_
Goods ex. food,
oil and other traded commodities, such as livestock, 15 beverages, and 1
crops, and metals, have increased notably (figures 9 energy 2
20
and 10 in the main text). Commodity prices started
to rebound during the second half of last year as the 2017 2018 2019 2020 2021
global economy partially reopened and have continued NOTE: The data are monthly.
to rise this year, in some cases reaching multiyear
highs. These prices most directly affect food and energy
consumer prices (the blue and black lines, respectively, connected to the motor vehicle sector—including
in figure A). However, readings from manufacturing prices for new and used vehicle purchases and vehicle
surveys and anecdotes reported in the Federal Reserve’s rental services—accounts for almost one-third of the
Beige Book suggest rising costs for raw materials have increase in PCE prices in April and May.
contributed to inflation for other goods as well (the Regarding services prices, demand for certain non-
red line in figure A). More recently, prices of some energy services that were severely curtailed by social
commodities, such as lumber, have come down distancing during the pandemic has surged this spring
from their peaks in the spring or have flattened out, as the vaccines have become widely available (the
suggesting that inflation pressures from commodities green line in figure A). Just as the drop in demand last
might ease in the coming months or even reverse. year led to a step-down in prices for categories related
Supply chain bottlenecks are another factor pushing to travel and group activities, the resurgence in demand
up consumer prices this year. As the economy reopened for these services is pushing up prices this year. As two
and as consumer demand for goods surged, many prominent examples, airline fares and prices for hotel
producers have reported shortages of critical parts and accommodations have jumped since the beginning of
packaging materials, as well as delivery delays. (See the the year but so far remain somewhat below their pre-
box “Supply Chain Bottlenecks in U.S. Manufacturing COvID trends (figure B, bottom panels).
and Trade.”) Supply chain bottlenecks have been Even as demand for services appears to be strong
particularly constraining in the motor vehicle sector, and growing, many service-sector businesses have
where global shortages of semiconductors and other reported difficulties in finding workers quickly enough
parts have curtailed production, at the same time that to ramp up their operations accordingly. These reports
demand by households and rental companies has are consistent with most available measures of wage
been strong. Prices for motor vehicles—particularly growth, which have stepped up notably since the
used vehicles—have jumped in recent months and beginning of the year. Wage gains have been especially
are currently at levels well above their pre-COvID-19 large in the leisure and hospitality sector and in other
trends (figure B, top-left panel). Strong demand amid service industries that have relatively low average
supply chain bottlenecks has also boosted prices for wages, which has likely contributed to the rise in
other durable goods in recent months, but the pattern inflation for certain categories of spending, such as
is not quite as pronounced as it is for motor vehicles food away from home.
(figure B, top-right panel). In fact, the rise in prices (continued on next page)
Recent Inflation Developments (continued)

B. Personal consumption expenditures prices and pre-COVID-19 trends
B1. Motor vehicles B2. Durables excluding motor vehicles

Monthly February 2020 = 100 Monthly February 2020 = 100
114
108
112
110 Trend 106
108 104
106
102
104
Trend 102 100
100 98
98
96
96
2017 2018 2019 2020 2021 2017 2018 2019 2020 2021
B3. Airline fares B4. Hotel accommodations

Monthly February 2020 = 100 Monthly February 2020 = 100
110
105
105
100
Trend 100 Trend
95 95
90 90
85
85
80
80
75
2017 2018 2019 2020 2021 2017 2018 2019 2020 2021
Note: Trend is calculated from February 2017 to February 2020.

Source: Bureau of Economic Analysis; FRB calculations.
Overall, an important part of the rise in inflation become better aligned, and inflation is widely expected
this spring appears to be due to a surge in demand, to move down toward the FOMC’s 2 percent longer-
including the rebound in travel-related spending, run goal. (For a more detailed discussion of recent
running up against short-run production bottlenecks developments in inflation expectations, see the box
and hiring difficulties. As these extraordinary “Assessing the Recent Rise in Inflation Expectations.”)
circumstances pass, supply and demand should
Supply Chain Bottlenecks in U.S. Manufacturing and Trade

The strong U.S. demand for goods has been faced A. Customer inventories and order backlogs
with a supply chain that has struggled to keep pace.
Monthly Diffusion index
With the onset of the pandemic in the spring of 2020,
many manufacturers sharply curtailed production
80
in expectation of a long downturn and a drawn-out
recovery. Companies laid off workers, idled plants, Order backlogs 70
and canceled orders for materials. In many cases,
60
however, the pause in demand was much shorter
and the rebound in demand was much stronger than 50
anticipated, and by late 2020, factories in some
40
industries were scrambling to find the workers, parts,
and materials to fill a rush of new orders. As demand Customer inventories 30
for goods surged in the second half of 2020, U.S.
20
import volumes shot up to record levels and have
remained elevated. The massive influx of goods
2007 2009 2011 2013 2015 2017 2019 2021
combined with COvID-19-related staffing issues
have overwhelmed U.S. ports, resulting in additional NOTE: The data extend through June 2021.
SOURCE: Institute for Supply Management, Manufacturing ISM
challenges for manufacturers that experience extended Report on Business.
wait times for imported parts.
Ample evidence—including widespread anecdotes B. Reasons production is below capacity
of shortages mentioned in the press and in the
Federal Reserve’s Beige Book—points to broad and Quarterly Percent
sometimes deep supply chain disruptions across the
manufacturing sector. The challenges in procuring 30
materials are also reflected in reports from the Insufficient supply of labor 25
Institute for Supply Management on order backlogs,
which recently reached historical highs at the same Insufficient supply 20
of materials
time as customer inventories were at historical lows
15
(figure A).1 Additionally, roughly one-fourth of all
manufacturers cannot produce at full capacity because 10
of an insufficient supply of materials, labor, or both
5
(figure B).2 Amid strong demand, these shortages have
put upward pressure on the prices manufacturers pay 0
for parts and materials (figure C).
A few key manufacturing industries have 2001 2006 2011 2016 2021
experienced pronounced supply disruptions NOTE: Gaps in series represent the end of the Annual Survey of Plant
or shortfalls. Perhaps most notably, the burst in Capacity in 2006 and the start of the Quarterly Survey of Plant Capacity
in 2008.
SOURCE: Census Bureau, Manufacturing and Construction Division,
1. The Institute for Supply Management survey asks Quarterly Survey of Plant Capacity Utilization.
respondents whether their customers’ inventories are
currently “too high,” “too low,” or “about right.” values demand for consumer electronics contributed to
below 50 indicate more respondents perceived customers’ full order books, long lead times, and shortages of
inventories as “too low” than “too high.” Similarly,
semiconductors; these shortages led to widespread
respondents are asked to compare the current month’s
backlog of orders with the previous month’s backlog; shutdowns and slowdowns at several U.S. motor
values above 50 suggest more respondents reported higher vehicle assembly plants.3 Lumber supply has also fallen
backlogs than reported lower backlogs.
(continued on next page)
2. Labor shortages appear increasingly problematic.
Although manufacturers have long expressed challenges in
attracting and retaining workers, the most recent reading 3. The semiconductor shortage was exacerbated when a
from the Bureau of Labor Statistics reported 814,000 chip factory in Japan closed for about a month in the spring
job openings in the sector, nearly double the 2017–19 after being damaged by a fire; the company announced that it
average. expects shipments to return to pre-fire levels in late July.
Supply Chain Bottlenecks (continued)

C. Prices paid by manufacturers for materials in acute shortages; the outages resolved slowly, and
only in early May did operations essentially return
Monthly Diffusion index to normal.
100
Logjams at some of the nation’s ports—particularly
on the West Coast—resulted from the unprecedented
90
volume of imports and were compounded by
80
limitations on labor attributable to COvID-19
70
precautions and to isolated outbreaks among dock
60 workers. For example, since the fall of 2020, the Port
50 of Los Angeles, the nation’s busiest port, has had more
40 ships to unload than it could easily accommodate.
30 Typically, ships have little to no wait before they reach
20 a berth at the port, but since last October, on average,
10 more than 10 ships have been waiting at anchor at any
given time (figure D). While this number has retreated
2007 2009 2011 2013 2015 2017 2019 2021 from its peak, ships are still spending an extended
NOTE: Values greater than 50 indicate that more respondents paid time in the port. Continued high import volumes have
higher prices for material inputs relative to a month earlier than reported hampered the port’s progress in resolving congestion
lower prices. The data extend through June 2021.
SOURCE: Institute for Supply Management, Manufacturing ISM even as the quick pace of vaccinations in the United
Report on Business.
States has allowed the port to resume processing
incoming containers at full capacity.
short, as last year’s increase in remodeling projects In addition to the congestion at ports, carriers have
and new home construction outpaced production raised shipping rates and imposed large surcharges
at sawmills. Meanwhile, supply bottlenecks for on containers sent to the United States.5 These
steel emerged last fall after a resurgence in orders delays and elevated costs have likely discouraged
surprised mill operators that had not yet fully restarted additional imports of low-value, high-volume products,
steelmaking equipment idled in the early days of the contributing to higher prices and reduced inputs for
pandemic.4 Finally, extremely cold temperatures in (continued)
mid-February caused extensive damage to several
petrochemical facilities along the Gulf Coast, resulting 5. Air freight rates have also risen sharply, as many goods
normally shipped by sea are being transported by air to
avoid extended delays. Furthermore, pandemic-related
4. More than half of the nation’s blast furnaces were idled restrictions on international travel have limited the number of
last year, and a few were permanently shuttered; the vast international flights, reducing the supply of cargo space for air
majority of the idled furnaces were restarted by this spring. shipments and further increasing prices.
D. Ships waiting at anchor (Port of Los Angeles) E. Container flows at U.S. ports
Daily Ships Monthly Millions of TEUs
25 2.4
Averages
Jan. 2016–Sept. 2020: .2 20 2.0
Inbound loaded
Oct. 2020–present: 10.9
15 1.6
10 1.2
5 .8
Outbound loaded
0 .4
Jan. Mar. May July Sept. Nov. Jan. Mar. May July 2017 2018 2019 2020 2021
2020 2021
NOTE: The data extend through April 2021. The data include the ports
NOTE: The data are 7-day moving averages.
of Baltimore, Charleston, Houston, Los Angeles, Long Beach, New York
SOURCE: Port of Los Angeles.
and New Jersey, Oakland, Savannah, Seattle, and Tacoma, which
accounted for 91 percent of total throughput at U.S. ports in 2019. TEUs
are 20-foot equivalent units.
SOURCE: Maryland Port Administration; South Carolina Ports
U.S. manufacturers. Relatedly, the higher inbound Authority; Port of Houston Authority; Port of Los Angeles; Port of
rates have created a challenge for U.S. exports in the Long Beach; Port of New York and New Jersey; Port of Oakland;
Georgia Ports Authority; Northwest Seaport Alliance; all via Haver
form of a container shortage. Shipping rates for U.S. Analytics; Federal Reserve Board staff calculations.
exports have risen by much less than rates for inbound
shipments, so carriers find it more profitable at times
to quickly return empty containers for another inbound
U.S. delivery than to receive modest revenue from the pandemic. As producers and the distribution network
taking on U.S. exports. Thus, although the number of work through these bottlenecks, production is expected
inbound loaded containers skyrocketed in the second to pick up and price pressures to ease—for example,
half of last year, the number of outbound loaded lumber prices have come down from their late-spring
containers stayed below pre-pandemic levels until peaks. The time frame for the resolution of these
March 2021 (figure E). bottlenecks is uncertain, as they reflect both the global
In summary, trade and production bottlenecks have supply chain and some industry-specific reasons for the
been an important factor as the economy emerges from tight conditions.
inflation compensation—including inflation

swaps and the yield gap between nominal
Treasury securities and Treasury Inflation-
Protected Securities—continued to climb in
2021, returning to the range observed in the
2010–14 period. (See the box “Assessing the
Recent Rise in Inflation Expectations.”)
Gross domestic product surged in the

11. Real gross domestic product and gross first half of the year . . .
domestic income
Real gross domestic product (GDP) rose
Quarterly Billions of chained 2012 dollars at a brisk annual rate of 6½ percent in the
first quarter and, with indicators suggesting
20 another strong increase in the second quarter,
19 appears to have now recovered to its pre-
18
pandemic level (figure 11). Even so, supply
Gross domestic income
chain bottlenecks, hiring difficulties, and
17
other capacity constraints have damped the
Gross domestic product 16 economic rebound to some degree this year,
15 causing order backlogs and longer delivery
14
times and leading producers to meet demand
in part by drawing down inventories rather
2005 2007 2009 2011 2013 2015 2017 2019 2021 than from new production.
SOURCE: Bureau of Economic Analysis via Haver Analytics.
. . . driven by a sharp increase in
household spending . . .
The rebound in GDP primarily reflects a
12. Real personal consumption expenditures resurgence of household spending, driven by
the reopening of the economy and additional
Billions of chained 2012 dollars Billions of chained 2012 dollars
fiscal support. In particular, the easing of
6.0
voluntary and mandatory social distancing
9.5
has spurred an increase in services spending,
5.5 9.0
such as more prevalent dining out, hotel
5.0
8.5 stays, and air travel (figure 12). Still, concerns
4.5
8.0
about COVID-19 continue to limit in-person
4.0 Goods interactions, and services spending has yet
7.5
3.5 to reach its pre-pandemic level. Spending on
3.0 Services 7.0 goods, which quickly recovered in the second
2.5 6.5 half of 2020, soared from January through
May. Spending on durable goods has been
2005 2007 2009 2011 2013 2015 2017 2019 2021 especially strong, including on motor vehicles,
NOTE: The data are monthly. where sales reached levels among the highest
on record in March and April before being
held back in May by extremely low dealer
inventories.
. . . supported by rising personal income, 13. Indexes of consumer sentiment

consumer sentiment, and wealth . . . Monthly 2018 average = 100
The marked increase in personal consumption 110

has been supported by increasing income, Michigan survey 100
accumulated savings, rising housing and 90
stock market wealth, low interest rates, and 80

70
improving consumer sentiment (figure 13).
60
Disposable personal income—that is, Conference Board
50
household income net of taxes—surged in the 40
first quarter of this year, boosted by further 30
fiscal support, including stimulus checks 20
10
and enhanced unemployment insurance
benefits, along with solid gains in wages and 2005 2007 2009 2011 2013 2015 2017 2019 2021
compensation. Meanwhile, the continuing NOTE: The data extend through June 2021.
SOURCE: University of Michigan Surveys of Consumers; Conference
brisk rise in house prices and stock prices has Board.
boosted the wealth of homeowners and equity
investors (figure 14). The tremendous gains in 14. Wealth-to-income ratio
income have led to a very elevated saving rate
Quarterly Ratio
(figure 15). That said, these aggregate figures
mask important variation across households, 8.0
and many low-income households, especially
7.5
those whose earnings declined as a result of
7.0
the pandemic and recession, have seen their
finances stretched. 6.5
6.0
. . . and ready access to credit for
5.5
households with good credit profiles
5.0
Household borrowing has expanded
moderately. Consumer loans have grown at 2005 2007 2009 2011 2013 2015 2017 2019 2021
a modest pace so far this year, driven by the NOTE: The series is the ratio of household net worth to disposable
continued expansion of auto loans (figure 16). personal income.
SOURCE: For net worth, Federal Reserve Board, Statistical Release
Banks reported significant easing of lending Z.1, “Financial Accounts of the United States”; for income, Bureau of
Economic Analysis via Haver Analytics.
standards on consumer loans in the first
quarter of 2021 after a moderate easing in 15. Personal saving rate
the last quarter of the previous year, though
standards remain tight relative to the period Monthly Percent
just before the pandemic. Delinquency rates 36

for nonprime auto and credit card borrowers 32
remained well below pre-pandemic levels, 28
likely stemming from forbearance programs 24
and fiscal support. Mortgage credit is broadly 20
available to high-credit-score borrowers who 16
meet standard conforming loan criteria but 12

8
continues to be tight for borrowers with lower
4
credit scores. Historically low mortgage rates
0
have led to elevated refinance and purchase
activity, supported by accommodative credit 2005 2007 2009 2011 2013 2015 2017 2019 2021
Assessing the Recent Rise in Inflation Expectations

The sharp rise in inflation so far this year (see the which are contracts in which two parties agree to swap
box “Recent Inflation Developments”) has raised the fixed nominal payments for floating cash flows that are
question of whether the recent elevated pace of price tied to cumulative CPI inflation over some horizon.
increases (1) will abate, as the effects of the strong Longer-horizon TIPS- and swaps-based measures of
rebound in aggregate demand and accompanying inflation compensation have both moved up since the
supply chain bottlenecks fade, without calling for start of the year. The TIPS-based measure of 10-year
a change in the path of monetary policy or (2) will inflation compensation increased from an annual
instead be followed by a period of higher inflation rate close to 2 percent in the beginning of 2021 to
pressures and call for a change in the stance of somewhat above 2¼ percent in early July. Over the
monetary policy. The latter situation could arise same period, the swaps-based measure increased from
if longer-term inflation expectations were to rise around 2¼ percent to 2½ percent. To shed further
persistently above levels consistent with the Federal light on how the recent economic developments
Open Market Committee’s (FOMC) longer-run inflation are influencing investors’ views on the inflation rate
goal. Inflation expectations are often seen as a driver of likely to prevail at different horizons, it is useful to
actual inflation, which is why a fundamental aspect of split the recent rise in inflation compensation over the
the FOMC’s monetary policy framework is for longer- next 10 years into changes in inflation compensation
term inflation expectations to be well anchored at the for the next year and for subsequent 1-year periods
Committee’s 2 percent longer-run inflation objective.1 starting at times between 1 and 9 years from now.
In monitoring the inflation outlook, the FOMC The result of this exercise suggests that market-based
considers a variety of financial and economic data measures of inflation compensation over the next
in order to gauge whether inflation expectations are year have increased about 1½ percentage points
consistent with meeting its inflation objective. Recent since early 2021, reaching levels above 3 percent in
readings on these measures indicate that inflation early July. Measures of inflation compensation for the
is expected to return to levels consistent with the period beyond the next year have also moved up but
Committee’s 2 percent longer-run inflation objective by a much smaller amount than have measures of
after a period of temporarily higher inflation. That said, 1-year inflation compensation. In particular, inflation
some measures suggest that the upside risks to the compensation beyond five years has reversed the large
inflation outlook in the near term have increased. declines seen earlier in the pandemic, bouncing back
Information concerning inflation expectations to levels consistent with those observed before 2014,
can be obtained from various sources, including when measures of longer-term inflation compensation
financial instruments linked to inflation and surveys of ran modestly above 2 percent on a CPI basis, and
financial market participants, professional forecasters, before these measures showed signs that CPI inflation
households, and businesses. For example, the expectations may have drifted down (figure A).
compensation that investors require to hold certain If the recent readings on inflation compensation
financial instruments whose payouts are linked to could be interpreted as direct measures of expected CPI
inflation sheds light on financial market participants’ inflation, they would suggest that investors currently
expectations regarding inflation. Inflation compensation anticipate that average CPI inflation will temporarily run
implied by the yields on Treasury securities, known somewhat above 3 percent over the next year before
as the Treasury Inflation-Protected Securities (TIPS) moving back down. Over the longer run, assuming no
breakeven inflation rate, is defined as the difference wedge between inflation compensation and inflation
between yields on conventional Treasury securities and expectations, market-based measures indicate that
yields on TIPS, which are linked to actual outcomes investors are expecting CPI inflation to settle at around
regarding headline consumer price index (CPI) inflation. 2¼ percent. This pattern is consistent with expectations
An alternative market-based measure of inflation of CPI inflation moving to levels in line with the FOMC’s
compensation can be derived from inflation swaps, longer-run inflation goal of 2 percent PCE (personal
consumption expenditures) inflation.2
1. For a discussion of the role inflation expectations play TIPS- and swaps-based measures of inflation
in inflation dynamics, see Janet L. yellen (2015), “Inflation compensation, however, reflect not only expected
Dynamics and Monetary Policy,” speech delivered at the
Philip Gamble Memorial Lecture, University of Massachusetts, (continued)
Amherst, September 24, https://www.federalreserve.gov/ 2. The Committee’s 2 percent longer-run inflation objective
newsevents/speech/yellen20150924a.htm. is stated in terms of the PCE price index, and PCE inflation
A. Inflation compensation implied by Treasury expectations that is not obscured by the presence of
Inflation-Protected Securities these risk premiums.
Information about inflation expectations obtained
Daily Percent
from surveys of financial market participants,
economists, and professional forecasters tells a story
3.5
similar to that of market-based measures. Since the
5-to-10-year 3.0 turn of the year, projections of PCE inflation for 2021
2.5 as a whole, obtained from information in the Blue
2.0
Chip Financial Forecasts, the Survey of Professional
Forecasters, and the Survey of Primary Dealers,
1.5 increased substantially to well above 2 percent. Over
5-year
1.0 the same period, the projections of PCE inflation
.5
beyond 2022 appear, in comparison, to be little
changed at levels just over 2 percent (figure B). This
0
pattern suggests that these forecasters expect the
recent jump in inflation to be transitory and that survey
2011 2013 2015 2017 2019 2021
respondents do not appear to have revised their views
NOTE: The data are at a business-day frequency and are based on regarding the longer-term inflation rate in response to
smoothed nominal and inflation-indexed Treasury yield curves.
SOURCE: Federal Reserve Bank of New York; Federal Reserve Board the recent strong readings on inflation.
staff calculations. Even if financial market participants and professional
forecasters see inflation returning to levels close to
inflation, but also other factors, including the inflation 2 percent after a bout of higher inflation as the most
risk premium and possibly other premiums driven by likely outcome, they still could have judged that the
liquidity differences and shifts in demand and supply likelihood of higher inflation had increased. Probability
of TIPS relative to those of nominal Treasury securities. (continued on next page)
The presence of these additional factors can make it
difficult to ascertain the information regarding expected B. Survey-based measures of personal
inflation embedded in market-based measures of consumption expenditures inflation expectations
inflation compensation.3 Survey-based measures, Annual Percent
in contrast, provide information about inflation
SPD June 2021 3.5

tends to run somewhat below CPI inflation, which is used in
pricing TIPS and inflation swaps. Over the past two decades, 3.0
PCE price inflation has run, on average, around ¼ percentage
point lower than CPI inflation, though this wedge has varied SPF 2021:Q2
from year to year. BC June 2021 2.5
SPF
3. The Federal Reserve System staff maintains several term
2021:Q1
structure models to disentangle the various components of 2.0
inflation compensation. For more details, see, for example,
Michael Abrahams, Tobias Adrian, Richard K. Crump, BC Dec. 2020
SPD Jan. 2021 1.5
Emanuel Moench, and Rui yu (2016), “Decomposing Real
and Nominal yield Curves,” Journal of Monetary Economics,
vol. 84 (December), pp. 182–200; Jens H.E. Christensen, Longer-
2021 2022 2023 2024 2025 2026
Jose A. Lopez, and Glenn D. Rudebusch (2010), “Inflation run
Expectations and Risk Premiums in an Arbitrage-Free Model of
NOTE: The data are for expectations of year-over-year percent
Nominal and Real Bond yields,” Journal of Money, Credit and changes. The mean of Blue Chip (BC) survey responses and medians of
Banking, vol. 42 (September), pp. 143–78; Stefania D’Amico, the Survey of Professional Forecasters (SPF) and Survey of Primary
Don H. Kim, and Min Wei (2018), “Tips from TIPS: The Dealers (SPD) are shown. Longer-run expectations are 5-to-10-year
Informational Content of Treasury Inflation-Protected Security expectations for the BC survey and SPF. Gaps represent unreported
Prices,” Journal of Financial and Quantitative Analysis, vol. 53 forecast horizons, and dots represent the longer-run value of the series
(February), pp. 395–436; and Andrea Ajello, Luca Benzoni, that have a gap after 2023. The BC and SPF 2021:Q1 series end at 2.1
percent in the longer run, and the SPF 2021:Q2 and the SPD series end at
and Olena Chyruk (2020), “Core and ‘Crust’: Consumer Prices 2.0 percent.
and the Term Structure of Interest Rates,” Review of Financial SOURCE: Blue Chip Financial Forecasts; Federal Reserve Bank of
Studies, vol. 33 (August), pp. 3719–65. Philadelphia, SPF; Federal Reserve Bank of New York, SPD.
Rise in Inflation Expectations (continued)

distributions of future inflation derived from surveys 5 to 10 years picked up only slightly. Nevertheless,
provide information on how respondents’ views about the latest reading is above its pre-pandemic level and
the likelihood of various outcomes for inflation have stands close to levels last seen consistently in 2015
evolved. Since the turn of the year, the probability when this measure started drifting down and raised
distribution of PCE inflation for 2022 derived from concerns that households’ expectations might have
the Survey of Professional Forecasters suggests that slipped below the FOMC’s 2 percent longer-run goal.
the average respondent now appears to attach lower In the Survey of Consumer Expectations, conducted by
probabilities to outcomes of inflation below 2 percent, the Federal Reserve Bank of New york, the median of
and somewhat higher odds of inflation running above respondents’ expected inflation rate 3 years ahead also
3 percent, which suggests that respondents’ perceived increased sharply in May, the highest reading since the
upside risks to inflation in the near term have shifted up summer of 2013.
somewhat.4 The common inflation expectations (CIE) index
Finally, survey-based measures of households’ constructed by Federal Reserve Board staff—a series
inflation expectations have also moved up in recent that takes many measures of inflation expectations and
months. And, similarly to the other surveys, the inflation compensation and consolidates them into a
movements have been more pronounced in the near- to single indicator—has continued to edge up in recent
medium-term inflation expectations. In the University quarters, more than reversing the moderate decline
of Michigan Surveys of Consumers, households’ recorded in the middle of last year (figure D).5 Taking a
expectations for inflation over the next 12 months in somewhat longer view, the CIE has now also reversed
June were markedly higher than in February and well the net decline since 2014 and has brought the index
above the expectations for average inflation over the up to levels that are likely more consistent with the
next 5 to 10 years (figure C). Over the same period, the FOMC’s longer-term goal of 2 percent PCE inflation.
median value of inflation expectations over the next
D. Survey of Professional Forecasters inflation expectations
C. Survey measures of consumers’ inflation expectations and Index of Common Inflation Expectations
Monthly Percent Quarterly Percent
Michigan survey, 6 2.6

SPF, 6 to 10 years ahead
next 12 months
5
NY Fed survey, 2.4
3 years ahead
4
2.2
3
2.0
Michigan survey, 2 SPF, 10 years ahead
next 5 to 10 years
CIE, projected onto 10-year SPF 1.8
1
2005 2007 2009 2011 2013 2015 2017 2019 2021 2005 2007 2009 2011 2013 2015 2017 2019 2021
NOTE: The series are medians of the survey responses. The NY Fed NOTE: The Survey of Professional Forecasters (SPF) data begin in
data begin in June 2013. The Michigan survey data extend through June 2007:Q1 and extend through 2021:Q2.
2021. SOURCE: Federal Reserve Bank of Philadelphia, SPF; Federal Reserve
SOURCE: University of Michigan Surveys of Consumers; Federal Board, Index of Common Inflation Expectations (CIE).
Reserve Bank of New York, Survey of Consumer Expectations.
4. Of note, distributions of CPI inflation 5 to 10 years ahead 5. For more details, see Hie Joo Ahn and Chad
derived from the Federal Reserve Bank of New york’s Survey Fulton (2021), “Research Data Series: Index of Common
of Primary Dealers and Survey of Market Participants have Inflation Expectations,” FEDS Notes (Washington: Board
remained stable over the year, consistent with the stability of of Governors of the Federal Reserve System, March 5),
survey-based measures of longer-run inflation expectations. https://doi.org/10.17016/2380-7172.2873.
standards for high-credit-score borrowers 16. Consumer credit flows

(figure 17). Billions of dollars, monthly rate
The housing sector remains remarkably Student loans

Auto loans 20
strong Credit cards
Apr.
Residential investment surged following the 10
shutdown last spring and has remained at +

0_
a high level since then. Low mortgage rates Q1
have boosted demand, as have adaptations 10
to the pandemic, including working from
and spending more time at home. New 20
construction, home sales, and residential

improvements have all been well above pre- 2009 2011 2013 2015 2017 2019 2021
pandemic levels, and demand has outpaced NOTE: The data are seasonally adjusted by the Federal Reserve Board.
SOURCE: Federal Reserve Board, Statistical Release G.19, “Consumer
supply, as construction has been limited Credit.”
by material shortages and sales have been
constrained by low inventories (figures 18
and 19). This tension has fueled a sizable rise 17. Mortgage rates
in home prices and driven down the inventory Weekly Percent
of homes for sale to extraordinarily low levels
(figure 20). 5.0
4.5
Business investment has recovered from
its plunge last year and continues to rise 4.0
at a solid pace . . .
3.5
Solid business investment in the first half of
3.0
the year has been supported by the unwinding
of pandemic disruptions, accommodative 2.5
monetary policy and fiscal support, and
the strong business outlook. Investment in 2013 2015 2017 2019 2021
equipment and intangibles has led the rise NOTE: The data are contract rates on 30-year, fixed-rate conventional
home mortgage commitments and extend through July 1, 2021.
in investment, especially investment in high- SOURCE: Freddie Mac Primary Mortgage Market Survey.
technology equipment and software driven by
the shift to remote work and other changes
18. Private housing starts and permits
to business practices. Investment in structures
in the oil and gas sector also has risen in Monthly Millions of units, annual rate
recent quarters, spurred by a turnaround in 2.0

oil prices. In contrast, investment in structures 1.8
outside of the drilling and mining sector has 1.6
been subdued after falling sharply last year Single-family starts 1.4
(figure 21). 1.2
1.0
.8
. . . amid financing conditions that Single-family .6
permits
remain accommodative for nonfinancial .4
corporations Multifamily starts .2
0
Financing conditions for nonfinancial firms
2005 2007 2009 2011 2013 2015 2017 2019 2021
through capital markets have remained broadly
SOURCE: Census Bureau via Haver Analytics.
19. New and existing home sales accommodative since the start of the year
Millions, annual rate Millions, annual rate
and continued to be supported by historically
low interest rates. The gross issuance of
7.5
1.4 nonfinancial corporate bonds continued to
7.0
1.2
be solid during the first part of year and was
6.5
particularly strong in March for investment-
6.0 Existing home sales 1.0
grade firms (figure 22). Corporate bond yields
5.5
.8 have remained at historically low levels, and
5.0
4.5 .6 corporate bond spreads have narrowed to
4.0
very low levels, supported in part by signs
.4
3.5 of improvement in the credit quality of
3.0
New home sales .2 nonfinancial firms.
2007 2009 2011 2013 2015 2017 2019 2021
In contrast, net bank lending to businesses
NOTE: The data are monthly. New home sales include only
single-family sales. Existing home sales include single-family, condo, and has been subdued so far this year. For
co-op sales. commercial and industrial loans, increasing
SOURCE: For new home sales, Census Bureau; for existing home sales,
National Association of Realtors; all via Haver Analytics. new loan originations have been obscured
20. Real prices of existing single-family houses to some degree by balance reductions due
to forgiveness of loans under the Paycheck
Quarterly 2005:Q1 = 100
Protection Program (PPP). Commercial real
estate loans have remained little changed, held
120
down in part by weak growth in construction
Zillow index
110
and land development loans amid tighter
S&P/Case-Shiller 100 credit standards earlier in the year.
national index
90
For small businesses, privately financed lending
80
CoreLogic has climbed smartly since the turn of the year,
price index 70 as the PPP has increased access to credit.
60 Outside of the PPP, credit availability for
small businesses remains fairly tight, demand
2005 2007 2009 2011 2013 2015 2017 2019 2021 for such credit is weak, and default risk is still
NOTE: Series are deflated by the personal consumption expenditures elevated. Small business loan performance has
price index.
SOURCE: CoreLogic Home Price Index; Zillow; S&P/Case-Shiller U.S. improved, and the share of small businesses
National Home Price Index. The S&P/Case-Shiller index is a product of
S&P Dow Jones Indices LLC and/or its affiliates. (For Dow Jones
expecting to require additional financial
Indices licensing information, see the note on the Contents page.) assistance has moved down, though hotels and
21. Real business fixed investment restaurants report ongoing stress.
Billions of chained 2012 dollars Billions of chained 2012 dollars
Exports have partly recovered as imports
650 Equipment and 2,400
have continued to increase
intangible capital
600 2,200 U.S. exports have moved higher in recent
2,000 months but still remain below pre-pandemic
550
1,800 levels (figure 23). Despite the robust recovery
500
1,600
for goods exports, the overall contribution
450 to GDP from exports has been held down
1,400
400
by the continuing depressed level of service
1,200
Structures
exports given ongoing restraint in international
350 1,000 travel. In contrast to the relatively modest
2006 2009 2012 2015 2018 2021
recovery of exports, imports have soared since
NOTE: Business fixed investment is known as “private nonresidential
fixed investment” in the national income and product accounts. The data
are quarterly.
last summer, boosted by strong demand for 22. Selected components of net debt financing for
both immediate consumption and rebuilding nonfinancial businesses
inventories. High levels of imports have Billions of dollars, monthly rate
strained the ability of the international Commercial paper
logistics channel to deliver goods to U.S. Bonds
120
Bank loans
customers in a timely fashion. Given the recent Sum
strength of imports relative to the milder 80
Q1
recovery in exports, both the nominal trade
40
deficit and current account deficit, relative to
GDP, widened since 2019 (figure 24). +
0_
Federal fiscal actions provided substantial 40

support to economic activity while also
significantly raising the budget deficit 2007 2009 2011 2013 2015 2017 2019 2021
Federal fiscal policies enacted in response to SOURCE: Mergent Inc., Fixed Income Securities Database; S&P
Global, Leveraged Commentary & Data; DTCC Solutions LLC, an
the pandemic, most recently the American affiliate of the Depository Trust & Clearing Corporation. This
publication includes data licensed from DTCC Solutions LLC, an
Rescue Plan, continue to fuel the economic affiliate of the Depository Trust & Clearing Corporation. (For the
recovery now under way. Stimulus checks DTCC licensing disclaimer, see the note on the Contents page.)
have boosted most household incomes, and

supplemental unemployment insurance has 23. Real imports and exports of goods
supported households affected by job loss. and services
Increased grants-in-aid to state and local Quarterly Billions of chained 2012 dollars
governments and business programs have
3,750
supported aggregate demand as well. The
3,500
Congressional Budget Office estimates that Imports 3,250
pandemic-related fiscal policies enacted to 3,000
date will increase federal expenditures or 2,750
reduce federal revenues by over $5 trillion Exports 2,500
over 10 years, with much of the effect on the 2,250
deficit occurring in fiscal years 2020 and 2021.5 2,000
These discretionary fiscal measures, combined 1,750
with the automatic stabilizers—the reduction 1,500
in tax receipts and increase in transfers that 2007 2009 2011 2013 2015 2017 2019 2021
occur as a consequence of depressed economic SOURCE: Bureau of Economic Analysis via Haver Analytics.
activity—caused the federal deficit to surge
to 15 percent of nominal GDP in fiscal 2020 24. U.S. trade and current account balances
Quarterly Percent of nominal GDP

5. For more information, see Congressional
+
Budget Office (2020), The Effects of Pandemic- 0
_
Related Legislation on Output (Washington: CBO, 1
September), https://www.cbo.gov/publication/56537;
Congressional Budget Office (2020), “Summary Estimate 2
for Divisions M through FF; H.R. 133, Consolidated 3
Appropriations Act, 2021,” January 14, https://www.
Trade 4
cbo.gov/system/files/2021-01/PL_116-260_Summary.
pdf; and Congressional Budget Office (2021), “Estimated 5
Budgetary Effects of H.R. 1319, American Rescue 6
Plan Act of 2021,” March 10, https://www.cbo.gov/ Current account
7
publication/57056.
2003 2005 2007 2009 2011 2013 2015 2017 2019 2021
NOTE: GDP is gross domestic product.
25. Federal receipts and expenditures (figure 25). Federal debt held by the public
Monthly Percent change from year earlier
jumped to around 100 percent of nominal
GDP—the highest debt-to-GDP ratio since
70 1947—and is expected to rise further this fiscal
60
year (figure 26).6
50
40
Challenges to state and local government
30
Expenditures financing have been mitigated by federal aid
20
10
+
The pandemic pushed down state and local
0_ government tax collections and induced
Receipts
10 additional COVID-related expenses. In
20 response, federal policymakers provided a
2005 2007 2009 2011 2013 2015 2017 2019 2021 historic level of fiscal support to state and
NOTE: The data are 12-month moving sums. local governments, covering budget shortfalls
SOURCE: Office of Management and Budget via Haver Analytics. in aggregate, although some governments
continue to confront pandemic-related fiscal
stress. Moreover, the drag on state tax receipts
26. Federal government debt and net interest outlays from the pandemic is abating, as revenues have
Percent of nominal GDP Percent of nominal GDP
moved up smartly so far this year (figure 27).
Property tax receipts—the primary tax
120
4.0
Net interest outlays 110 source for local governments—have increased
3.5 on federal debt
100 steadily during the pandemic. State and
90
3.0
80
local government payrolls, though, have only
2.5
70 edged up from their lows at the onset of the
2.0 60 pandemic, and they remain 5 percent below
50
1.5
40 pre-pandemic levels, including notably lower
1.0 30 education employment (figure 28). Finally,
.5 Debt held by
the public
20
municipal bond market conditions continued
10
0
0 to be generally accommodative this year.
1901 1921 1941 1961 1981 2001 2021
Issuance has been robust, as yields remained
historically low and bond spreads relative to
NOTE: The data for net interest outlays are annual, begin in 1948, and
extend through 2021. Net interest outlays are the cost of servicing the Treasury securities have declined moderately
debt held by the public. Federal debt held by the public equals federal
debt less Treasury securities held in federal employee defined-benefit so far this year.
retirement accounts, evaluated at the end of the quarter. The data for
federal debt are annual from 1901 to 1951 and quarterly thereafter. GDP
is gross domestic product.
SOURCE: For GDP, Bureau of Economic Analysis via Haver Financial Developments
Analytics; for federal debt, Federal Reserve Board, Statistical Release
Z.1, “Financial Accounts of the United States.”
The path of the federal funds rate
expected to prevail over the next year
remains near zero
Market-based measures of the path that the
federal funds rate is expected to take over the
6. Even before accounting for the additional budget

effects from the most recent fiscal policy, the American
Rescue Plan, the CBO projected in February that the
debt-to-GDP ratio would rise in 2021. See Congressional
Budget Office (2021), The Budget and Economic Outlook:
2021 to 2031 (Washington: CBO, February), https://www.
cbo.gov/system/files/2021-02/56970-Outlook.pdf.
next few years remain below 0.25 percent until 27. State and local tax receipts
the fourth quarter of 2022, about two quarters Year-over-year percent change
earlier than in February (figure 29).7 The
shift in the path followed news of the rapid
15
deployment in the United States of highly
effective COVID-19 vaccines, the reopening of 10
Total state taxes
contact-intensive sectors of the economy, and
expectations that further support for aggregate 5
demand would be coming from fiscal policy. Property taxes +
0_
Survey-based measures of the expected path

5
of the policy rate shifted up somewhat since
the start of the year. According to the results
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
of two surveys that the Federal Reserve Bank
NOTE: State tax data are year-over-year percent changes of 12-month
of New York conducted in June—the Survey moving averages, begin in June 2012, extend through April 2021, and are
of Primary Dealers and the Survey of Market aggregated over all states except Wyoming, for which data are not
available. Revenues from Washington, DC, are also excluded. Data for
Participants—the median respondent of each March and April are missing for New Mexico, as this state has longer
reporting lags than others. Property tax data are year-over-year percent
survey views the most likely path of the federal changes of 4-quarter moving averages, begin in 2012:Q2, and are
funds rate as remaining in its current range of primarily collected by local governments.
SOURCE: State Tax and Economic Review, State and Local Finance
0 to ¼ percent until the third quarter of 2023, Initiative at Urban Institute; Census Bureau.
a quarter earlier than in March.8
28. State and local government payroll employment
Longer-term nominal Treasury yields were Monthly Millions
little changed . . .
Yields on nominal Treasury securities at longer 20.0
maturities were little changed, on net, since
mid-February (figure 30). Concurrently, near- 19.5
term uncertainty about longer-term interest

19.0
rates—as measured by volatility of near-term
swap options (swaptions) on 10-year swap 18.5
interest rates—remained roughly unchanged,
on net, since February. 18.0
. . . while spreads of other long-term debt 2005 2007 2009 2011 2013 2015 2017 2019 2021
to Treasury securities narrowed modestly NOTE: The data are seasonally adjusted and extend through June
on net 2021.
SOURCE: Bureau of Labor Statistics, National Compensation Survey
via Haver Analytics.
Across different categories of corporate credit,
bond yields are little changed since mid-
February and have remained near the lowest
levels of their historical distributions. Spreads
7. These measures are based on a straight read of

market quotes and are not adjusted for term premiums.
8. The results of the Survey of Primary Dealers and
the Survey of Market Participants are available on the
Federal Reserve Bank of New York’s website at https://
www.newyorkfed.org/markets/primarydealer_survey_
questions.html and https://www.newyorkfed.org/
markets/survey_market_participants, respectively.
29. Market-implied federal funds rate path of corporate bond yields over comparable-
Quarterly Percent
maturity Treasury securities have narrowed
modestly and stand somewhat below the
1.50 levels prevailing at the onset of the pandemic,
1.25
supported in part by signs of improvement in
the credit quality of nonfinancial firms.
1.00
.75 Since mid-February, yields on 30-year agency

July 6, 2021
.50
mortgage-backed securities—an important
February 19, 2021
factor entering into the pricing of home
.25
mortgages—were little changed, on net, while
0 those on comparable-maturity Treasury
securities increased a bit, leaving their spread
2021 2022 2023 2024 2025
modestly lower on net (figure 31). Municipal
NOTE: The federal funds rate path is implied by quotes on overnight
index swaps—a derivative contract tied to the effective federal funds rate. bond spreads over rates on longer-term
The implied path as of February 19, 2021, is compared with that as of
July 6, 2021. The path is estimated with a spline approach, assuming a
Treasury securities have declined moderately
term premium of 0 basis points. The February 19, 2021, path extends across credit categories since mid-February
through 2025:Q1 and the July 6, 2021, path through 2025:Q3.
SOURCE: Bloomberg; Federal Reserve Board staff estimates. and stand at the lower end of the historical
distribution, while municipal bond yields
30. Yields on nominal Treasury securities
across credit categories are at about their all-
Daily Percent time lowest historical levels.
5-year 4 Broad equity price indexes increased

moderately
10-year 3
Broad stock price indexes have continued to
2 rise since mid-February, as strong corporate
earnings, optimism about the pace of
1
2-year vaccinations, additional fiscal stimulus, and
0
signs of a faster pace of economic recovery
outweighed concerns about high valuations,
higher inflation, and prospects for the control
2011 2013 2015 2017 2019 2021
of the virus abroad (figure 32). Prices of
SOURCE: Department of the Treasury via Haver Analytics.
cyclical stocks, including those associated
31. Yield and spread on agency mortgage-backed with companies in the basic materials, energy,
securities
and industrial sectors, outperformed broad
Percent Basis points equity price indexes. Banks’ stock prices have
also risen notably, on net, as the improved
5 250 economic outlook and banks’ reports of
Yield
200
strong first-quarter earnings provided a
4 further boost to investor optimism regarding
150 the banking sector. Measures of realized and
3
100 option-implied stock price volatility for the
2 S&P 500 index—the 20-day realized volatility
50
Spread and the VIX, respectively—have declined
1 0 somewhat and are near their historical medians
(figure 33). (For a discussion of financial
2011 2013 2015 2017 2019 2021 stability issues, see the box “Developments
NOTE: The data are daily. Yield shown is for the Fannie Mae 30-year Related to Financial Stability.”)
current coupon, the coupon rate at which new mortgage-backed
securities would be priced at par, or face, value. Spread shown is to the
average of the 5-year and 10-year nominal Treasury yields.
SOURCE: Department of the Treasury; J.P. Morgan. Courtesy of J.P.
Morgan Chase & Co., Copyright 2021.
Markets for Treasury securities, mortgage- 32. Equity prices

backed securities, and corporate and Daily December 31, 2010 = 100
municipal bonds have functioned well . . .
350
Measures of market liquidity for Treasury
securities—such as measures of market 300
depth and bid-ask spreads—remained close 250

to pre-pandemic levels overall, particularly
S&P 500 index 200
for shorter-dated securities. However,
150
longer-dated Treasury securities and some
portions of the mortgage-backed securities Dow Jones bank index 100
market—notably those classes of securities 50
excluded from Federal Reserve open market
purchases—remain somewhat less liquid than 2011 2013 2015 2017 2019 2021
before the onset of the pandemic. Measures SOURCE: S&P Dow Jones Indices LLC via Bloomberg. (For Dow
Jones Indices licensing information, see the note on the Contents page.)
of market functioning in the corporate and
municipal bond markets remained stable since
February, with these markets functioning 33. S&P 500 volatility
roughly as they did in the months before the
pandemic. Bid-ask spreads across corporate Daily Percent
bond credit categories have been slightly 90

below pre-pandemic levels, and issuance of 80
corporate bonds in primary markets has been 70
solid. Municipal bond market liquidity—as 60
measured by round-trip transaction costs—has VIX

50
come back to near pre-pandemic levels. 40

30
. . . while short-term funding market 20

10
conditions remained stable Realized volatility
0
The effective federal funds rate (EFFR) and
2011 2013 2015 2017 2019 2021
other overnight unsecured rates have seen
NOTE: The VIX is a measure of implied volatility that represents the
some slight downward pressure relative to expected annualized change in the S&P 500 index over the following 30
the interest rate on excess reserves since days. For realized volatility, 5-minute S&P 500 returns are used in an
exponentially weighted moving average with 75 percent of weight
mid-February. The EFFR has nevertheless distributed over the past 20 days.
SOURCE: Cboe Volatility Index® (VIX®) via Bloomberg; Federal
been comparatively stable, while other short- Reserve Board staff estimates.
term interest rates registered more sizable
declines. Secured overnight rates traded lower,
with the Secured Overnight Financing Rate
trading at or just above the offering rate on
the overnight reverse repurchase agreement
(ON RRP) facility since mid-March. Ample
liquidity, arising from substantial increases in
reserves, has, in conjunction with paydowns
of Treasury bills, driven short-term interest
rates lower. Notwithstanding the very low
level of rates—including small volumes of
negative-rate trading in overnight repurchase
agreements on most days between mid-March
Developments Related to Financial Stability

While some financial vulnerabilities have increased B. Corporate bond spreads to similar-maturity
since February, the institutions at the core of the Treasury securities
financial system remain resilient. This discussion
Percentage points Percentage points
reviews vulnerabilities in the U.S. financial system.
The framework used by the Federal Reserve Board for 10 20
assessing the resilience of the U.S. financial system 9 18
focuses on financial vulnerabilities in four broad areas: 8 16
asset valuations, business and household debt, leverage 7 14
High-yield
in the financial sector, and funding risks. 6 12
Prices of risky assets have generally increased in the 5 10
first half of 2021. They have been buoyed by the rapid 4 8
deployment of highly effective COvID-19 vaccines in 3 6
the United States, the support provided by fiscal policy, 2 4
1 Triple-B 2
and increased investor risk appetite. Broad equity
0 0
market indexes have reached record highs in recent
months, and the ratio of prices to forecasts of earnings 1997 2001 2005 2009 2013 2017 2021
remains high relative to its historical distribution NOTE: The data are monthly and extend through June 2021. The
(figure A). Option-implied volatility has been declining triple-B series reflects the effective yield of the ICE Bank of America
Merrill Lynch (BofAML) 7-to-10-year triple-B U.S. Corporate Index
throughout the first half of 2021 and now stands (C4A4), and the high-yield series reflects the effective yield of the ICE
at about its historical median. yields on corporate BofAML 7-to-10-year U.S. Cash Pay High Yield Index (J4A0). Treasury
bonds and leveraged loans remain low. On balance, yields from the smoothed yield curve are estimated from off-the-run
securities.
indicators of commercial real estate (CRE) valuations SOURCE: ICE Data Indices, LLC, used with permission; Department
remain high; however, low transaction volumes— of the Treasury.
especially for distressed properties—may mask declines

in commercial property values. Supported by relatively the prices of a variety of crypto-assets also reflects in
low mortgage rates and shifting supply and demand part increased risk appetite. Long-term Treasury yields
dynamics brought about by the pandemic, house have risen since mid-February but remain low by
prices have increased at double-digit annual rates for historical standards. The high asset prices in part reflect
several months amid strong home sales. The surge in the continued low level of Treasury yields. However,
valuations for some assets are elevated relative to
A. Forward price-to-earnings ratio of S&P 500 firms historical norms even when using measures that
account for Treasury yields (figure B). Asset prices may
Monthly Ratio
be vulnerable to significant declines should investor
risk appetite fall, interest rates rise unexpectedly, or the
27 recovery stall.
24 vulnerabilities from both business and household
debt have declined through the first quarter of 2021,
21 reflecting a slower pace of business borrowing, an
18 improvement in business earnings, and government
programs that have supported business and household
15 incomes. Even so, some businesses and households
Median
12 remain under considerable strain. Business debt
outstanding changed little in the second half of 2020
9 and first quarter of 2021, although it remains high
relative to gross domestic product (figure C). Recovering
1991 1996 2001 2006 2011 2016 2021 earnings and the low level of interest rates have
NOTE: The data extend through June 2021. The series represents the generally aided businesses’ ability to carry debt. Some
aggregate forward price-to-earnings ratio of S&P 500 firms based on
expected earnings for 12 months ahead.
smaller businesses continue to face significant financial
SOURCE: Federal Reserve Board staff calculations using Refinitiv strains but have been supported by government
(formerly Thomson Reuters); Institutional Brokers’ Estimate System
estimates. (continued)
C. Nonfinancial business- and household-sector sizable inventories of Treasury securities. No notable

credit-to-GDP ratios effect on Treasury market functioning followed the
expiration in March 2021 of temporary changes to the
Ratio Ratio
supplementary leverage ratio, which were implemented
1.1 1.0
to ease strains in Treasury market intermediation in
1.0 the initial weeks of the pandemic. Most measures of
.9 hedge fund leverage increased in the second half of
.9
Household .8 2020 into the beginning of 2021 and are now above
.8
their historical averages. A few recent episodes have
.7 .7
highlighted the opacity of risky exposures and the
.6 .6 need for greater transparency at hedge funds and other
.5 leveraged financial entities that can transmit stress to
Nonfinancial business .5
.4 the financial system. The Financial Stability Oversight
.3 .4 Council has restarted its Hedge Fund Working Group to
improve data sharing, identify risks, and strengthen the
1981 1986 1991 1996 2001 2006 2011 2016 2021 financial system. Leverage at life insurance companies
NOTE: The data are quarterly. The shaded bars indicate periods of remains historically high as of the first quarter of
business recession as defined by the National Bureau of Economic
Research (NBER). As of the publication of this report, the NBER has 2021. Issuance volumes of non-agency securities
not declared an end to the current recession. GDP is gross domestic recovered somewhat in the first quarter of 2021,
product.
SOURCE: Federal Reserve Board staff calculations based on Bureau of although the recovery was uneven across asset classes.1
Economic Analysis, national income and product accounts, and Federal Collateralized loan obligation and asset-backed
Reserve Board, Statistical Release Z.1, “Financial Accounts of the
United States.” securities issuance was elevated, whereas non-agency
commercial mortgage-backed securities issuance
was weak.
programs, including the Paycheck Protection Program
Funding risks at domestic banks remained low,
(PPP). Debt owed by households remains at a moderate
as these banks rely only modestly on short-term
level relative to income. Household borrowing
wholesale funding and maintain sizable holdings of
continues to be heavily concentrated among borrowers
high-quality liquid assets. Liquidity ratios were well
with high credit scores. Moreover, government actions
above regulatory requirements at most large domestic
taken in response to the pandemic have provided
banks as of the first quarter of 2021. Assets under
significant support to household balance sheets and
management at prime and tax-exempt money market
incomes, with many households saving more and
funds (MMFs) have declined since the middle of 2020,
holding more liquid assets.
but vulnerabilities at these funds remain and call for
In the financial sector, leverage at banks and
structural fixes.
broker-dealers remained low, while leverage at hedge
The President’s Working Group on Financial
funds and life insurance companies continued to be
Markets released a report in December 2020 outlining
high. The common equity Tier 1 ratio for most banks
potential reforms to address risks from the MMF
increased, on net, over 2020 and into the first quarter
sector.2 Subsequently, the Securities and Exchange
of 2021. Measures of credit quality of bank loans have
Commission issued a request for comment on these
also improved in the first quarter of 2021. Moreover,
potential reforms and summarized its findings.3 If
the share of loan balances in loss-mitigation programs
at the largest banks has declined. The shares of credit (continued on next page)
cards and auto loans in loss mitigation have seen larger 1. Securitization can add leverage to the financial system
declines, while the shares of residential real estate, through its use of “special purpose entities,” which are
generally subject to rules such as risk retention that are less
commercial and industrial, and CRE loans remain stringent than banks’ regulatory capital requirements.
high. Nevertheless, some uncertainty remains about 2. See U.S. Department of the Treasury (2020), “President’s
the ability of borrowers in loss-mitigation programs to Working Group on Financial Markets Releases Report on
meet their obligations after those programs end and Money Market Funds,” press release, December 22, https://
government support runs out. Broker-dealer leverage home.treasury.gov/news/press-releases/sm1219.
3. See U.S. Securities and Exchange Commission (2021),
remained near historically low levels through the first “SEC Requests Comment on Potential Money Market Fund
quarter of 2021, although dealers continue to finance Reform Options Highlighted in President’s Working Group
Developments Related to Financial Stability (continued)

properly calibrated, some of these reforms—such The termination date of the Federal Reserve’s
as swing pricing, a minimum balance at risk, and Paycheck Protection Program Liquidity Facility, which
capital buffers—could significantly reduce the run risk currently has $90.6 billion in loans outstanding
associated with MMFs. Meanwhile, the Money Market funded to the PPP, was extended to July 30, 2021.
Mutual Fund Liquidity Facility and the Commercial The Federal Reserve has begun winding down the
Paper Funding Facility, which were deployed during the portfolio of the Secondary Market Corporate Credit
COvID-19 pandemic to backstop short-term funding Facility, an emergency lending facility that closed on
markets, expired at the end of March with no material December 31, 2020.4 The portfolio sales have been
effect on these markets. Bond and bank loan mutual gradual and orderly and have aimed to minimize the
funds benefited from net inflows but are exposed to potential for any adverse effect on market functioning
risks due to large holdings of illiquid assets. by taking into account daily liquidity and trading
A routine survey of market contacts on salient conditions for exchange-traded funds and corporate
shocks to financial stability highlights several important bonds. To date, these sales have had no notable effect
risks. A worsening of the global pandemic could stress on mutual fund flows or price effects in the market.
the financial systems in emerging markets and some The Federal Reserve also took actions to reduce
European countries. Further, if global interest rates were spillovers to the U.S. economy from foreign financial
to rise abruptly, some emerging market economies stresses. Temporary U.S. dollar liquidity swap lines
could experience additional fiscal strains. These risks, were established in March 2020, in addition to the
if realized, could interact with financial vulnerabilities preexisting standing lines, and have improved liquidity
and pose additional risks to the U.S. financial system. conditions in dollar funding markets in the United
States and abroad by providing foreign central banks
with the capacity to deliver U.S. dollar funding to
Developments Associated with Facilities
institutions in their jurisdictions during times of market
to Support the Economy during the
stress. The FIMA (Foreign and International Monetary
COVID-19 Crisis Authorities) Repo Facility has helped support the
In the immediate wake of the pandemic, the smooth functioning of the U.S. Treasury market by
Federal Reserve took forceful actions and established providing a temporary source of U.S. dollars to a
emergency lending facilities, with the approval of the broad range of countries, many of which do not have
Secretary of the Treasury as needed. These actions and swap line arrangements with the Federal Reserve. The
facilities supported the flow of credit to households Federal Reserve recently announced the extension of
and businesses and served as backstop measures that its temporary swap lines through December 31, 2021,
have given investors confidence that support would be which should help sustain improvements in global U.S.
available should conditions deteriorate substantially. dollar funding markets.
Most of the facilities established at the onset of the
pandemic expired at the end of December 2020, the
beginning of January 2021, or the end of March 2021.
These facilities expired with no notable effect on 4. See Board of Governors of the Federal Reserve
financial market functioning. System (2021), “Federal Reserve Board Announces Plans
to Begin Winding Down the Portfolio of the Secondary
Market Corporate Credit Facility,” press release, June 2,
Report,” press release, February 4, https://www.sec.gov/news/ https://www.federalreserve.gov/newsevents/pressreleases/
press-release/2021-25. monetary20210602a.htm.
and mid‑June—short-term funding markets

have functioned smoothly since February.
Money market funds increased

significantly their holdings of overnight
repurchase agreements
Since February, assets under management of
government money market funds (MMFs)
have gradually increased to an all-time high
of nearly $4 trillion amid the disbursement
of fiscal relief payments to individuals, states,
and municipalities, and as some banks have
reportedly taken steps to discourage additional
deposit inflows. Against the backdrop of a
34. Growth in total loans and leases
sizable decrease in outstanding Treasury bill
supply, government MMFs reduced their Monthly Percent
holdings of Treasury and agency securities

50
while increasing their holdings of overnight
40
repurchase agreements, including with the
Federal Reserve. This development led to 30
record levels of usage of the Federal Reserve’s 20
ON RRP facility in late May and June. 10

+
(See the box “Developments in the Federal 0
_
Reserve’s Balance Sheet and Money Markets” 10
in Part 2.)
20
Bank credit remained little changed, 2007 2009 2011 2013 2015 2017 2019 2021
while lending standards eased NOTE: The data are calculated as monthly annualized growth rates
and are seasonally and break adjusted.
Total loans and leases outstanding at SOURCE: Federal Reserve Board, Statistical Release H.8, “Assets and
Liabilities of Commercial Banks in the United States.”
commercial banks remained little changed
in the first half of the year (figure 34). The
April Senior Loan Officer Opinion Survey on
Bank Lending Practices, conducted by the 35. Profitability of bank holding companies
Federal Reserve, reported easier standards for
most business and household loans over the Percent, annual rate Percent, annual rate
first quarter of the year. Bank profitability 2.0 30

increased over the first quarter of 2021 1.5
Return on assets
(figure 35). Delinquency rates on bank loans 1.0

20
remain low but may increase later in the year, .5 10

as foreclosure moratoriums and payment +
0_
+
0_
forbearance programs are set to expire. .5 Return on equity
10
1.0
20
1.5
2.0 30
2005 2007 2009 2011 2013 2015 2017 2019 2021

NOTE: The data are quarterly and are seasonally adjusted.
SOURCE: Federal Reserve Board, Form FR Y-9C, Consolidated
Financial Statements for Bank Holding Companies.
36. Foreign real gross domestic product International Developments

Quarterly 2005 average = 100
The recovery abroad slowed in the first
160 half of the year . . .
150 A resurgence of COVID-19 cases late last
140 year led to substantial tightening in social-
130 distancing restrictions in many foreign
120 economies. Consequently, foreign GDP growth
110
slowed in the last quarter of 2020 and the first
quarter of 2021, as several advanced foreign
100
economies (AFEs) experienced contractions
90
in activity (figure 36). In most AFEs, the level
2005 2007 2009 2011 2013 2015 2017 2019 2021 of GDP in the first quarter remained below its
Note: Foreign gross domestic product is computed on a representative pre-pandemic peak. However, compared with
sample of 40 countries and aggregated using U.S. trade weights. last spring, many foreign economies exhibited
Source: Federal Reserve Bank of Dallas, Database of Global
Economic Indicators, “Real Gross Domestic Product.” greater resilience to public health restrictions,
37. Manufacturing output purchasing managers index in and their governments have continued to
selected foreign economies provide fiscal support. Recent available
Monthly Index
indicators suggest a pickup for AFEs in GDP
Euro area
growth in the second quarter of this year as
65
United Kingdom
60
vaccination rates increased and restrictions
Canada
China 55 were eased (figures 37 and 38).
50
Mexico 45 Although the situation in the AFEs appears
40
to be improving, conditions in emerging
35
30
market economies (EMEs) are more mixed,
25 partly reflecting differences in success in
20 containing COVID-19 outbreaks. Also, the
15 pace of vaccinations in many EMEs remains
2016 2017 2018 2019 2020 2021 slow due to supply shortages and other
NOTE: For the foreign manufacturing output purchasing managers logistical challenges. Some higher-income
index (PMI), values greater than (less than) 50 indicate better (worse)
business conditions, on average, for the participants surveyed relative to Asian economies, where infections have so far
conditions at the time of the previous survey.
SOURCE: IHS Markit, Global Sector PMI.
remained mostly under control, experienced
38. Services purchasing managers index in
surprisingly fast growth, boosted by increased
selected foreign economies export demand and a partial recovery in
domestic consumption. Most notably,
Monthly Index
the levels of GDP in China and in other
65 industrialized EMEs such as Taiwan—which
Euro area China 60
55
had managed to remain fairly insulated from
50 the virus but has seen outbreaks recently—are
United Kingdom 45 already roughly 8 percent above their pre-
40 pandemic levels (figure 39). Conversely, in
35
30
many Latin American countries and some
25 South and Southeast Asian economies,
20 infection outbreaks led to continuing or
15
increased public health restrictions and social
10
distancing. Reflecting these headwinds, recent
2016 2017 2018 2019 2020 2021 economic indicators suggest a decline in
NOTE: For the foreign services output purchasing managers index
(PMI), values greater than (less than) 50 indicate better (worse) business
conditions, on average, for the participants surveyed relative to
conditions at the time of the previous survey.
SOURCE: IHS Markit, Global Sector PMI.
growth in the second quarter of 2021 in many 39. Real gross domestic product in selected
of these EMEs following a sharp rebound in emerging market economies
the first quarter, with economic activity still Percent change from 2019:Q4
well below pre-pandemic levels.
10
8
Unemployment rates in Europe are about
6
1 percentage point higher in early 2021 than
4
before the pandemic (figure 40). This relatively
muted change is partly a result of wage subsidy 2
+
programs that kept workers on payrolls and 0
_
employment protection regulations that limited 2
rapid job destruction. Hours worked, however, 4
have fallen more substantially, suggesting that 6
the extent of economic slack in Europe may be South

Taiwan China Korea Indonesia Mexico Thailand
greater than indicated by the unemployment
rate. The unemployment trajectory in Canada NOTE: The data are for 2021:Q1.
SOURCE: For Taiwan, Directorate General of Budget, Accounting and
was more similar to that in the United States, Statistics; for China, National Bureau of Statistics of China; for South
Korea, Bank of Korea; for Indonesia, Badan Pusat Statistik; for Mexico,
with a rapid increase early last spring followed Instituto Nacional de Estadística y Geografía; for Thailand, Office of the
by a steep decline subsequently. National Economic and Social Development Board; all via Haver
Analytics.
. . . amid a pickup in inflation and

continued policy support 40. Unemployment rate in selected advanced economies
Inflation rates abroad have increased in recent Monthly Percent
months. In many AFEs, inflation readings
moved up since the beginning of the year after 16
substantial declines last year (figure 41). The 14

United States
rise in inflation was largely driven by base 12
effects due to low price levels in 2020 as well Euro area
10
as run-ups in energy prices. In some EMEs, Canada 8
currency depreciation and higher food prices 6
are also contributing to inflation pressures.
4
Even so, core inflation readings in many AFEs
United Kingdom Japan 2
still point to moderate underlying inflation
pressure, suggesting that the observed rise 2005 2007 2009 2011 2013 2015 2017 2019 2021
in inflation so far this year largely reflects NOTE: The data for the United Kingdom extend through March 2021
temporary factors. and are centered 3-month averages of monthly data. The data for the
United States extend through June 2021.
SOURCE: For the United Kingdom, Office for National Statistics; for
Japan, Ministry of Health, Labour and Welfare; for the euro area,
Monetary policy abroad remained Statistical Office of the European Communities; for Canada, Statistics
accommodative, as central banks focused Canada; for the United States, Bureau of Labor Statistics; all via Haver
Analytics.
on supporting growth and viewed the recent
rise in inflation as transitory. Market-implied
policy paths in many AFEs continue to
signal a period of monetary accommodation,
although paths in Canada and the United
Kingdom moved higher this year (figure 42).
The European Central Bank increased its
pace of asset purchases in the spring, and the
Bank of Japan’s yield curve control policy
41. Consumer price inflation in selected advanced proved effective in containing a rise in bond
foreign economies yields. By contrast, while still maintaining
Monthly 12-month percent change an accommodative policy rate, the Bank of
Canada announced plans to end liquidity
4 support programs and started slowing its pace
United Kingdom
3 of asset purchases. The Bank of England
Canada
also slowed its pace of asset purchases but
2
indicated that its policy stance remains
1 accommodative. Monetary policy in EMEs
Japan +
0
_ was generally accommodative as well, but
Euro area 1
some EME central banks—including in Brazil,
Russia, and Turkey—increased policy rates,
2
citing concerns about inflationary pressures.
2016 2017 2018 2019 2020 2021 The Bank of Mexico, while leaving its policy
NOTE: The data for the euro area incorporate the flash estimate for
rate unchanged, highlighted concerns about
June 2021. financial market volatility and past peso
SOURCE: For the United Kingdom, Office for National Statistics; for
Japan, Ministry of Internal Affairs and Communications; for the euro depreciation.
area, Statistical Office of the European Communities; for Canada,
Statistics Canada; all via Haver Analytics.
Improved outlook led to increases in
foreign yields and equity prices . . .
42. 24-month policy expectations for selected advanced Longer-term sovereign yields and market-
foreign economies
based inflation compensation measures
Weekly Basis points increased in some major advanced economies,
300
as the economic outlook brightened and
commodity prices rose (figure 43). Despite the
250
increase, market-based inflation compensation
200
in many AFEs remained below the inflation
150
target of their respective central banks.
Canada 100
Japanese yields were little changed due to the
United Kingdom 50
+ Bank of Japan’s yield curve control policy.
0_
Japan Equity markets in AFEs generally rose despite
50
Euro area the new wave of COVID-19 infections earlier
100
this year, as many economies proved resilient
2016 2017 2018 2019 2020 2021 to increased case numbers and lockdowns and
NOTE: The data are weekly averages of daily 24-month market-implied the vaccine rollout allowed gradual reopening
central bank policy rates. The 24-month policy rates are implied by
quotes on overnight index swaps tied to the policy rates. The data extend (figure 44).
through July 2, 2021.
SOURCE: Bloomberg; Federal Reserve Board staff estimations.
Equities in emerging markets were mixed.
Since the beginning of the year, equity prices
in some EMEs, including South Korea,
Taiwan, and Mexico, improved considerably,
but equity prices in other countries, including
China, underperformed (figure 45). Inflows
into dedicated EME investment funds slowed
this year but remained positive, and EME
bond spreads moved little so far this year
(figure 46).
. . . and the dollar remained little changed 45. Equity indexes for selected emerging market
economies
After depreciating sharply in late 2020, the
Weekly Week ending January 8, 2016 = 100
broad dollar index—a measure of the trade-
weighted value of the dollar against foreign 350
currencies—has changed little, on net, since
300
the beginning of the year. It has strengthened
somewhat recently, amid increases in medium- 250
Brazil Taiwan
term U.S. yields (figure 47). Among AFE 200
currencies, the dollar appreciated most against South Korea
150
the Japanese yen, as Japanese yields moved
least. Since the beginning of the year, the U.S. 100
China Mexico
dollar depreciated against the Canadian dollar, 50
which was buoyed by higher commodity prices
2016 2017 2018 2019 2020 2021
and signs of a stronger-than-expected recovery
in Canada (figure 48). NOTE: The data are weekly averages of daily data and extend through
July 2, 2021.
SOURCE: For China, Shanghai Composite Index; for Brazil, Bovespa
43. Nominal 10-year government bond yields in Index; for South Korea, Korean Composite Index; for Mexico, IPC
selected advanced economies Index; for Taiwan, TAIEX; all via Bloomberg.
Weekly Percent
46. Emerging market mutual fund flows and spreads

6
Basis points Billions of dollars
United Kingdom 5
Equity fund flows (right scale) Q1
4 100
United States 900 Bond fund flows (right scale)
3 EMBI+ (left scale) 75
Germany 600
2 50
300 25
Japan 1 + +
+ _0 _0
0
_
300 25
1 May
50
600 Apr.
2005 2007 2009 2011 2013 2015 2017 2019 2021 75
900 100
NOTE: The data are weekly averages of daily benchmark yields and
extend through July 2, 2021.
SOURCE: Bloomberg. 2007 2009 2011 2013 2015 2017 2019 2021
NOTE: The bond and equity fund flows data are semiannual sums of
44. Equity indexes for selected advanced economies weekly data from December 28, 2006, to December 30, 2020; a quarterly
sum of weekly data from December 31, 2020, to March 31, 2021; and
monthly sums of weekly data from April 1, 2021, to May 26, 2021. Weekly
Weekly Week ending January 8, 2016 = 100
data span Thursday through Wednesday, and the semiannual, quarterly,
and monthly values are sums over weekly data for weeks ending in that
220 half year, quarter, or month. The fund flows data exclude funds located in
China. The J.P. Morgan Emerging Markets Bond Index Plus (EMBI+)
200 data are weekly averages of daily data and extend through July 2, 2021.
The EMBI+ data exclude Venezuela.
180 SOURCE: For bond and equity fund flows, EPFR Global; for EMBI+,
J.P. Morgan Emerging Markets Bond Index Plus via Bloomberg.
United States 160
140
120
Euro area 100

United
Kingdom
Japan 80
2016 2017 2018 2019 2020 2021
NOTE: The data are weekly averages of daily data and extend through
July 2, 2021.
SOURCE: For euro area, Dow Jones Euro Stoxx Index; for Japan, Tokyo
Stock Price Index; for United Kingdom, Financial Times Stock Exchange
100 Index; for United States, S&P 500 Index; all via Bloomberg. (For Dow
Jones Indices licensing information, see the note on the Contents page.)
47. U.S. dollar exchange rate indexes 48. Exchange rate indexes for selected economies
Weekly Week ending January 8, 2016 = 100 Weekly Week ending January 8, 2016 = 100
Dollar appreciation 120 Dollar appreciation 150

EME dollar index 140
115 Chinese renminbi
130
Broad dollar index 110 Mexican peso 120
105 110
100 100
90
95
AFE dollar index Canadian dollar Japanese yen 80
90 70
2016 2017 2018 2019 2020 2021 2016 2017 2018 2019 2020 2021
NOTE: The data, which are in foreign currency units per dollar, are NOTE: The data, which are in foreign currency units per dollar, are
weekly averages of daily values of the broad dollar index, advanced weekly averages of daily data and extend through July 2, 2021. As
foreign economies (AFE) dollar index, and emerging market economies indicated by the leftmost arrow, increases in the data reflect U.S. dollar
(EME) dollar index. The weekly data extend through July 2, 2021. As appreciation and decreases reflect U.S. dollar depreciation.
indicated by the leftmost arrow, increases in the data reflect U.S. dollar SOURCE: Federal Reserve Board, Statistical Release H.10, “Foreign
appreciation and decreases reflect U.S. dollar depreciation. Exchange Rates.”
SOURCE: Federal Reserve Board, Statistical Release H.10, “Foreign
Exchange Rates.”
39
Part 2
Monetary Policy
The Federal Open Market Committee inflation expectations remain well anchored at
maintained the federal funds rate near 2 percent. The Committee expects to maintain
zero as it seeks to achieve maximum an accommodative stance of monetary policy
employment and inflation at the rate of until these outcomes are achieved.
2 percent over the longer run . . .
. . . and the Committee increased the
As part of its actions to ensure that monetary holdings of Treasury securities and agency
policy will continue to deliver powerful mortgage-backed securities in the System
support to the economy until the recovery Open Market Account
is complete, the Federal Open Market
Committee (FOMC) has maintained the In addition, the Federal Reserve has continued
target range for the federal funds rate at 0 to to expand its holdings of Treasury securities
¼ percent (figure 49). The Committee has by $80 billion per month and its holdings of
indicated that it expects it will be appropriate agency mortgage-backed securities (MBS) by
to maintain the target range for the federal $40 billion per month. These asset purchases
funds rate at 0 to ¼ percent until labor market help foster smooth market functioning and
conditions have reached levels consistent with accommodative financial conditions, thereby
the Committee’s assessments of maximum supporting the flow of credit to households
employment and inflation has risen to and businesses. The Committee’s current
2 percent and is on track to moderately guidance regarding asset purchases indicates
exceed 2 percent for some time. With that increases in the holdings of Treasury
inflation having run persistently below the securities and agency MBS in the System Open
Committee’s longer-run goal, the Committee Market Account will continue at least at this
will aim to achieve inflation moderately above pace until substantial further progress has
2 percent for some time so that inflation been made toward its maximum-employment
averages 2 percent over time and longer-term and price-stability goals since the Committee
49. Selected interest rates
Daily Percent
5
10-year Treasury rate
4
2
2-year Treasury rate
1
0
Target federal funds rate
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
NOTE: The 2-year and 10-year Treasury rates are the constant-maturity yields based on the most actively traded securities.
SOURCE: Department of the Treasury; Federal Reserve Board.
40 Part 2: Monetary Policy
adopted its asset purchase guidance last policymakers routinely consult prescriptions
December. In addition, the minutes of for the policy interest rate provided by various
the June 2021 FOMC meeting noted the monetary policy rules. These rule prescriptions
importance that policymakers attach to clear can provide useful benchmarks for the FOMC.
communications about the Committee’s Simple rules cannot capture the complexities
assessment of progress toward its longer-run of monetary policy, and many practical
goals and to providing these communications considerations make it undesirable for the
well in advance of the time when progress FOMC to adhere strictly to the prescriptions
can be judged substantial enough to warrant of any specific rule. However, some principles
a change in the pace of asset purchases.9 In associated with good monetary policy can be
coming meetings, the FOMC will continue illustrated by these policy rules (see the box
to assess the economy’s progress toward the “Monetary Policy Rules, the Effective Lower
Committee’s goals. Bound, and the Economic Recovery”). The
FOMC’s framework for conducting monetary
The FOMC is committed to using its full policy involves a systematic approach in
range of tools to promote maximum keeping with key principles of good monetary
employment and price stability policy but allows for more flexibility than is
Progress on vaccinations will likely continue implied by simple policy rules.
to reduce the effects of the public health crisis
The size of the Federal Reserve’s balance
on the economy, but risks to the economic
sheet continued to grow, reflecting
outlook remain. The Federal Reserve is
purchases of U.S. Treasury securities and
committed to using its full range of tools to
agency mortgage-backed securities
support the U.S. economy in this challenging
time, thereby promoting its maximum- The Federal Reserve’s balance sheet has grown
employment and price-stability goals. The to $8.1 trillion from $7.4 trillion at the end of
Committee will continue to monitor the January, reflecting continued asset purchases
implications of incoming information for the to help foster smooth market functioning and
economic outlook and is prepared to adjust accommodative financial conditions, thereby
the stance of monetary policy as appropriate if supporting the flow of credit to households
risks emerge that could impede the attainment and businesses (figure 50). The Federal
of the Committee’s goals. The Committee’s Reserve has continued rolling over at auction
assessments will continue to take into account all principal payments from its holdings
a wide range of information, including of Treasury securities. Principal payments
readings on public health, labor market received from agency MBS and agency debt
conditions, inflation pressures and inflation continue to be reinvested into agency MBS.
expectations, and financial and international After the March FOMC meeting, in light of
developments. the sustained smooth functioning of markets
for agency commercial mortgage-backed
In addition to considering a wide range of securities (CMBS), the Federal Reserve ended
economic and financial data and information regular purchases of agency CMBS.
gathered from business contacts and other
informed parties around the country, The increase in aggregate asset holdings on
the Federal Reserve’s balance sheet arising
from Treasury security and agency MBS
purchases has been offset in part by declines
9. The minutes for the June 2021 FOMC meeting in several other asset categories. Outstanding
are available on the Board’s website at https://www. balances at many of the Federal Reserve’s
federalreserve.gov/monetarypolicy/fomccalendars.htm. emergency liquidity and credit facilities
50. Federal Reserve assets and liabilities
Weekly Trillions of dollars
Other assets
8
Credit and liquidity facilities
Agency debt and mortgage-backed securities holdings 6
Treasury securities held outright 4
2
+
0
-
2
4
Federal Reserve notes in circulation
6
Deposits of depository institutions
Capital and other liabilities 8
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
NOTE: “Agency debt and mortgage-backed securities holdings” includes agency residential mortgage-backed securities and agency commercial
mortgage-backed securities. “Credit and liquidity facilities” consists of primary, secondary, and seasonal credit; term auction credit; central bank liquidity
swaps; support for Maiden Lane, Bear Stearns Companies, Inc., and AIG; and other credit and liquidity facilities, including the Primary Dealer Credit
Facility, the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Term
Asset-Backed Securities Loan Facility, the Primary and Secondary Market Corporate Credit Facilities, the Paycheck Protection Program Liquidity Facility,
the Municipal Liquidity Facility, and the Main Street Lending Program. “Other assets” includes repurchase agreements, FIMA (Foreign and International
Monetary Authorities) repurchase agreements, and unamortized premiums and discounts on securities held outright. “Capital and other liabilities” includes
reverse repurchase agreements, the U.S. Treasury General Account, and the U.S. Treasury Supplementary Financing Account. The data extend through June
30, 2021. The key identifies shaded areas in order from top to bottom.
SOURCE: Federal Reserve Board, Statistical Release H.4.1, “Factors Affecting Reserve Balances.”
have declined since the end of January, functioning. Draws on central bank liquidity
and most facilities have now expired.10 In swap lines have decreased further to near
June, the Federal Reserve Board announced zero, and usage of repurchase operations has
plans to begin winding down the portfolio remained at zero since February. In contrast,
of the Secondary Market Corporate Credit the Paycheck Protection Program Liquidity
Facility (SMCCF). The SMCCF proved very Facility has expanded to around $80 billion
important in restoring market functioning last since the end of January.
year, supporting the availability of credit for
large employers, and bolstering employment Reserves have increased significantly to around
through the COVID-19 pandemic. The $4 trillion, mostly because of asset purchases
winding down of the SMCCF portfolio and the large drawdown in the Treasury
has been gradual and orderly and has not General Account from around $1.6 trillion
produced any adverse effect on market in January to about $850 billion in June.
However, reserves have been relatively stable
more recently given a substantial increase in
10. A list of credit and liquidity facilities established the use of the overnight reverse repurchase
by the Federal Reserve in response to COVID-19
is available on the Board’s website at https://www.
agreement facility. (See the box “Developments
federalreserve.gov/funding-credit-liquidity-and-loan- in the Federal Reserve’s Balance Sheet and
facilities.htm. Money Markets.”)
Monetary Policy Rules, the Effective Lower Bound, and

the Economic Recovery
Simple interest rate rules relate a policy interest Policy Rules: Some Key Design Principles
rate, such as the federal funds rate, to a small number and Limitations
of other economic variables—typically including
In many stylized models of the economy, desirable
the deviation of inflation from its target value
economic outcomes can be achieved by following a
and a measure of resource slack in the economy.
monetary policy rule that incorporates key principles
Policymakers consult prescriptions of the policy interest
of good monetary policy. One such principle is that
rate derived from a variety of policy rules for guidance,
monetary policy should respond in a predictable way to
without mechanically following the prescriptions
changes in economic conditions, thus fostering public
of any particular rule. This discussion examines the
understanding of policymakers’ goals and strategy.
prescriptions of a number of interest rate rules. One
A second principle is that, to stabilize inflation, the
simplification these rules typically adopt is ignoring
policy rate should be adjusted over time in response
the effective lower bound (ELB) on interest rates, and
to persistent increases or decreases in inflation to an
many of the rules have prescribed negative values for
extent sufficient to ensure a return of inflation to the
the federal funds rate since the onset of the pandemic-
central bank’s longer-run objective.
driven recession.
Simple monetary policy rules also have important
Most rules analyzed in the research literature
limitations. As noted earlier, simple rules do not
respond to deviations—both positive and negative—
typically recognize that the ELB limits the extent to
of resource utilization from its trend level because
which the policy rate can be lowered to support the
they were informed by historical periods and
economy, which may impart a downward bias to both
economic models in which high resource utilization
employment and inflation. To mitigate the challenges
is accompanied by inflation pressure. By contrast, the
posed by the ELB and anchor longer-term inflation
Federal Open Market Committee’s (FOMC) Statement
expectations at 2 percent, the Committee indicates
on Longer-Run Goals and Monetary Policy Strategy
in its statement that it “seeks to achieve inflation that
indicates that policymakers would not respond to
averages 2 percent over time, and therefore judges
high employment unless it was accompanied by signs
that, following periods when inflation has been
of unwanted increases in inflation or the emergence
running persistently below 2 percent, appropriate
of other risks that could impede the attainment of
monetary policy will likely aim to achieve inflation
the Committee’s goals.1 Accordingly, this discussion
moderately above 2 percent for some time.”3 None of
examines—in addition to the prescriptions of a number
the simple rules analyzed in this discussion include
of commonly studied monetary policy rules—the
any mechanism to offset the downward bias in inflation
prescriptions of a modified simple rule that, all else
imposed by the ELB. As such, they do not reflect these
being equal, does not mechanically call for policy rate
important aspects of the FOMC’s monetary policy
increases as unemployment drops below its estimated
strategy.
longer-run level.2
(continued)
1. For a discussion of changes made to the statement,

see the box “The FOMC’s Revised Statement on Longer- the Decade Ahead: Implications for Monetary Policy,” an
Run Goals and Monetary Policy Strategy” in Board of economic policy symposium sponsored by the Federal Reserve
Governors of the Federal Reserve System (2021), Monetary Bank of Kansas City, held in Jackson Hole, Wyo. (via webcast),
Policy Report (Washington: Board of Governors, February), August 27, https://www.federalreserve.gov/newsevents/speech/
pp. 40–41, https://www.federalreserve.gov/monetarypolicy/ powell20200827a.htm.
files/20210219_mprfullreport.pdf. 3. The statement recognizes the ELB as an important
2. Other key features of the Committee’s monetary policy consideration in the conduct of monetary policy by indicating
strategy outlined in its statement, including the aim of having that “the federal funds rate is likely to be constrained by its
inflation average 2 percent over time to ensure that longer- effective lower bound more frequently than in the past.” In
term inflation expectations remain well anchored, are not part because of the proximity of interest rates to the ELB, the
incorporated in the simple rules analyzed in this discussion. Committee judges that downward risks to employment and
For a description of the revised statement, see Jerome H. inflation have increased. The Committee is prepared to use its
Powell (2020), “New Economic Challenges and the Fed’s full range of tools to achieve its maximum-employment and
Monetary Policy Review,” speech delivered at “Navigating price-stability goals.
Another limitation is that simple rules respond rules, figure A shows a “balanced approach (shortfalls)”
to only a small set of economic variables and thus rule, which represents one simple way to illustrate
necessarily abstract from many of the considerations the Committee’s focus on shortfalls from maximum
that the FOMC takes into account. For example, employment. All of the policy rules analyzed in this
a simple rule might respond to movements in a discussion embody the key principles of good monetary
specific labor market indicator, such as the overall policy previously noted as well as the important
unemployment rate. However, no single labor market limitations.
indicator can precisely capture the size of the shortfall All five rules feature the unemployment rate gap,
from maximum employment or identify when a strong measured as the difference between an estimate of
labor market can be sustained without putting undue the rate of unemployment in the longer run (utLR) and
upward pressure on inflation; many labor market the current unemployment rate; the first-difference
indicators must be assessed.4 Similarly, simple policy rule includes the change in the unemployment rate
rules that systematically call for increases in the policy gap rather than its level.7 All of the rules abstract
rate as slack in the labor market diminishes might from the uncertainty that surrounds estimates of the
fail to recognize the benefits of sustaining a strong unemployment rate gap. In addition, all of the rules
labor market.5 include the difference between inflation and the
Finally, simple rules for the policy rate do not FOMC’s longer-run objective of 2 percent.8 All but the
explicitly recognize that the monetary policy toolkit
(continued on next page)
includes other tools—notably, large-scale asset
purchases and forward guidance, which are especially
relevant when the policy rate is constrained by the ELB. adjusted Taylor (1993) rule was studied in David Reifschneider
and John C. Williams (2000), “Three Lessons for Monetary
(See the box “Developments in the Federal Reserve’s Policy in a Low-Inflation Era,” Journal of Money, Credit and
Balance Sheet and Money Markets.”) Banking, vol. 32 (November), pp. 936–66. The first-difference
rule is based on a rule suggested by Athanasios Orphanides
(2003), “Historical Monetary Policy Analysis and the Taylor
Policy Rules: Descriptions Rule,” Journal of Monetary Economics, vol. 50 (July),
pp. 983–1022. A review of policy rules is in John B. Taylor
Economists have analyzed many monetary policy and John C. Williams (2011), “Simple and Robust Rules for
rules, including the well-known Taylor (1993) rule, the Monetary Policy,” in Benjamin M. Friedman and Michael
“balanced approach” rule, the “adjusted Taylor (1993)” Woodford, eds., Handbook of Monetary Economics, vol. 3B
rule, and the “first difference” rule.6 In addition to these (Amsterdam: North-Holland), pp. 829–59. The same volume
of the Handbook of Monetary Economics also discusses
approaches other than policy rules for deriving policy rate
4. See Lael Brainard (2021), “How Should We Think prescriptions.
about Full Employment in the Federal Reserve’s Dual 7. The original Taylor (1993) rule represented slack in
Mandate?” speech delivered at the Ec10, Principles of resource utilization using an output gap (the difference
Economics, Lecture, Faculty of Arts and Sciences, Harvard between the current level of real gross domestic product
University, Cambridge, Mass. (via webcast), February 24, (GDP) and the level that GDP would be if the economy were
https://www.federalreserve.gov/newsevents/speech/ operating at maximum employment, measured in percent of
brainard20210224a.htm. the latter). The rules in figure A represent slack in resource
5. For examples of the benefits associated with strong utilization using the unemployment gap instead, because that
labor market conditions, see Fed Listens: Perspectives from gap better captures the FOMC’s statutory goal to promote
the Public, which summarizes the feedback received from maximum employment. Movements in these alternative
the community as part of the FOMC’s 2019–20 review of its measures of resource utilization are highly correlated. For
monetary policy strategy, tools, and communication practices more information, see the note below figure A.
and is available on the Board’s website at https://www. 8. None of these rules take into account historical inflation
federalreserve.gov/publications/files/fedlistens-report- performance. As such, these rules do not incorporate the aim
20200612.pdf. of achieving inflation that averages 2 percent over time as
6. The Taylor (1993) rule was suggested in John B. Taylor described in the FOMC’s Statement on Longer-Run Goals and
(1993), “Discretion versus Policy Rules in Practice,” Carnegie- Monetary Policy Strategy. In particular, that statement indicates
Rochester Conference Series on Public Policy, vol. 39 that “the Committee seeks to achieve inflation that averages
(December), pp. 195–214. The balanced-approach rule was 2 percent over time, and therefore judges that, following
analyzed in John B. Taylor (1999), “A Historical Analysis of periods when inflation has been running persistently below
Monetary Policy Rules,” in John B. Taylor, ed., Monetary Policy 2 percent, appropriate monetary policy will likely aim to
Rules (Chicago: University of Chicago Press), pp. 319–41. The achieve inflation moderately above 2 percent for some time.”
Monetary Policy Rules (continued)

A. Monetary policy rules
93 = + + 0.5( − )+( − )
Taylor (1993) rule
Balanced-approach rule = + + 0.5( − ) + 2( − )
Balanced-approach (shortfalls) rule S

= + + 0.5( − )+ 2 n {( − ) , 0}
93 93
Adjusted Taylor (1993) rule = { − , ELB}
First-difference rule = −1 + 0.5( − )+( − )−( −4 − −4)
Note: RtT93, RtBA, RtSBA, RtT93adj, and RtFD represent the values of the nominal federal funds rate prescribed by the Taylor
(1993), balanced-approach, balanced-approach (shortfalls), adjusted Taylor (1993), and first-difference rules, respectively.
Rt denotes the realized nominal federal funds rate for quarter t, πt is the 4-quarter price inflation for quarter t, ut is the
unemployment rate in quarter t, and rtLR is the level of the neutral real federal funds rate in the longer run that is expected to be
consistent with sustaining maximum employment and inflation at the Federal Open Market Committee’s 2 percent longer-run
objective, πLR. In addition, utLR is the rate of unemployment expected in the longer run. Zt is the cumulative sum of past
deviations of the federal funds rate from the prescriptions of the Taylor (1993) rule when that rule prescribes setting the federal
funds rate below an effective lower bound (ELB) of 12.5 basis points.
The Taylor (1993) rule and other policy rules are generally written in terms of the deviation of real output from its full
capacity level. In these equations, the output gap has been replaced with the gap between the rate of unemployment in the
longer run and its actual level (using a relationship known as Okun’s law) to represent the rules in terms of the unemployment
rate. The rules are implemented as responding to core personal consumption expenditures (PCE) inflation rather than to
headline PCE inflation because current and near-term core inflation rates tend to outperform headline inflation rates as
predictors of the medium-term behavior of headline inflation. Box note 6 provides references for the policy rules.
first-difference rule include an estimate of the neutral level. However, when the unemployment rate is below
real interest rate in the longer run (rtLR).9 that level, the balanced-approach (shortfalls) rule is
By construction, the balanced-approach (shortfalls) more accommodative than the balanced-approach rule
rule prescribes identical policy rates to those prescribed because it does not call for the policy rate to rise as the
by the balanced-approach rule at times when the unemployment rate drops further.
unemployment rate is above its estimated longer-run Unlike the other simple rules featured here, the
adjusted Taylor (1993) rule recognizes that the federal
funds rate cannot be reduced materially below
9. The neutral real interest rate in the longer run (rtLR) is the ELB. To make up for the cumulative shortfall in
the level of the real federal funds rate that is expected to be accommodation following a recession during which
consistent, in the longer run, with maximum employment
and stable inflation. Like utLR, rtLR is determined largely by the federal funds rate has fallen to its ELB, the adjusted
nonmonetary factors. The first-difference rule shown in Taylor (1993) rule prescribes delaying the return of the
figure A does not involve an estimate of rtLR. However, this rule policy rate to the (positive) levels prescribed by the
has its own shortcomings. For example, research suggests that standard Taylor (1993) rule until after the economy
this sort of rule often results in greater volatility in employment
and inflation relative to what would be obtained under the
begins to recover.
Taylor (1993) and balanced-approach rules. (continued)
B. Historical federal funds rate prescriptions from simple policy rules
Quarterly Percent
Taylor (1993) rule Balanced-approach rule

6
3
+
0_
3
Target federal funds rate Adjusted Taylor (1993) rule 6

Balanced-approach (shortfalls) rule
9
12
First-difference rule
15
18
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
NOTE: The rules use historical values of the federal funds rate, core personal consumption expenditures inflation, and the unemployment rate.
Quarterly projections of longer-run values for the federal funds rate and the unemployment rate are derived through interpolations of the biannual
projections from Blue Chip Economic Indicators. The longer-run value for inflation is taken as 2 percent.
SOURCE: Federal Reserve Bank of Philadelphia; Wolters Kluwer, Blue Chip Economic Indicators; Federal Reserve Board staff estimates.
Policy Rules: Prescriptions Regarding the recovery from the 2008–09 recession,
all of the simple rules shown here prescribed departure
Figure B shows historical prescriptions for the from the ELB well before the FOMC determined that
federal funds rate from the five rules. For each period, it was appropriate to raise the federal funds rate.
the figure reports the policy rates prescribed by The FOMC judged, on the basis of a wide range
the rules, taking as given the prevailing economic of information available at the time, that it was
conditions and estimates of utLR and rtLR at the time. appropriate to maintain a more accommodative path
The four rules whose formulas do not impose a lower of the federal funds rate than prescribed by these rules.
bound on the value of the federal funds rate imply Similarly, in the aftermath of the pandemic-driven
prescriptions of strongly negative policy rates in recession, the FOMC has been drawing from a broad
response to the pandemic-driven recession, well below range of indicators, analyses, and judgments in making
their respective troughs in the 2008–09 recession. The its determinations concerning the appropriate stance
prescriptions of the balanced-approach and balanced- for monetary policy, including readings on public
approach (shortfalls) rules are the most negative health, labor market conditions, inflation pressures and
because these rules call for relatively large responses inflation expectations, and financial and international
to resource slack. The negative prescriptions of the four developments. Under the FOMC’s flexible form of
rules show the extent to which policymakers’ ability to average inflation targeting, departure from the ELB
support the economy through reductions in the federal might be delayed relative to the simple rules by the
funds rate has been constrained by the ELB during desire to see inflation run moderately above 2 percent
the pandemic-driven recession—a constraint that for some time. While the simple rules are concerned
underlines the importance of the FOMC’s other policy with period-by-period inflation, the Committee aims
actions at the time, including forward guidance about for a sustained return of inflation to the 2 percent
the federal funds rate and large-scale asset purchases. objective.
Developments in the Federal Reserve’s Balance Sheet and

Money Markets
The Federal Reserve’s asset purchases since A. Federal Reserve assets
March 2020 have resulted in a large and rapid
Weekly Trillions of dollars
expansion of the Federal Reserve’s balance sheet.
Other assets
Federal Reserve assets totaled $4.2 trillion before the Loans
9
pandemic in January 2020 and have since grown to Central bank liquidity swaps 8
Repurchase agreements
$8.1 trillion (figure A). As net asset purchases proceed Agency debt and MBS
7
at a pace of $120 billion per month, the Federal Treasury securities 6
held outright
Reserve’s total liabilities increase correspondingly.1 5
Alongside this growth in aggregate liabilities arising 4
from asset purchases, there have also been large 3
compositional shifts between liabilities this year due to 2
factors that are not directly related to monetary policy 1
decisions (figure B). This discussion reviews recent
developments in the Federal Reserve’s balance sheet 2019 2020 2021
and associated changes in money market conditions. NOTE: The data extend through June 30, 2021. MBS is mortgage-backed
securities. The key identifies shaded areas in order from top to bottom.
Reserve balances are the largest liability on the SOURCE: Federal Reserve Board, Statistical Release H.4.1, “Factors Affecting
Reserve Balances.”
Federal Reserve’s balance sheet. Federal Reserve asset
purchases are settled by adding reserves to the banking
system; thus, the magnitude of asset purchases since B. Federal Reserve liabilities
the onset of the pandemic has brought reserves to Weekly Trillions of dollars
record levels.2 Reserves grew substantially earlier this Reverse repurchase agreements
Deposits of depository institutions (reserves) 9
year, from $3.1 trillion in early January to $3.9 trillion U.S. Treasury General Account 8
by early April. The level of reserves was, however, Other deposits
Capital and other liabilities 7
mostly stable from April to June 2021, reflecting
Federal Reserve notes
6
growth in other liabilities such as the overnight reverse
repurchase agreement (ON RRP) facility. 5
In light of the Federal Reserve’s role as fiscal agent 4
for the federal government, the U.S. Treasury holds 3
balances in the Treasury General Account (TGA), which 2
is another liability on the Federal Reserve’s balance 1
sheet. Changes in the TGA affect other Federal Reserve

2019 2020 2021
liabilities such as reserves and may have implications
NOTE: The data extend through June 30, 2021. “Capital and other liabilities”
for money market conditions. A reduction in the TGA includes Treasury contributions. The key identifies shaded areas in order from top to
increases the level of reserves, other things being equal, bottom.
SOURCE: Federal Reserve Board, Statistical Release H.4.1, “Factors Affecting
as the Treasury makes payments to individuals and Reserve Balances.”
businesses, which may increase private deposits in the
banking system. An important recent development in of pandemic-related fiscal stimulus measures through
this regard has been the substantial drawdown of the multiple rounds of federal legislation in 2020 and
TGA over the first half of 2021. With the enactment 2021, the Treasury’s balance in the TGA increased to
unprecedentedly high levels. As shown in figure C, as
the bulk of the most recent fiscal stimulus payments
1. For general explanations of several liabilities on the and tax refunds came to an end, the Treasury lowered
Federal Reserve’s balance sheet, see the box “The Role of
Liabilities in Determining the Size of the Federal Reserve’s its outstanding balance in the TGA from about
Balance Sheet” in Board of Governors of the Federal Reserve $1.6 trillion at the end of January 2020 to about
System (2019), Monetary Policy Report (Washington: Board of $850 billion by the end of June 2021. As the Treasury
Governors, February), pp. 41–43, https://www.federalreserve. sought to reduce its TGA balance, the Treasury also
gov/monetarypolicy/files/20190222_mprfullreport.pdf.
2. Reserves consist of deposits held at Federal Reserve
lowered its net issuance of Treasury bills substantially
Banks by depository institutions, such as commercial banks, in 2021.
savings banks, credit unions, thrift institutions, and U.S. The developments with reserves, the TGA, and
branches and agencies of foreign banks. Reserve balances Treasury bill issuance have affected money markets in
allow depository institutions to facilitate daily payment 2021. The recent large increases in reserves, resulting
flows, both in ordinary times and in stress scenarios, without
borrowing funds or selling assets. (continued)
C. Balance sheet comparison to serve its intended purpose of helping to provide a

(Billions of dollars) floor under short-term interest rates.4
6/30/2021 1/27/2021 Change The recent spike in facility usage reflected
Assets government money market funds turning to the facility
Total securities because of their large inflows. Certain banks reportedly
Treasury securities 5,183 4,766 417
Agency debt and MBS 2,322 2,072 250
sought to limit further growth of their reserve holdings
Net unamortized premiums 351 345 6 and of certain deposit liabilities. This phenomenon has
Repurchase agreements 0 1 −1 reportedly been important in recent months in driving
Loans and lending facilities additional inflows into money market funds in lieu of
PPPLF 91 47 44
bank deposits. Additionally, money market funds faced
Other loans and lending
facilities
72 91 −19 a relative lack of eligible short-term investments amid
Central bank liquidity swaps 1 10 −9 declining Treasury bill supply and reduced demand for
Other assets 58 74 −16 repo funding on the part of borrowers. In this situation,
Total assets 8,079 7,405 674
the ON RRP has provided money market funds with an
Liabilities and capital
additional investment option for these inflows despite
Federal Reserve notes 2,184 2,097 87
Reserves held by depository its offering rate being at 0 percent through mid-June.
3,512 3,229 283
institutions Other deposits, another liability on the Federal
Reverse repurchase agreements Reserve’s balance sheet, include deposits from
Foreign official and government-sponsored enterprises (GSEs) and
269 209 60
international accounts
Others 992 1 991 designated financial market utilities. These deposits
U.S. Treasury General Account 852 1,613 −761 roughly doubled since the beginning of 2021 to
Other deposits 230 203 27 $408 billion by mid-June, reflecting in part the
Other liabilities and capital 40 52 −12 same money market conditions that drove higher
Total liabilities and capital 8,079 7,405 674
ON RRP take-up.
Note: MBS is mortgage-backed securities. PPPLF is Paycheck Protection
Program Liquidity Facility. Following the June 2021 FOMC meeting, the
SourCe: Federal Reserve Board, Statistical Release H.4.1, “Factors Affecting Federal Reserve made a technical adjustment to its
Reserve Balances.”
administered rates: interest on excess reserves and
the ON RRP offering rate. Both rates were increased
from both asset purchases and reductions in the 5 basis points in order to keep the federal funds rate
TGA, have put broad but modest downward pressure well within the FOMC’s target range and to support
on short-term interest rates over recent months. smooth functioning of short-term funding markets. ON
Additionally, the net declines in Treasury bill supply RRP take-up rose substantially over subsequent days.
have put downward pressure on bill yields, which This increase reflected shifts to the ON RRP from GSEs’
similarly affected rates on close substitutes to bills such deposits at the Federal Reserve that do not earn interest
as repurchase agreements (repos) collateralized by as well as additional participation from money market
Treasury securities.3 funds. Following the technical adjustment, short-term
In this environment of ample liquidity and market interest rates adjusted slightly higher, largely
downward pressure on money market rates, the Federal in step with the increase in administered rates. The
Reserve’s ON RRP facility has seen a historically large effective federal funds rate rose to 10 basis points,
increase in usage since April 2021, primarily driven by while the Secured Overnight Financing Rate increased
greater participation from government money market to 5 basis points.
funds. Take-up at the ON RRP facility reached record
levels—nearly $1 trillion by the end of June 2021. In
light of the potential for expanded use of the facility
4. The ON RRP facility helps keep the effective federal
and given growth in money market fund assets under
funds rate from falling below the target range set by the
management in recent years, the Federal Open Market FOMC, as institutions with access to the ON RRP should be
Committee (FOMC) raised the per-counterparty cap unwilling to lend funds below the ON RRP’s pre-announced
on ON RRP participation to $80 billion per day from offering rate. The ON RRP facility is primarily used by
$30 billion at the March 2021 FOMC meeting. With nonbank counterparties such as money market funds. The rate
offered through the ON RRP facility complements the interest
the increase in usage, the ON RRP facility continued on excess reserves rate in supporting effective monetary policy
implementation. The Federal Reserve provides a similar service
3. For further information on recent money market to foreign official and international accounts (primarily foreign
developments, see the Financial Developments section in central banks), though these balances have not seen notable
Part 1 of this report. growth in recent months.
49
Part 3
Summary of Economic Projections
The following material was released after the conclusion of the June 15–16, 2021, meeting of the
Federal Open Market Committee.
In conjunction with the Federal Open Market The longer-run projections represent each
Committee (FOMC) meeting held on June 15– participant’s assessment of the value to which
16, 2021, meeting participants submitted their each variable would be expected to converge,
projections of the most likely outcomes for over time, under appropriate monetary
real gross domestic product (GDP) growth, policy and in the absence of further shocks
the unemployment rate, and inflation for each to the economy. “Appropriate monetary
year from 2021 to 2023 and over the longer policy” is defined as the future path of policy
run. Each participant’s projections were based that each participant deems most likely to
on information available at the time of the foster outcomes for economic activity and
meeting, together with her or his assessment inflation that best satisfy his or her individual
of appropriate monetary policy—including a interpretation of the statutory mandate to
path for the federal funds rate and its longer- promote maximum employment and price
run value—and assumptions about other stability.
factors likely to affect economic outcomes.
Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their
individual assumptions of projected appropriate monetary policy, June 2021
Percent
Median1 Central tendency2 Range3
Variable
Longer Longer Longer
2021 2022 2023 2021 2022 2023 2021 2022 2023
run run run
Change in real GDP. . . . . . 7.0 3.3 2.4 1.8 6.8–7.3 2.8–3.8 2.0–2.5 1.8–2.0 6.3–7.8 2.6–4.2 1.7–2.7 1.6–2.2
March projection. . . . . . 6.5 3.3 2.2 1.8 5.8–6.6 3.0–3.8 2.0–2.5 1.8–2.0 5.0–7.3 2.5–4.4 1.7–2.6 1.6–2.2
Unemployment rate. . . . . . 4.5 3.8 3.5 4.0 4.4–4.8 3.5–4.0 3.2–3.8 3.8–4.3 4.2–5.0 3.2–4.2 3.0–3.9 3.5–4.5
March projection. . . . . . 4.5 3.9 3.5 4.0 4.2–4.7 3.6–4.0 3.2–3.8 3.8–4.3 4.0–5.5 3.2–4.2 3.0–4.0 3.5–4.5
PCE inflation. . . . . . . . . . . . 3.4 2.1 2.2 2.0 3.1–3.5 1.9–2.3 2.0–2.2 2.0 3.0–3.9 1.6–2.5 1.9–2.3 2.0
March projection. . . . . . 2.4 2.0 2.1 2.0 2.2–2.4 1.8–2.1 2.0–2.2 2.0 2.1–2.6 1.8–2.3 1.9–2.3 2.0
Core PCE inflation4. . . . . . 3.0 2.1 2.1 2.9–3.1 1.9–2.3 2.0–2.2 2.7–3.3 1.7–2.5 2.0–2.3
March projection. . . . . . 1.9–2.5 1.8–2.3 1.9–2.3
2.2 2.0 2.1 2.0–2.3 1.9–2.1 2.0–2.2
Memo: Projected
appropriate policy path . .
Federal funds rate 0.1 0.1 0.6 2.5 0.1 0.1–0.4 0.1–1.1 2.3–2.5 0.1 0.1–0.6 0.1–1.6 2.0–3.0
March projection. . . . . . 0.1 0.1 0.1 2.5 0.1 0.1–0.4 0.1–0.9 2.3–2.5 0.1 0.1–0.6 0.1–1.1 2.0–3.0
Note: Projections of change in real gross domestic product (GDP) and projections for both measures of inflation are percent changes from the fourth quarter of the previous
year to the fourth quarter of the year indicated. PCE inflation and core PCE inflation are the percentage rates of change in, respectively, the price index for personal consump-
tion expenditures (PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civilian unemployment rate in the
fourth quarter of the year indicated. Each participant’s projections are based on his or her assessment of appropriate monetary policy. Longer-run projections represent each
participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the econ-
omy. The projections for the federal funds rate are the value of the midpoint of the projected appropriate target range for the federal funds rate or the projected appropriate
target level for the federal funds rate at the end of the specified calendar year or over the longer run. The March projections were made in conjunction with the meeting of the
Federal Open Market Committee on March 16–17, 2021. One participant did not submit longer-run projections for the change in real GDP, the unemployment rate, or the
federal funds rate in conjunction with the March 16–17, 2021, meeting, and one participant did not submit such projections in conjunction with the June 15–16, 2021, meeting.
1. For each period, the median is the middle projection when the projections are arranged from lowest to highest. When the number of projections is even, the median is the
average of the two middle projections.
2. The central tendency excludes the three highest and three lowest projections for each variable in each year.
3. The range for a variable in a given year includes all participants’ projections, from lowest to highest, for that variable in that year.
4. Longer-run projections for core PCE inflation are not collected.
50 Part 3: Summary of Economic Projections
Figure 1. Medians, central tendencies, and ranges of economic projections, 2021–23 and over the longer run
Percent
Change in real GDP
8
7
6
5
4
3
2
1
Actual 0
Median of projections
−1
−2
Central tendency of projections −3
Range of projections −4
2016 2017 2018 2019 2020 2021 2022 2023 Longer

run
Percent
Unemployment rate
8
7
6
5
4
3
2
1
2016 2017 2018 2019 2020 2021 2022 2023 Longer

run
Percent
PCE inflation
5
2016 2017 2018 2019 2020 2021 2022 2023 Longer

run
Percent
Core PCE inflation
5
2016 2017 2018 2019 2020 2021 2022 2023 Longer

run
Note: Definitions of variables and other explanations are in the notes to table 1. The data for the actual values of the
variables are annual.
Figure 2. FOMC participants’ assessments of appropriate monetary policy: Midpoint of target range or target
level for the federal funds rate
Percent
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2021 2022 2023 Longer run
Note: Each shaded circle indicates the value (rounded to the nearest 1/8 percentage point) of an individual participant’s
judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal
funds rate at the end of the specified calendar year or over the longer run. One participant did not submit longer-run projections
for the federal funds rate.
Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2021–23 and over the longer run
Number of participants
18
2021 June projections 16
March projections 14
12
10
8
6
4
2
1.4− 2.0− 2.6− 3.2− 3.8− 4.4− 5.0− 5.6− 6.2− 6.8− 7.4−
1.5 2.1 2.7 3.3 3.9 4.5 5.1 5.7 6.3 6.9 7.5
Percent range
18
2022 16
14
12
10
8
6
4
2
1.4− 2.0− 2.6− 3.2− 3.8− 4.4− 5.0− 5.6− 6.2− 6.8− 7.4−
1.5 2.1 2.7 3.3 3.9 4.5 5.1 5.7 6.3 6.9 7.5
Percent range
18
2023 16
14
12
10
8
6
4
2
1.4− 2.0− 2.6− 3.2− 3.8− 4.4− 5.0− 5.6− 6.2− 6.8− 7.4−
1.5 2.1 2.7 3.3 3.9 4.5 5.1 5.7 6.3 6.9 7.5
Percent range
18
Longer run 16
14
12
10
8
6
4
2
1.4− 2.0− 2.6− 3.2− 3.8− 4.4− 5.0− 5.6− 6.2− 6.8− 7.4−
1.5 2.1 2.7 3.3 3.9 4.5 5.1 5.7 6.3 6.9 7.5
Percent range
Note: Definitions of variables and other explanations are in the notes to table 1.
Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2021–23 and over the longer run
18
2021 June projections 16
March projections 14
12
10
8
6
4
2
2.4− 3.0− 3.6− 4.2− 4.8− 5.4−

2.5 3.1 3.7 4.3 4.9 5.5
Percent range
18
2022 16
14
12
10
8
6
4
2
2.4− 3.0− 3.6− 4.2− 4.8− 5.4−

2.5 3.1 3.7 4.3 4.9 5.5
Percent range
18
2023 16
14
12
10
8
6
4
2
2.4− 3.0− 3.6− 4.2− 4.8− 5.4−

2.5 3.1 3.7 4.3 4.9 5.5
Percent range
18
Longer run 16
14
12
10
8
6
4
2
2.4− 3.0− 3.6− 4.2− 4.8− 5.4−

2.5 3.1 3.7 4.3 4.9 5.5
Percent range
Figure 3.C. Distribution of participants’ projections for PCE inflation, 2021–23 and over the longer run
2021 June projections
March projections
18
16
14
12
10
8
6
4
2
1.3− 1.5− 1.7− 1.9− 2.1− 2.3− 2.5− 2.7− 2.9− 3.1− 3.3− 3.5− 3.7− 3.9−
1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 4.0
Percent range
2022
18
16
14
12
10
8
6
4
2
1.3− 1.5− 1.7− 1.9− 2.1− 2.3− 2.5− 2.7− 2.9− 3.1− 3.3− 3.5− 3.7− 3.9−
1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 4.0
Percent range
2023
18
16
14
12
10
8
6
4
2
1.3− 1.5− 1.7− 1.9− 2.1− 2.3− 2.5− 2.7− 2.9− 3.1− 3.3− 3.5− 3.7− 3.9−
1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 4.0
Percent range
Longer run
18
16
14
12
10
8
6
4
2
1.3− 1.5− 1.7− 1.9− 2.1− 2.3− 2.5− 2.7− 2.9− 3.1− 3.3− 3.5− 3.7− 3.9−
1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 4.0
Percent range
Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2021–23
March projections
18
16
14
12
10
8
6
4
2
1.5− 1.7− 1.9− 2.1− 2.3− 2.5− 2.7− 2.9− 3.1− 3.3−
1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4
Percent range
2022
18
16
14
12
10
8
6
4
2
1.5− 1.7− 1.9− 2.1− 2.3− 2.5− 2.7− 2.9− 3.1− 3.3−
1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4
Percent range
2023
18
16
14
12
10
8
6
4
2
1.5− 1.7− 1.9− 2.1− 2.3− 2.5− 2.7− 2.9− 3.1− 3.3−
1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4
Percent range
Figure 3.E. Distribution of participants’ judgments of the midpoint of the appropriate target range for the
federal funds rate or the appropriate target level for the federal funds rate, 2021–23 and over the longer run
March projections
18
16
14
12
10
8
6
4
2
0.13− 0.38− 0.63− 0.88− 1.13− 1.38− 1.63− 1.88− 2.13− 2.38− 2.63− 2.88−
0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12
Percent range
2022
18
16
14
12
10
8
6
4
2
0.13− 0.38− 0.63− 0.88− 1.13− 1.38− 1.63− 1.88− 2.13− 2.38− 2.63− 2.88−
0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12
Percent range
2023
18
16
14
12
10
8
6
4
2
0.13− 0.38− 0.63− 0.88− 1.13− 1.38− 1.63− 1.88− 2.13− 2.38− 2.63− 2.88−
0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12
Percent range
Longer run
18
16
14
12
10
8
6
4
2
0.13− 0.38− 0.63− 0.88− 1.13− 1.38− 1.63− 1.88− 2.13− 2.38− 2.63− 2.88−
0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12
Percent range
Figure 4.A. Uncertainty and risks in projections of GDP growth
Median projection and confidence interval based on historical forecast errors
Percent
Change in real GDP
Median of projections 8
70% confidence interval 7
6
5
4
3
2
Actual 1
0
−1
−2
−3
−4
2016 2017 2018 2019 2020 2021 2022 2023
FOMC participants’ assessments of uncertainty and risks around their economic projections
Number of participants Number of participants
Uncertainty about GDP growth Risks to GDP growth

June projections June projections
March projections March projections
18 18
16 16
14 14
12 12
10 10
8 8
6 6
4 4
2 2
Lower Broadly Higher Weighted to Broadly Weighted to
similar downside balanced upside
Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the percent
change in real gross domestic product (GDP) from the fourth quarter of the previous year to the fourth quarter of the year
indicated. The confidence interval around the median projected values is assumed to be symmetric and is based on root mean
squared errors of various private and government forecasts made over the previous 20 years; more information about these data
is available in table 2. Because current conditions may differ from those that prevailed, on average, over the previous 20 years,
the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC
participants’ current assessments of the uncertainty and risks around their projections; these current assessments are summa-
rized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as “broadly
similar” to the average levels of the past 20 years would view the width of the confidence interval shown in the historical fan
chart as largely consistent with their assessments of the uncertainty about their projections. Likewise, participants who judge
the risks to their projections as “broadly balanced” would view the confidence interval around their projections as approximate-
ly symmetric. For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.”
Figure 4.B. Uncertainty and risks in projections of the unemployment rate
Percent
Unemployment rate
Median of projections 8
70% confidence interval
7
6
5
Actual 4
3
2
1
2016 2017 2018 2019 2020 2021 2022 2023
Uncertainty about the unemployment rate Risks to the unemployment rate

18 18
16 16
14 14
12 12
10 10
8 8
6 6
4 4
2 2
Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the average
civilian unemployment rate in the fourth quarter of the year indicated. The confidence interval around the median projected
values is assumed to be symmetric and is based on root mean squared errors of various private and government forecasts made
over the previous 20 years; more information about these data is available in table 2. Because current conditions may differ from
those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the
basis of the historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty and risks
around their projections; these current assessments are summarized in the lower panels. Generally speaking, participants who
judge the uncertainty about their projections as “broadly similar” to the average levels of the past 20 years would view the
width of the confidence interval shown in the historical fan chart as largely consistent with their assessments of the uncertainty
about their projections. Likewise, participants who judge the risks to their projections as “broadly balanced” would view the
confidence interval around their projections as approximately symmetric. For definitions of uncertainty and risks in economic
projections, see the box “Forecast Uncertainty.”
Figure 4.C. Uncertainty and risks in projections of PCE inflation
Percent
PCE inflation
70% confidence interval
5
Actual 2
2016 2017 2018 2019 2020 2021 2022 2023
Uncertainty about PCE inflation Risks to PCE inflation

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

18 18
16 16
14 14
12 12
10 10
8 8
6 6
4 4
2 2
Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the percent
change in the price index for personal consumption expenditures (PCE) from the fourth quarter of the previous year to the
fourth quarter of the year indicated. The confidence interval around the median projected values is assumed to be symmetric
and is based on root mean squared errors of various private and government forecasts made over the previous 20 years; more
information about these data is available in table 2. Because current conditions may differ from those that prevailed, on average,
over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors
may not reflect FOMC participants’ current assessments of the uncertainty and risks around their projections; these current
assessments are summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their
projections as “broadly similar” to the average levels of the past 20 years would view the width of the confidence interval shown
in the historical fan chart as largely consistent with their assessments of the uncertainty about their projections. Likewise,
participants who judge the risks to their projections as “broadly balanced” would view the confidence interval around their
projections as approximately symmetric. For definitions of uncertainty and risks in economic projections, see the box “Forecast
Uncertainty.”
Figure 4.D. Diffusion indexes of participants’ uncertainty assessments

Diffusion index
Change in real GDP
1.00
0.75
0.50
0.25
0.00
−0.25
−0.50
−0.75
−1.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Diffusion index
Unemployment rate
1.00
0.75
0.50
0.25
0.00
−0.25
−0.50
−0.75
−1.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Diffusion index
PCE inflation
1.00
0.75
0.50
0.25
0.00
−0.25
−0.50
−0.75
−1.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Diffusion index
Core PCE inflation
1.00
0.75
0.50
0.25
0.00
−0.25
−0.50
−0.75
−1.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Note: For each SEP, participants provided responses to the question “Please indicate your judgment of the uncertainty
attached to your projections relative to the levels of uncertainty over the past 20 years.” Each point in the diffusion indexes
represents the number of participants who responded “Higher” minus the number who responded “Lower,” divided by the total
number of participants. Figure excludes March 2020 when no projections were submitted.
Figure 4.E. Diffusion indexes of participants’ risk weightings
Diffusion index
Change in real GDP
1.00
0.75
0.50
0.25
0.00
−0.25
−0.50
−0.75
−1.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Diffusion index
Unemployment rate
1.00
0.75
0.50
0.25
0.00
−0.25
−0.50
−0.75
−1.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Diffusion index
PCE inflation
1.00
0.75
0.50
0.25
0.00
−0.25
−0.50
−0.75
−1.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Diffusion index
Core PCE inflation
1.00
0.75
0.50
0.25
0.00
−0.25
−0.50
−0.75
−1.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Note: For each SEP, participants provided responses to the question “Please indicate your judgment of the risk weighting
around your projections.” Each point in the diffusion indexes represents the number of participants who responded “Weighted
to the Upside” minus the number who responded “Weighted to the Downside,” divided by the total number of participants.
Figure excludes March 2020 when no projections were submitted.
Figure 5. Uncertainty and risks in projections of the federal funds rate
Percent
Federal funds rate
Midpoint of target range

70% confidence interval*
4
Actual 1
2016 2017 2018 2019 2020 2021 2022 2023
Note: The blue and red lines are based on actual values and median projected values, respectively, of the Committee’s target
for the federal funds rate at the end of the year indicated. The actual values are the midpoint of the target range; the median
projected values are based on either the midpoint of the target range or the target level. The confidence interval around the
median projected values is based on root mean squared errors of various private and government forecasts made over the
previous 20 years. The confidence interval is not strictly consistent with the projections for the federal funds rate, primarily
because these projections are not forecasts of the likeliest outcomes for the federal funds rate, but rather projections of
participants’ individual assessments of appropriate monetary policy. Still, historical forecast errors provide a broad sense of the
uncertainty around the future path of the federal funds rate generated by the uncertainty about the macroeconomic variables as
well as additional adjustments to monetary policy that may be appropriate to onset the effects of shocks to the economy.
The confidence interval is assumed to be symmetric except when it is truncated at zero - the bottom of the lowest target range
for the federal funds rate that has been adopted in the past by the Committee. This truncation would not be intended to
indicate the likelihood of the use of negative interest rates to provide additional monetary policy accommodation if doing so
was judged appropriate. In such situations, the Committee could also employ other tools, including forward guidance and
large-scale asset purchases, to provide additional accommodation. Because current conditions may differ from those that
prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the
historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty and risks around their
projections.
* The confidence interval is derived from forecasts of the average level of short-term interest rates in the fourth quarter of the
year indicated; more information about these data is available in table 2. The shaded area encompasses less than a 70 percent
confidence interval if the confidence interval has been truncated at zero.
Table 2. Average historical projection error ranges

Percentage points
Variable 2021 2022 2023
Change in real GDP1. . . . . . . ±1.5 ±2.0 ±2.0
Unemployment rate . . . . . . .
1
±0.9 ±1.4 ±1.8
Total consumer prices2. . . . . ±0.8 ±1.0 ±1.0
Short-term interest rates3. . . ±0.7 ±2.0 ±2.2
Note: Error ranges shown are measured as plus or minus the root mean squared
error of projections for 2001 through 2020 that were released in the summer by
various private and government forecasters. As described in the box “Forecast
Uncertainty,” under certain assumptions, there is about a 70 percent probability
that actual outcomes for real GDP, unemployment, consumer prices, and the
federal funds rate will be in ranges implied by the average size of projection errors
made in the past. For more information, see David Reifschneider and Peter Tulip
(2017), “Gauging the Uncertainty of the Economic Outlook Using Historical
Forecasting Errors: The Federal Reserve’s Approach,” Finance and Economics
Discussion Series 2017-020 (Washington: Board of Governors of the Federal
Reserve System, February), https://dx.doi.org/10.17016/FEDS.2017.020.
1. Definitions of variables are in the general note to table 1.
2. Measure is the overall consumer price index, the price measure that has been
most widely used in government and private economic forecasts. Projections are
percent changes on a fourth quarter to fourth quarter basis.
3. For Federal Reserve staff forecasts, measure is the federal funds rate. For
other forecasts, measure is the rate on 3-month Treasury bills. Projection errors
are calculated using average levels, in percent, in the fourth quarter.
Forecast Uncertainty
The economic projections provided by the members reported in table 2 would imply a probability of about
of the Board of Governors and the presidents of 70 percent that actual GDP would expand within a
the Federal Reserve Banks inform discussions of range of 1.5 to 4.5 percent in the current year and
monetary policy among policymakers and can aid 1.0 to 5.0 percent in the second and third years. The
public understanding of the basis for policy actions. corresponding 70 percent confidence intervals for
Considerable uncertainty attends these projections, overall inflation would be 1.2 to 2.8 percent in the
however. The economic and statistical models and current year and 1.0 to 3.0 percent in the second and
relationships used to help produce economic forecasts third years. Figures 4.A through 4.C illustrate these
are necessarily imperfect descriptions of the real world, confidence bounds in “fan charts” that are symmetric
and the future path of the economy can be affected and centered on the medians of FOMC participants’
by myriad unforeseen developments and events. Thus, projections for GDP growth, the unemployment rate,
in setting the stance of monetary policy, participants and inflation. However, in some instances, the risks
consider not only what appears to be the most likely around the projections may not be symmetric. In
economic outcome as embodied in their projections, particular, the unemployment rate cannot be negative;
but also the range of alternative possibilities, the furthermore, the risks around a particular projection
likelihood of their occurring, and the potential costs to might be tilted to either the upside or the downside,
the economy should they occur. in which case the corresponding fan chart would
Table 2 summarizes the average historical accuracy be asymmetrically positioned around the median
of a range of forecasts, including those reported in projection.
past Monetary Policy Reports and those prepared Because current conditions may differ from those
by the Federal Reserve Board’s staff in advance of that prevailed, on average, over history, participants
meetings of the Federal Open Market Committee provide judgments as to whether the uncertainty
(FOMC). The projection error ranges shown in the attached to their projections of each economic variable
table illustrate the considerable uncertainty associated is greater than, smaller than, or broadly similar to
with economic forecasts. For example, suppose a typical levels of forecast uncertainty seen in the past
participant projects that real gross domestic product 20 years, as presented in table 2 and reflected in the
(GDP) and total consumer prices will rise steadily at widths of the confidence intervals shown in the top
annual rates of, respectively, 3 percent and 2 percent. panels of figures 4.A through 4.C. Participants’ current
If the uncertainty attending those projections is similar assessments of the uncertainty surrounding their
to that experienced in the past and the risks around projections are summarized in the bottom-left panels
the projections are broadly balanced, the numbers (continued)
of those figures. Participants also provide judgments as year basis. However, the forecast errors should provide
to whether the risks to their projections are weighted a sense of the uncertainty around the future path of
to the upside, are weighted to the downside, or the federal funds rate generated by the uncertainty
are broadly balanced. That is, while the symmetric about the macroeconomic variables as well as
historical fan charts shown in the top panels of figures additional adjustments to monetary policy that would
4.A through 4.C imply that the risks to participants’ be appropriate to offset the effects of shocks to the
projections are balanced, participants may judge that economy.
there is a greater risk that a given variable will be above If at some point in the future the confidence interval
rather than below their projections. These judgments around the federal funds rate were to extend below
are summarized in the lower-right panels of figures 4.A zero, it would be truncated at zero for purposes of
through 4.C. the fan chart shown in figure 5; zero is the bottom of
As with real activity and inflation, the outlook the lowest target range for the federal funds rate that
for the future path of the federal funds rate is subject has been adopted by the Committee in the past. This
to considerable uncertainty. This uncertainty arises approach to the construction of the federal funds rate
primarily because each participant’s assessment of fan chart would be merely a convention; it would
the appropriate stance of monetary policy depends not have any implications for possible future policy
importantly on the evolution of real activity and decisions regarding the use of negative interest rates to
inflation over time. If economic conditions evolve provide additional monetary policy accommodation
in an unexpected manner, then assessments of the if doing so were appropriate. In such situations, the
appropriate setting of the federal funds rate would Committee could also employ other tools, including
change from that point forward. The final line in forward guidance and asset purchases, to provide
table 2 shows the error ranges for forecasts of short- additional accommodation.
term interest rates. They suggest that the historical While figures 4.A through 4.C provide information
confidence intervals associated with projections of on the uncertainty around the economic projections,
the federal funds rate are quite wide. It should be figure 1 provides information on the range of views
noted, however, that these confidence intervals are not across FOMC participants. A comparison of figure 1
strictly consistent with the projections for the federal with figures 4.A through 4.C shows that the dispersion
funds rate, as these projections are not forecasts of of the projections across participants is much smaller
the most likely quarterly outcomes but rather are than the average forecast errors over the past 20 years.
projections of participants’ individual assessments of
appropriate monetary policy and are on an end-of-
67
Abbreviations
AFE advanced foreign economy
CBO Congressional Budget Office
CIE common inflation expectations
CMBS commercial mortgage-backed securities
COVID-19 coronavirus disease 2019
CPI consumer price index
CPS Current Population Survey
CRE commercial real estate
EFFR effective federal funds rate
ELB effective lower bound
EME emerging market economy
EPOP ratio employment-to-population ratio
FIMA Foreign and International Monetary Authorities
FOMC Federal Open Market Committee; also, the Committee
FPUC Federal Pandemic Unemployment Compensation
GDP gross domestic product
LFPR labor force participation rate
MBS mortgage-backed securities
MMF money market fund
ON RRP overnight reverse repurchase agreement
OPEC Organization of the Petroleum Exporting Countries
PCE personal consumption expenditures
PEUC Pandemic Emergency Unemployment Compensation
PPP Paycheck Protection Program
PUA Pandemic Unemployment Assistance
repo repurchase agreement
SMCCF Secondary Market Corporate Credit Facility
S&P Standard & Poor’s
TGA Treasury General Account
TIPS Treasury Inflation-Protected Securities
UI unemployment insurance
VIX implied volatility for the S&P 500 index
For use at 11:00 a.m. EDT
July 9, 2021
Monetary Policy Report

July 9, 2021
Board of Governors of the Federal Reserve System

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For use at 11:00 a.m.

Monetary Policy Report

Board of Governors of the Federal Reserve System

Board of Governors of the

Washington, D.C., July 9, 2021

The President of the Senate

Jerome H. Powell, Chair

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

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

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

Financial conditions. Since mid-February, quarter, but structural vulnerabilities persist at

Monthly Millions of jobs

and hospitality sector, where the largest 130

A brisk increase in labor demand 8

outpaced the return of labor supply . . . 6

consuming process. In addition, enhanced .9

intensity of their job search. Faced with a .3

4. Labor force participation rate and . . . which was restrained by ongoing

1. Since the beginning of the pandemic, some

. . . especially for some groups that have

Wages have risen sharply as the economy

6. Unemployment rate, by race and ethnicity

2005 2007 2009 2011 2013 2015 2017 2019 2021

The Uneven Recovery in Labor Force Participation

decomposes the decline in the EPOP ratio into the

Uneven Recovery (continued)

despite being held down in those months 4

8 percent through the first quarter, bolstered

objective of 2 percent (figure 8). The closely 4.0

increases for goods have been concentrated

Survey-reported inflation expectations

Recent Inflation Developments

increased markedly, reaching 3.9 percent in May 30 7

Recent Inflation Developments (continued)

B1. Motor vehicles B2. Durables excluding motor vehicles

B3. Airline fares B4. Hotel accommodations

Note: Trend is calculated from February 2017 to February 2020.

Supply Chain Bottlenecks in U.S. Manufacturing and Trade

Supply Chain Bottlenecks (continued)

Daily Ships Monthly Millions of TEUs

inflation compensation—including inflation

Gross domestic product surged in the

. . . supported by rising personal income, 13. Indexes of consumer sentiment

The marked increase in personal consumption 110

stock market wealth, low interest rates, and 80

just before the pandemic. Delinquency rates 36

available to high-credit-score borrowers who 16

meet standard conforming loan criteria but 12

Assessing the Recent Rise in Inflation Expectations

SPD June 2021 3.5

Rise in Inflation Expectations (continued)

Monthly Percent Quarterly Percent

Michigan survey, 6 2.6

standards for high-credit-score borrowers 16. Consumer credit flows

The housing sector remains remarkably Student loans

Residential investment surged following the 10

shutdown last spring and has remained at +

construction, home sales, and residential