Monetary Policy Report, February 19, 2021

Board of Governors of the Federal Reserve System

For use at 11:00 a.m. EST

February 19, 2021

Monetary Policy rePort

February 19, 2021

Letter of transmittaL

B  G  

F R S

Washington, D.C., February 19, 2021

T P   S

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

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

section 2B of the Federal Reserve Act.

Sincerely,

Jerome H. Powell, 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 rmly committed to fullling its statutory mandate from

the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The

Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity

facilitates well-informed decisionmaking by households and businesses, reduces economic and nancial

uncertainty, increases the eectiveness of monetary policy, and enhances transparency and accountability,

which are essential in a democratic society.

Employment, ination, and long-term interest rates uctuate over time in response to economic and nancial

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 eective lower bound

more frequently than in the past. Owing in part to the proximity of interest rates to the eective lower bound,

the Committee judges that downward risks to employment and ination 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 aect the structure and dynamics of the

labor market. Consequently, it would not be appropriate to specify a xed goal for employment; rather, the

Committee’s policy decisions must be informed by assessments of the 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 ination rate over the longer run is primarily determined by monetary policy, and hence the Committee

has the ability to specify a longer-run goal for ination. The Committee rearms its judgment that ination

at the rate of 2 percent, as measured by the annual change in the price index for personal consumption

expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate. The

Committee judges that longer-term ination 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 signicant economic disturbances. In order to anchor longer-term ination

expectations at this level, the Committee seeks to achieve ination that averages 2 percent over time, and

therefore judges that, following periods when ination has been running persistently below 2 percent,

appropriate monetary policy will likely aim to achieve ination moderately above 2 percent for some time.

Monetary policy actions tend to inuence 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 ination from its longer-run goal. Moreover, sustainably

achieving maximum employment and price stability depends on a stable nancial system. Therefore, the

Committee’s policy decisions reect its longer-run goals, its medium-term outlook, and its assessments

of the balance of risks, including risks to the nancial system that could impede the attainment of the

Committee’s goals.

The Committee’s employment and ination 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 ination deviations and the potentially dierent time horizons over which

employment and ination are projected to return to levels judged consistent with its mandate.

The Committee intends to 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

note: This report reects information that was publicly available as of noon EST on February 17, 2021.

Unless otherwise stated, the time series in the gures extend through, for daily data, February16, 2021; for monthly

data, January2021; and, for quarterly data, 2020:Q4. In bar charts, except as noted, the change for a given period is

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

For gures 15, 33, and 44, note that the S&P/Case-Shiller U.S. National Home Price Index, the S&P 500 Index, and

the Dow Jones Bank Index are products of S&P Dow Jones Indices LLC and/or its afliates and have been licensed for

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 afliates nor their third party licensors make any representation or warranty, express or implied, as to

the ability of any index to accurately represent the asset class or market sector that it purports to represent, and neither

S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their afliates nor their third party licensors shall have

any liability for any errors, omissions, or interruptions of any index or the data included therein.

For gure22, neither DTCC Solutions LLC nor any of its afliates 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 afliates be

liable for any direct, indirect, special, or consequential damages, costs, expenses, legal fees, or losses (including lost

income or lost prot, trading losses, and opportunity costs) in connection with this publication.

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

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

Monetary Policy ........................................................... 2

Special Topics ............................................................. 3

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

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

Financial Developments .................................................... 26

International Developments ................................................. 32

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

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

Abbreviations ...........................................................67

List of Boxes

Monitoring Economic Activity with Nontraditional High-Frequency Indicators ............ 7

Disparities in Job Loss during the Pandemic ..................................... 12

Developments Related to Financial Stability ..................................... 30

The FOMC’s Revised Statement on Longer-Run Goals and Monetary Policy Strategy ...... 40

Monetary Policy Rules and Shortfalls from Maximum Employment .................... 45

Forecast Uncertainty ....................................................... 64

summary

The COVID-19 pandemic continues to

weigh heavily on economic activity and labor

markets in the United States and around

the world, even as the ongoing vaccination

campaigns oer hope for a return to more

normal conditions later this year. While

unprecedented scal and monetary stimulus

and a relaxation of rigorous social-distancing

restrictions supported a rapid rebound in the

U.S. labor market last summer, the pace of

gains has slowed and employment remains

well below pre-pandemic levels. In addition,

weak aggregate demand and low oil prices

have held down consumer price ination. In

this challenging environment, the Federal

Open Market Committee (FOMC) has held

its policy rate near zero and has continued

to purchase Treasury securities and agency

mortgage-backed securities to support the

economic recovery. These measures, along

with the Committee’s strong guidance on

interest rates and the balance sheet, will ensure

that monetary policy will continue to deliver

powerful support to the economy until the

recovery is complete.

Economic and Financial

Developments

Economic activity and the labor market. The

initial wave of COVID-19 infections led to a

historic contraction in economic activity as

a result of both mandatory restrictions and

voluntary changes in behavior by households

and businesses. The level of gross domestic

product (GDP) fell a cumulative 10percent

over the rst half of 2020, and the measured

unemployment rate spiked to a post–World

War II high of 14.8percent in April. As

mandatory restrictions were subsequently

relaxed and households and rms adapted

to pandemic conditions, many sectors of the

economy recovered rapidly and unemployment

fell back. Momentum slowed substantially

in the late fall and early winter, however, as

spending on many services contracted again

amid a worsening of the pandemic. All told,

GDP is currently estimated to have declined

2.5percent over the four quarters of last

year and payroll employment in January was

almost 10million jobs below pre-pandemic

levels, while the unemployment rate remained

elevated at 6.3percent and the labor force

participation rate was severely depressed.

Job losses have been most severe and

unemployment remains particularly elevated

among Hispanics, African Americans, and

other minority groups as well as those who

hold lower-wage jobs.

Ination. After declining sharply as the

pandemic struck, consumer price ination

rebounded along with economic activity, but

ination remains below pre-COVID levels and

the FOMC’s longer-run objective of 2percent.

The 12-month measure of PCE (personal

consumption expenditures) ination was

1.3percent in December, while the measure

that excludes food and energy items—so-called

core ination, which is typically less volatile

than total ination—was 1.5percent. Both

total and core ination were held down in part

by prices for services adversely aected by

the pandemic, and indicators of longer-run

ination expectations are now at similar levels

to those seen in recent years.

Financial conditions. Financial conditions

have improved notably since the spring of last

year and remain generally accommodative.

Low interest rates, the Federal Reserve’s asset

purchases, the establishment of emergency

lending facilities, and other extraordinary

actions, together with scal policy, continued

to support the ow of credit in the economy

and smooth market functioning. The nominal

Treasury yield curve steepened and equity

prices continued to increase steadily in the

second half of last year as concerns over the

resurgence in COVID-19 cases appeared to

have been outweighed by positive news about

vaccine prospects and expectations of further

2 SUMMARY

scal support. Spreads of yields on corporate

bonds over those on comparable-maturity

Treasury securities narrowed signicantly,

partly because the credit quality of rms

improved and market functioning remained

stable. Mortgage rates for households remain

near historical lows. However, nancing

conditions remain relatively tight for

households with low credit scores and for small

businesses.

Financial stability. While some nancial

vulnerabilities have increased since the start

of the pandemic, the institutions at the core

of the nancial system remain resilient.

Asset valuation pressures have returned to

or exceeded pre-pandemic levels in most

markets, including in equity, corporate bond,

and residential real estate markets. Although

government programs have supported business

and household incomes, some businesses and

households have become more vulnerable to

shocks, as earnings have fallen and borrowing

has risen. Strong capital positions before the

pandemic helped banks absorb large losses

related to the pandemic. Financial institutions,

however, may experience additional losses as

a result of rising defaults in the coming years,

and long-standing vulnerabilities at money

market mutual funds and open-end investment

funds remain unaddressed. Although some

facilities established by the Federal Reserve in

the wake of the pandemic have expired, those

remaining continue to serve as important

backstops against further stress. (See the box

“Developments Related to Financial Stability”

in Part 1.)

International developments. Mirroring the

United States, economic activity abroad

bounced back last summer after the spread

of the virus moderated and restrictions eased.

Subsequent infections and renewed restrictions

have again depressed economic activity,

however. Relative to the spring, the current

slowdown in economic activity has been

less dramatic. Fiscal and monetary policies

continue to be supportive, and people have

adapted to containment measures that have

often been less stringent than earlier.

Despite the resurgence of the pandemic in

many economies, nancial markets abroad

have recovered since the spring, buoyed

by continued strong scal and monetary

policy support and the start of vaccination

campaigns in many countries. With the

abatement of nancial stress, the broad dollar

has depreciated, more than reversing its

appreciation at the onset of the pandemic. On

balance, global equity prices have recovered

and sovereign credit spreads in emerging

market economies and in the European

periphery have narrowed. In major advanced

economies, sovereign yields remained near

historical low levels amid continued monetary

policy accommodation.

Monetary Policy

Review of the strategic framework for monetary

policy. The Federal Reserve concluded the

review of its strategic framework for monetary

policy in the second half of 2020. The review

was motivated by changes in the U.S. economy

that aect monetary policy, including the

global decline in the general level of interest

rates and the reduced sensitivity of ination

to labor market tightness. In August, the

FOMC issued a revised Statement on Longer-

Run Goals and Monetary Policy Strategy.

The revised statement acknowledges the

changes in the economy over recent decades

and articulates how policymakers are taking

these changes into account in conducting

monetary policy. In the revised statement,

the Committee indicates that it aims to attain

its statutory goals by seeking to eliminate

shortfalls from maximum employment—a

broad-based and inclusive goal—and achieve

ination that averages 2percent over time.

Achieving ination that averages 2percent

1. The statement, revised in August2020, was

unanimously rearmed at the FOMC’s January2021

meeting.

MONETARY POLICY REPORT: FEBRUARY 2021 3

over time helps ensure that longer-term

ination expectations remain well anchored at

the FOMC’s longer-run 2percent objective.

Hence, following periods when ination has

been running persistently below 2percent,

appropriate monetary policy will likely aim to

achieve ination moderately above 2percent

for some time. (See the box “The FOMC’s

Revised Statement on Longer-Run Goals and

Monetary Policy Strategy” in Part 2.)

In addition, in December the FOMC

introduced two changes to the Summary

of Economic Projections (SEP) intended

to enhance the information provided to the

public. First, the release of the full set of SEP

exhibits was accelerated by three weeks, from

the publication of the minutes three weeks

after the end of an FOMC meeting to the

day of the policy decision, the second day of

an FOMC meeting. Second, new charts were

included that display how FOMC participants’

assessments of uncertainties and risks have

evolved over time.

Interest rate policy. In light of the eects of the

continuing public health crisis on the economy

and the associated risks to the outlook, the

FOMC has maintained the target range for the

federal funds rate at 0 to ¼percent since last

March. In pursuing the strategy outlined in its

revised statement, the Committee noted that it

expects it will be appropriate to maintain this

target range until labor market conditions have

reached levels consistent with the Committee’s

assessments of maximum employment and

ination has risen to 2percent and is on track

to moderately exceed 2percent for some time.

Balance sheet policy. With the federal funds

rate near zero, the Federal Reserve has also

continued to undertake asset purchases to

increase its holdings of Treasury securities

by $80billion per month and its holdings

of agency mortgage-backed securities by

$40billion per month. These purchases

help foster smooth market functioning and

accommodative nancial conditions, thereby

supporting the ow of credit to households

and businesses. The Committee expects these

purchases to continue at least at this pace until

substantial further progress has been made

toward its maximum-employment and price-

stability goals.

In assessing the appropriate stance of

monetary policy, the Committee will continue

to monitor the implications of incoming

information for the economic outlook. The

Committee is prepared to adjust the stance of

monetary policy as appropriate if risks emerge

that could impede the attainment of the

Committee’s goals.

Special Topics

Disparities in job loss. The COVID-19 crisis

has exacerbated pre-existing disparities in

labor market outcomes across job types and

demographic groups. Job losses last spring

were disproportionately severe among lower-

wage workers, less-educated workers, and

racial and ethnic minorities, as in previous

recessions, but also among women, in contrast

to previous recessions. While all groups

have experienced at least a partial recovery

in employment rates since April2020, the

shortfall in employment remains especially

large for lower-wage workers and for

Hispanics, African Americans, and other

minority groups, and the additional childcare

burdens resulting from school closures have

weighed more heavily on women’s labor

force participation than on men’s labor force

participation. (See the box “Disparities in Job

Loss during the Pandemic” in Part 1.)

High-frequency indicators. The unprecedented

magnitude, speed, and nature of the

COVID-19 shock to the economy rendered

traditional statistics insucient for monitoring

economic activity in a timely manner. As a

result, policymakers turned to nontraditional

high-frequency indicators of activity,

especially for the labor market and consumer

4 SUMMARY

spending. These indicators presented a more

timely and granular picture of the drop and

subsequent rebound in economic activity last

spring. The most recent readings obtained

from those indicators suggest that economic

activity began to edge up again in January,

likely reecting in part the disbursement of

additional stimulus payments to households.

(See the box “Monitoring Economic Activity

with Nontraditional High-Frequency

Indicators” in Part 1.)

Monetary policy rules. Simple monetary policy

rules, which relate a policy interest rate to a

small number of other economic variables,

can provide useful guidance to policymakers.

This discussion presents the policy rate

prescriptions from a number of rules that have

received attention in the research literature,

many of which mechanically prescribe raising

the federal funds rate as employment rises

above estimates of its longer-run level. A rule

that instead responds only to shortfalls of

employment from assessments of its maximum

level is featured to illustrate one aspect of

the FOMC’s revised approach to policy, as

described in the revised Statement on Longer-

Run Goals and Monetary Policy Strategy. (See

the box “Monetary Policy Rules and Shortfalls

from Maximum Employment” in Part 2.)

Domestic Developments

The labor market has partially recovered

from the pandemic-induced collapse,

but the pace of improvement slowed

substantially toward the end of last year . . .

The public health crisis spurred by the

spread of COVID-19 weighed on economic

activity throughout 2020, and patterns

in the labor market reected the ebb and

ow of the virus and the actions taken by

households, businesses, and governments

to combat its spread. During the initial

stage of the pandemic in March and April,

payroll employment plunged by 22million

jobs, while the measured unemployment rate

jumped to 14.8percent—its highest level

since the Great Depression (gures 1 and2).

As cases subsided and early lockdowns were

relaxed, payroll employment rebounded

rapidly—particularly outside of the service

sectors—and the unemployment rate fell

back. Beginning late last year, however, the

pace of improvement in the labor market

slowed markedly amid another large wave

of COVID-19 cases. The unemployment

rate declined only 0.4percentage point from

November through January, while payroll

gains averaged just 29,000 per month, weighed

down by a contraction in the leisure and

hospitality sector, which is particularly aected

by social distancing and government-mandated

restrictions.

2. Since the beginning of the pandemic, a substantial

number of people on temporary layo, who should be

counted as unemployed, have instead been recorded as

“employed but on unpaid absence.” The Bureau of Labor

Statistics reports that, if these workers had been correctly

classied, the unemployment rate would have been

5percentage points higher in April. The misclassication

problem has abated since then, and the unemployment

rate in January was at most about ½percentage

point lower than it would have been in the absence of

misclassication.

Part 1

reCent eConomiC and finanCiaL deveLoPments

Percent

202120192017201520132011200920072005

2. Civilian unemployment rate

Monthly

SOURCE: Bureau of Labor Statistics.

125

130

135

140

145

150

155

Millions of jobs

202120192017201520132011200920072005

1. Nonfarm payroll employment

Monthly

SOURCE: Bureau of Labor Statistics via Haver Analytics.

6 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

Employment-to-

population ratio

Percent

202120192017201520132011200920072005

3. Labor force participation rate and

employment-to-population ratio

Monthly

Labor force participation rate

NOTE: The labor force participation rate and the

employment-

to-population ratio are percentages of the population aged 16 and over.

OURCE

: Bureau of Labor Statistics via Haver Analytics.

All told, the incomplete recovery left the level

of employment in January almost 10million

lower than it was a year earlier, while the

unemployment rate stood at 6.3percent—

nearly 3percentage points higher than before

the onset of the pandemic. Most recently,

high-frequency data—including initial claims

for unemployment insurance and weekly

employment data from the payroll processor

ADP—suggest modest further improvement

in the labor market in recent weeks. (For more

discussion of what high-frequency indicators

are suggesting about the current trajectory

of the economy, see the box “Monitoring

Economic Activity with Nontraditional High-

Frequency Indicators.”)

. . . and the harm has been substantial

The damage to the labor market has been

even more substantial than is indicated by

the extent of unemployment alone. The labor

force participation rate (LFPR)—the share

of the population that is either working or

actively looking for work—plunged in March

and April, as many of those who lost their

jobs were not seeking work and so were not

counted among the unemployed. Despite

recovering some over the summer, the LFPR

remains nearly 2percentage points below

its pre-pandemic level (gure3). A number

of factors appear to have contributed to the

continued weakness in the LFPR, including

a lack of job opportunities, the eects of

school closings and virtual learning on

parents’ ability to work, the health concerns

of potential workers, and a spate of early

retirements triggered by the crisis. All told,

the employment-to-population ratio—the

share of the population with jobs, regardless

of the number seeking work—in January

was 3.6percentage points below the level at

the beginning of 2020. Job losses last year

fell most heavily on lower-wage workers

and on Hispanics, African Americans,

and other minority groups. As a result,

the rise in unemployment and the decline

MONETARY POLICY REPORT: FEBRUARY 2021 7

A. Estimates of private payroll employment growth

NOTE: ADP data are weekly and extend through February 6, 2021. BLS data are monthly.

OURCE: Federal Reserve Board sta calculations using ADP, Inc., Payroll Processing Data; Bureau of Labor Statistics (BLS), Current

Employment Statistics (CES).

Payroll employment growth in leisure and hospitality Aggregate payroll employment growth

ADP-FRB, 4-week average

BLS CES

Millions of jobs, monthly rate

Feb. Apr. June Aug.Oct. Dec. Feb.

2020 2021

ADP-FRB

ADP-FRB, 4-week average

BLS CES

Millions of jobs, monthly rate

Feb. Apr. June Aug. Oct. Dec. Feb.

2020 2021

ADP-FRB

state of the labor market.

An important example is

data from the payroll processor ADP that cover roughly

20percent of private U.S. employment, a sample size

similar to the one used by the BLS to construct the CES.

Estimates of changes in employment constructed from

ADP data have tracked the of cial CES data remarkably

well since the start of the pandemic recession, and

the ADP data possess the important bene ts of being

available earlier and at a weekly frequency ( gure A,

left panel).

1. See, for example, Raj Chetty, John N. Friedman,

Nathaniel Hendren, Michael Stepner, and the Opportunity

Insights Team (2020), “The Economic Impacts of COVID-19:

Evidence from a New Public Database Built Using Private

Sector Data,” NBER Working Paper Series 27431 (Cambridge,

Mass.: National Bureau of Economic Research, November),

https://www.nber.org/papers/w27431; and Alexander W. Bartik,

Marianne Bertrand, Feng Lin, Jesse Rothstein, and Matt Unrath

(forthcoming), “Measuring the Labor Market at the Onset of

the COVID-19 Crisis,” Brookings Papers on Economic Activity.

2. For further analysis of the ADP employment series, see

Tomaz Cajner, Leland D. Crane, Ryan A. Decker, John Grigsby,

Adrian Hamins-Puertolas, Erik Hurst, Christopher Kurz, and

Ahu Yildirmaz (forthcoming), “The U.S. Labor Market during

the Beginning of the Pandemic Recession,” Brookings Papers

on Economic Activity. Note that the ADP employment series

referenced in this discussion differ from the ADP National

Employment Report, which is published monthly by the ADP

Research Institute in close collaboration with Moody’s Analytics.

The unprecedented magnitude, speed, and nature

of the COVID-19 shock to the economy rendered

traditional statistics insuf cient for monitoring

economic activity in a timely manner. As a result,

policymakers around the world turned to nontraditional

indicators of activity, both those based on private-

sector “big data” and those newly developed by of cial

statistical agencies. Because some of the most salient

characteristics of these indicators are their timeliness

and the time span they cover (such as daily or weekly),

they are often called “high-frequency indicators.”

An important example of the usefulness of high-

frequency indicators is the case of payroll employment.

The Bureau of Labor Statistics’ (BLS) monthly measure

of payroll employment is one of the most reliable,

timely, and closely watched business cycle indicators.

However, during the onset of the pandemic in the

United States, even the BLS Current Employment

Statistics (CES) data were published with too long of

a lag to track the dramatic dislocations in the labor

market in a timely manner. Speci cally, from the

second half of March through early April, the economy

was shedding jobs at an unprecedented rate, but

those employment losses were captured only in the

employment situation release issued on May8, 2020.

Because of this lag, economists looked to various

private data sources to gain insights about the current

(continued on next page)

Monitoring Economic Activity with Nontraditional

High-Frequency Indicators

8 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

B. Indicators of consumption growth

Services spending Retail goods spending

Total, Census

Percent change from year earlier

Feb. Apr. June Aug. Oct. Dec. Feb.

2020 2021

Total, NPD

OTE

: NPD data are weekly and extend through February 6, 2021,

and Census data are monthly. All series show nominal spending on

nonfood retail goods. Dashed lines represent the rst and second waves

of stimulus tranche.

OURCE

: NPD Group; Census Bureau.

Airport passengers

Food services

Hotel occupancy

100

Year-over-year percent change

Feb. Apr. June Aug. Oct. Dec. Feb.

2020 2021

Daily

Health-care visits

OTE: Year-over-year percent change in 7-day moving average.

Health-care visits data extend through February 7, 2021; food services

data extend through February 15, 2021; and hotel occupancy data extend

through February 6, 2021.

OURCE: SafeGraph, Inc.; Fiserv, Inc.; STR, Inc.; Transportation

Security Administration.

Monitoring Economic Activity (continued)

analytics  rm) on nonfood retail sales captured in real

time the dramatic and sudden drop in consumption in

mid-March; the monthly Census Bureau data recorded

that decline only with a lag ( gure B, left panel).

The NPD data also re ected how the income support

payments to families, provided by the Coronavirus Aid,

Relief, and Economic Security Act, or CARES Act,

rapidly affected consumer spending in mid-April.

More recently, the NPD data showed some decline

in consumption late last year, followed by a pickup

in January after the passage of the most recent  scal

stimulus package. Several nontraditional data sources

illustrate that services spending remains depressed as

social distancing continues to restrain in-person activity

( gure B, right panel).

With rapid changes in the economic environment,

many statistical agencies also developed high-frequency

3. Information from the NPD Group, Inc., and its af liates

contained in this report is the proprietary and con dential

property of NPD and was made available for publication

under a limited license from NPD. Such information may not

be republished in any manner, in whole or in part, without the

express written consent of NPD.

4. Services spending accounts for roughly one-half of

aggregate spending, but it is measured with some lag. In

particular, the services spending information folded into

gross domestic product comes from the revenue information

sourced from the Census Bureau’s Quarterly Services Survey

(QSS). The advance QSS (early data for a subset of industries

found in the full QSS) and full QSS are released two and three

months, respectively, after a given quarter ends.

Weekly employment estimates based on ADP data

were particularly valuable not only last spring when

employment plummeted and then quickly rebounded,

but also during the renewed COVID-19 wave that

started this past fall. In particular, high-frequency ADP

employment data indicate that the fall and winter virus

wave had a smaller effect on the labor market than

was seen last spring, likely because there were fewer

mandated shutdowns of businesses than in the spring,

because many businesses implemented adaptations

that made it easier for them to continue to operate

(for example, curbside pickup), and because many

individuals changed their behavior (for example, by

wearing masks such that more economic activities are

deemed safer now than in the spring). Most recently,

the BLS data show that private payroll employment

remained little changed through its survey week in

mid-January, and the ADP data indicate that

employment improved modestly through early

February. Additionally, the latest ADP data indicate

that the leisure and hospitality sector—which includes

hotels, restaurants, and entertainment venues and

is particularly affected by government-mandated

restrictions and social distancing—started adding jobs

again in recent weeks after experiencing a temporary

downturn at the end of last year ( gure A, right panel).

Outside of the labor market, several new high-

frequency indicators have been useful in monitoring

the massive effects of the COVID-19 pandemic on

consumer spending. Weekly data from NPD (a market

(continued)

MONETARY POLICY REPORT: FEBRUARY 2021 9

C. High-frequency indicators by ocial statistical agencies

New business applications Houshold expectations

Cumulative 2020

Cumulative

2021

100

200

300

400

500

600

Thousands

Feb. Apr. June Aug. Oct. Dec.

Weekly

Cumulative

2017-19 average

OTE

: The cumulative 2021 data extend through February 6, 2021.

The data are derived from Employer Identication Number applications

with planned wages.

OURCE

: Business Formation Statistics, Census Bureau via Haver

Analytics.

High condence

in making

next mortgage

payment

Expect loss of

employment

income in

next 4 weeks

Percent of households

May June July Aug. Sept. Oct. Nov. Dec. Jan. Feb.

2020 2021

Weekly

High condence

in making

next rent

payment

OTE

: Data extend through February 1, 2021. Dashed lines represent

pauses in Household Pulse Survey data collection.

OURCE

: Household Pulse Survey, Census Bureau via Haver

Analytics.

 nancial struggles of households ( gure C, right

panel). These data indicate that the  nancial stress of

households increased late last year as households were

becoming less con dent about being able to make their

next mortgage or rent payment as well as more likely

to expect income loss over the next four weeks, but

households’  nancial expectations improved somewhat

in January.

Overall, nontraditional high-frequency indicators

have served several purposes over the past year.

First, they provide timely alternative estimates that

complement of cial statistics and can also be used to

verify movements in of cial statistics. Second, they are

often helpful for assessing economic developments

more quickly and with greater granularity than what

can be found in of cial statistics. Third, high-frequency

indicators without a direct counterpart in of cial

statistics give a different perspective and help enhance

our understanding of economic developments. These

nontraditional indicators are also subject to several

potential limitations, such as systematic biases due to

nonrepresentativeness of data or small (and possibly

nonrandom) samples. Importantly, only time will tell if

such indicators will continue to provide a signal above

and beyond traditional indicators as the high-frequency

shocks associated with the pandemic dissipate. Overall,

however, the use of nontraditional high-frequency

indicators over the past year has amply shown that they

can yield large bene ts, especially when economic

conditions are changing rapidly.

indicators. For example, the Census Bureau released

data on weekly new business applications ( gure C,

left panel). During the initial stage of the pandemic

recession, new business applications fell compared

with previous years, a typical pattern during economic

downturns. However, new business applications started

to rebound notably during the summer, and for the year

as a whole, they were higher than the average over the

previous three years, a pattern that differs dramatically

from previous business cycles.

The increase in

applications appears to be concentrated in industries

that rapidly adapted to the landscape of the pandemic,

such as online retail, personal services, information

technology, and delivery. It remains unclear, however,

whether these business applications will lead to actual

job creation at the same rate as in the past.

As another

example, the Census Bureau developed high-frequency

survey statistics that contain information about the

5. For further discussion, see Emin Dinlersoz, Timothy

Dunne, John Haltiwanger, and Veronika Penciakova

(forthcoming), “Business Formation: A Tale of Two Recessions,”

American Economic Review Papers and Proceedings.

6. The link between applications and job creation in the

pre-pandemic period is studied in Kimberly Bayard, Emin

Dinlersoz, Timothy Dunne, John Haltiwanger, Javier Miranda,

and John Stevens (2018), “Early-Stage Business Formation:

An Analysis of Applications for Employer Identi cation

Numbers,” Finance and Economics Discussion Series 2018-

015 (Washington: Board of Governors of the Federal Reserve

System, March), https://dx.doi.org/10.17016/FEDS.2018.015.

10 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

in the employment-to-population ratio

were particularly evident among those

groups (gure4). (For more discussion

of the pandemic’s eects on the labor

market outcomes of various groups, see

the box “Disparities in Job Loss during the

Pandemic.”)

Aggregate wage growth appears to be

little changed despite the weakness in the

labor market

Although weakness in the labor market

generally puts downward pressure on overall

wages, the best available measures suggest

that wage growth in 2020 was little changed

from 2019. Total hourly compensation as

measured by the employment cost index,

which includes both wages and benets, rose

2.6percent during the 12 months ending in

December, only slightly below pre-pandemic

rates (gure5). Wage growth as computed by

the Federal Reserve Bank of Atlanta, which

tracks the median 12-month wage growth

of individuals responding to the Current

Population Survey, was about 3½percent

Average hourly earnings,

private sector

Employment

cost index,

private sector

Atlanta Fed’s

Wage Growth Tracker

Percent change from year earlier

202120192017201520132011200920072005

5. Measures of change in hourly compensation

Compensation per hour,

business sector

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

basis.

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

the

months ending in the last month of each quarter; for p

rivate-sector

average

hourly earnings, the data are 12-month percent changes a

begin

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

the

data

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

percent

change.

SOURCE: Bureau of Labor Statistics; Federal Reserve Bank of Atlanta

Wage Growth Tracker; all via Haver Analytics.

Hispanic or Latino

Black or African American

Asian

Percent

202120192017201520132011200920072005

4. Unemployment rate, by race and ethnicity

Monthly

White

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

atino

may be of any race. Small sample sizes preclude reliable estimates for Native Americans and other groups for which monthly data are not reported

the Bureau of Labor Statistics.

OURCE

: Bureau of Labor Statistics via Haver Analytics.

MONETARY POLICY REPORT: FEBRUARY 2021 11

during 2020, similar to the growth rate

in 2019.

The continued gains in aggregate

wages mask important heterogeneity,

however; according to the Atlanta Fed data,

workers with lower earnings and nonwhites

experienced larger decelerations in wages than

other groups last year.

Price ination remains low despite

rebounding since last spring

As measured by the 12-month change in

the price index for personal consumption

expenditures (PCE), ination fell from

1.6percent in December2019 to a low of

0.5percent in April, as economic activity

dropped sharply (gure6). Since then,

ination has partially recovered along with the

pickup in demand, but it was only 1.3percent

in December—still well below the Federal

Open Market Committee’s (FOMC) objective

of 2percent. After excluding consumer food

and energy prices, which are often quite

volatile, the 12-month measure of core PCE

ination was 1.5percent in December. An

alternative way to abstract from transitory

inuences on measured ination is provided

by the trimmed mean measure of PCE price

ination constructed by the Federal Reserve

Bank of Dallas.

The 12-month change in this

measure declined to 1.7percent in December

3. Some other common wage measures are providing

misleading signals at present because they are dominated

by compositional eects: Pandemic-related job losses fell

most heavily on lower-wage workers, which mechanically

increased measures of average wages. For example,

average hourly earnings from the payroll survey rose

more than 5 percent over the 12 months ending in

January. Similarly, the fourth-quarter reading on

compensation per hour, which includes both wages and

benets, was 7.7percent above its year-ago level. Output

per hour, or productivity, has also been aected by the

same composition eects, rising 2.5percent over the four

quarters of 2020, the fastest pace in a decade.

4. The trimmed mean price index excludes whichever

prices showed the largest increases or decreases in a given

month. Over the past 20years, changes in the trimmed

mean index have averaged ¼percentage point above core

PCE ination and 0.1percentage point above total PCE

ination.

Trimmed mean

Excluding food

and energy

1.0

1.5

2.0

2.5

3.0

12-month percent change

2020201920182017201620152014

6. Change in the price index for personal consumption

expenditures

Monthly

Total

NOTE: The data extend through December 2020.

OURCE: For trimmed mean, Federal Reserve Bank of Dallas; for a

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

12 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

distancing measures and relatively few workers are able

to work from home.

In keeping with the sectoral composition of recent

job losses, workers in lower-wage jobs have been hit

especially hard. Figure B uses data from the payroll

processor ADP to plot employment indexes for four

job tiers de ned by hourly wages. Between February

and April of last year, employment fell most sharply for

jobs in the bottom quartile of the pre-pandemic wage

distribution. Between April and June, employment

rose most quickly for these lowest-paying jobs. In

subsequent months, job gains moderated substantially

for all groups, and as of mid-January, employment in

the lowest-paying jobs was about 20percent below its

2. For instance, in the January2021 round of the Current

Population Survey, 41percent of those employed in the

professional and business services industry reported working

from home during the previous four weeks as a result of the

pandemic, compared with about 7percent of those employed

in leisure and hospitality. See Bureau of Labor Statistics (2021),

“Supplemental Data Measuring the Effects of the Coronavirus

(COVID-19) Pandemic on the Labor Market,” Current

Population Survey, January, https://www.bls.gov/cps/effects-of-

the-coronavirus-covid-19-pandemic.htm.

A. Changes in private-sector employment, by industry

Industry

Percent change since Feb. 2020

(1)

As of Apr. 2020

(2)

As of Jan. 2021

1. Total private ........................... −16.5 −6.6

2. Mining and logging ............... −9.9 −11.7

3. Manufacturing ....................... −10.8 −4.5

4. Construction .......................... −14.6 −3.3

5. Wholesale trade ..................... −6.9 −4.5

6. Retail trade ............................. −15.2 −2.5

7. Transp., warehousing, and

utilities ....................................

−9.1 −2.7

8. Information and  nancial

activities ..................................

−4.8 −2.8

9. Professional and business

services ....................................

−11.1 −3.8

10. Education and health

services ....................................

−11.6 −5.4

11. Leisure and hospitality ......... −48.6 −22.9

12. Other services ........................ −23.7 −7.8

N: The data are seasonally adjusted.

S: Bureau of Labor Statistics.

Although employment has improved substantially

since its trough in April2020, the labor market

recovery remains far from complete: As of

January2021, the employment-to-population (EPOP)

ratio, a broad measure that encompasses both

increased unemployment and decreased labor force

participation, was still 3.6percentage points below

its February2020 level. All industries, occupations,

and demographic groups experienced signi cant

employment declines at the start of the pandemic,

and, over the ensuing months, all groups have

experienced at least some partial recovery. That

said, employment declines last spring were steeper

for workers with lower earnings and for Hispanics,

African Americans, and other minority groups, and

the hardest-hit groups still have the most ground left

to regain.

Although disparities in labor market outcomes

generally widen during recessions, certain

factors unique to this episode—in particular, the

social-distancing measures taken by households,

businesses, and governments to limit in-person

interactions—have profoundly shaped the incidence

of recent job losses in different segments of the labor

market. Because jobs differ in the degree to which

they involve personal contact and physical proximity,

in whether they can be performed remotely, and in

whether they are deemed to serve “essential” functions,

social-distancing measures have had disparate effects

across industries and occupations. To illustrate this

point,  gure A reports net changes in employment in

11 broad industry categories, both during the period

of acute job losses last spring (column 1) and over the

longer interval since the start of the pandemic (column

2). Net job losses through January have been especially

severe in the leisure and hospitality industry—in which

employment is still 22.9percent below pre-pandemic

levels (line 11)—and in other services, a category that

includes barber shops and beauty salons (line 12).

contrast, employment in most other broad industries is

now 5percent or less below pre-pandemic levels. Job

losses have thus been disproportionately concentrated

in lower-wage consumer service industries, in which

business operations are strongly affected by social-

1. Net job losses have also been pronounced in mining

and logging (line 2), which is unique among these industries

in having experienced further contraction in employment

between April2020 and January2021.

Disparities in Job Loss during the Pandemic

(continued)

MONETARY POLICY REPORT: FEBRUARY 2021 13

pre-pandemic level. In comparison, employment in the

higher-paying job tiers is now about 10percent or less

below pre-pandemic levels.

Similar disparities are apparent across demographic

groups. Figure C shows the change in each group’s

EPOP ratio. Between February2020 and January2021,

the EPOP ratio fell by a similar amount for both men

and women; in contrast, during many previous

recessions the EPOP ratio declined substantially more

for men. (In fact, given that men’s employment rate was

substantially higher than women’s before the pandemic,

the decline in employment for women as a percentage

of pre-recession employment has been larger, which

contrasts even more starkly with previous recessions.)

Since February2020, the EPOP ratio has fallen more

for people without a bachelor’s degree than for those

with at least a bachelor’s degree, more for prime-age

individuals than for those under age 25 or over age 55,

and more for Hispanics, African Americans, and Asians

than for whites.

In general, the groups experiencing the

largest declines in employment since last February are

more commonly employed in the industries that have

3. The decline in employment also appears to have been

relatively large for Native Americans, based on annual average

data for 2020. (Monthly data are not available for this group

because of small sample sizes and are not shown in  gure C

for that reason.)

experienced the greatest net employment declines to

date, such as leisure and hospitality; these demographic

groups are also less likely to report being able to work

from home.

4. For more information on the groups with the largest

employment declines since February2020, see Kenneth

A. Couch, Robert W. Fairlie, and Huanan Xu (2020),

“Early Evidence of the Impacts of COVID-19 on Minority

Unemployment,” Journal of Public Economics, vol. 192

(December), pp. 1–11; Guido Matias Cortes and Eliza C.

Forsythe (2020), “The Heterogeneous Labor Market Impacts

of the Covid-19 Pandemic,” Upjohn Institute Working Paper

Series 20-327 (Kalamazoo, Mich.: W.E. Upjohn Institute for

Employment Research, May), https://research.upjohn.org/cgi/

viewcontent.cgi?article=1346&context=up_workingpapers;

and Titan Alon, Matthias Doepke, Jane Olmstead-Rumsey, and

Michèle Tertilt (2020), “This Time It’s Different: The Role of

Women’s Employment in a Pandemic Recession,” NBER Working

Paper 27660 (Cambridge, Mass.: National Bureau of Economic

Research, August), https://www.nber.org/papers/w27660.

Additional details on differences across demographic

groups in the ability to work from home can be found in the

Current Population Survey. For example, in January, around

23percent of white workers reported working from home in the

previous four weeks because of the pandemic, compared with

19percent of African Americans and 14percent of Hispanics;

43percent of those with a bachelor’s degree or higher reported

working from home, compared with 16percent or less for those

with lower levels of education. See Bureau of Labor Statistics,

“Supplemental Data,” in box note 2.

-20 -15 -10 -5 0

C. Change in employment-to-population ratio, by

demographic group

Percentage points

Feb. 2020 to Jan. 2021Feb. to Apr. 2020

Hispanic or Latino

Asian

Black or African American

White

55+

25–54

16–24

Bachelor’s degree and higher

Some college or associate’s degree

High school graduates, no college

Less than a high school diploma

Women

Men

OTE: The data are seasonally adjusted. 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.

OURCE

: Bureau of Labor Statistics via Haver Analytics.

Bottom

Top

Top-middle

100

110

Week ending February 15, 2020 = 100

Mar. May July Sept. Nov. Jan.

2020 2021

B. Employment declines for low-, middle-, and

high-wage workers

Weekly

Bottom-

middle

OTE: The data are seasonally adjusted by the Federal Reserve Board

and extend through January 16, 2021. Wage quartiles are dened using

the February 2020 wage distribution.

OURCE: Federal Reserve Board sta calculations using ADP, Inc.,

payroll processing data.

(continued on next page)

14 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

be important for narrowing the disparities that have

widened since the start of the pandemic, as research

has consistently shown that strong labor markets

especially bene t lower-wage and disadvantaged

workers.

The pace of labor market gains will also

depend on how many unemployed workers have

the opportunity to return to their original jobs. In

January2021, 2.2percent of labor force participants

(representing 34.6percent of unemployed workers)

reported being unemployed because of a permanent

job loss, up from 1.3percent of the labor force

(8.8percent of unemployed workers) in April2020.

Research has shown that workers who return to their

previous employers after a temporary layoff tend to earn

wages similar to what they were making previously,

whereas laid-off workers who do not return to their

previous employer experience a longer-lasting decline

in earnings.

7. For example, see Stephanie R. Aaronson, Mary C. Daly,

William L. Wascher, and David W. Wilcox (2019), “Okun

Revisited: Who Bene ts Most from a Strong Economy?”

Brookings Papers on Economic Activity, Spring, pp. 333–75,

https://www.brookings.edu/wp-content/uploads/2019/03/

aaronson_web.pdf; and Tomaz Cajner, Tyler Radler, David

Ratner, and Ivan Vidangos (2017), “Racial Gaps in Labor

Market Outcomes in the Last Four Decades and over

the Business Cycle,” Finance and Economics Discussion

Series 2017-071 (Washington: Board of Governors of the

Federal Reserve System, June), https://dx.doi.org/10.17016/

FEDS.2017.071.

8. The data are Federal Reserve Board staff calculations

from published Bureau of Labor Statistics estimates. By

comparison, the number of permanent job losers peaked

at 4.4percent of labor force participants (representing

44.8percent of unemployed workers) during the Great Recession.

9. See Louis S. Jacobson, Robert J. LaLonde, and Daniel G.

Sullivan (1993), “Earnings Losses of Displaced Workers,”

American Economic Review, vol. 83 (September), pp. 685–

709; Shigeru Fujita and Giuseppe Moscarini (2017), “Recall

and Unemployment,” American Economic Review, vol. 107

(December), pp. 3875–916; and Marta Lachowska, Alexandre

Mas, and Stephen A. Woodbury (2020), “Sources of Displaced

Workers’ Long-Term Earnings Losses,” American Economic

Review, vol. 110 (October), pp. 3231–66.

Since the start of the pandemic, another important

impediment to individuals’ ability to work or look for

work has been the absence of in-person education for

many K–12 students.

Because many working parents

are unable to work from home while monitoring their

children’s virtual education (depending on the nature

of their jobs and the availability of other caregivers),

the widespread lack of K–12 in-person education may

also explain some of the differences across groups.

For example, among mothers aged 25 to 54 with

children aged 6 to 17, the fraction who said they are

not working or looking for work for caregiving reasons

was 2½percentage points higher in the three months

ending January 2021 than over the year-earlier period,

compared with a ½ percentage point increase for

fathers. Relative to white mothers, the increase was

about twice as large for Hispanic mothers and more

than twice as large for African American mothers, and it

was also more than twice as large for mothers without

any college education as for mothers with more

education.

As the spread of COVID-19 is contained and

a growing share of the population is immunized,

some of the unique factors that have exacerbated

disparities since the start of the pandemic will likely

ease. For example, as COVID becomes less prevalent,

businesses offering in-person services (for example, in

the leisure and hospitality industry) will move closer

to pre-pandemic levels of employment. In addition, as

more schools return to offering in-person education,

childcare constraints will become less acute.

Even as labor market impediments speci c to the

pandemic subside, however, the speed at which the

labor market moves toward full employment will

5. According to the Census Bureau’s Household Pulse

Survey, 85percent of parents surveyed in early January

reported that their children’s classes for the 2020–21 school

year were moved to virtual learning.

6. The  ndings are Federal Reserve Board staff estimates

based on publicly available Current Population Survey microdata.

Disparities in Job Loss (continued)

MONETARY POLICY REPORT: FEBRUARY 2021 15

from 2percent a year earlier, a similar decrease

to those in total and core PCE ination.

The low level of consumer price ination

in 2020 partly reected the deterioration in

economic activity. For example, ination in

tenants’ rent and owners’ equivalent rent,

which tend to be sensitive to overall economic

conditions, softened in 2020 from the rates

observed during the preceding few years.

Low ination also reected the net eect

of a number of pandemic-driven shifts in

specic sectors of the economy, such as a

decline in gasoline prices that resulted from

a collapse in oil prices in the early part of

the year, which only partially reversed in the

second half. Similarly, airfares and hotel prices

fell markedly, driven by huge reductions in

demand due to the pandemic. In contrast,

food prices increased at an unusually fast

pace last year, given stronger demand at retail

grocery stores and, at times, some pandemic-

related supply chain disruptions. In addition,

prices for some durable goods, such as motor

vehicles and home appliances, rose sharply

during the summer and remained somewhat

elevated at the end of the year, in part because

of a pandemic-induced shift in demand away

from services and toward these goods.

Prices of imports and oil have also

rebounded

The partial rebound in ination later in 2020

also stemmed from a rming of import prices.

After declining in the rst half of last year,

nonfuel import prices increased in the second

half, as the dollar depreciated and the recovery

in global demand put upward pressure on

non-oil commodity prices—a substantial

component of nonfuel import prices (gure7).

Prices of both agricultural commodities and

industrial metals increased considerably, and

nonfuel import prices are now higher than

they were a year ago.

Early in the pandemic, benchmark oil prices

fell below $20 per barrel, a level not breached

since 2002. While prices have now nearly

Nonfuel import prices

100

102

104

January 2014 = 100

100

110

120

20212020201920182017201620152014

7. Nonfuel import prices and industrial metals indexes

January 2014 = 100

Industrial metals

OTE: The data for nonfuel import prices are monthly and extend through

December 2020. The data for industrial metals are monthly averages of daily

data and extend through January 29, 2021.

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

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

16 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

recovered, oil consumption and production are

still well below pre-pandemic levels (gure8).

Although global economic activity has picked

up since last spring, oil demand has not fully

recovered, held back by the slow recovery in

travel and commuting. Weak demand has been

met by reductions in supply: U.S. production

has fallen dramatically relative to a year ago,

while OPEC (Organization of the Petroleum

Exporting Countries) and Russia have only

slightly increased production after making

sharp cuts last spring.

Survey-based measures of long-run

ination expectations have been

broadly stable . . .

Despite the volatility in actual ination last

year, survey-based measures of ination

expectations at medium- and longer-term

horizons, which likely inuence actual ination

by aecting wage- and price-setting decisions,

have been little changed on net (gure9).

In the University of Michigan Surveys of

Consumers, the median value for ination

expectations over the next 5 to 10years was

2.7percent in January and early February.

In the Survey of Consumer Expectations,

conducted by the Federal Reserve Bank

of New York, the median of respondents’

expected ination rate three years ahead was

3.0percent in January, somewhat above its

year-earlier level. Finally, in the rst-quarter

Survey of Professional Forecasters, conducted

by the Federal Reserve Bank of Philadelphia,

the median expectation for the annual rate

of increase in the PCE price index over the

next 10years was 2.0percent, close to the

level around which it had typically hovered in

previous years.

. . . and market-based measures of

ination compensation have retraced

earlier declines

Ination expectations can also be inferred

from market-based measures of ination

compensation, although the inference is

not straightforward because these measures

are aected by changes in premiums that

provide compensation for bearing ination

Michigan survey,

next 5 to 10 years

NY Fed survey,

3 years ahead

Percent

202120192017201520132011200920072005

Survey of Professional

Forecasters,

next 10 years

9. Surveys of ination expectations

NOTE: The series are medians of the survey responses. The Michigan

survey data are monthly and extend through February 2021; the

February data are preliminary. The Survey of Professional Forecasters

data for ination expectations for personal consumption expenditures

are quarterly, begin in 2007:Q1, and extend through 2021:Q1. The N

Fed survey data are monthly and begin in June 2013.

SOURCE: University of Michigan Surveys of Consumers; Federal

Reserve Bank of New York, Survey of Consumer Expectations; Federal

Reserve Bank of Philadelphia, Survey of Professional Forecasters.

Brent spot price

100

120

140

160

Dollars per barrel

2007 2009 2011 2013 2015 2017 2019 2021

8. Spot and futures prices for crude oil

Weekly

24-month-ahead

futures contracts

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

Thursdays and extend through February 10, 2021.

OURCE

: ICE Brent Futures via Bloomberg.

MONETARY POLICY REPORT: FEBRUARY 2021 17

and liquidity risks. Measures of longer-term

ination compensation—derived either from

dierences between yields on nominal Treasury

securities and those on comparable-maturity

Treasury Ination-Protected Securities (TIPS),

or from ination swaps—dropped sharply

last March, partly reecting a reduction in

the relative liquidity of TIPS compared with

nominal Treasury securities (gure10). Both

measures rebounded in the next couple of

months as liquidity improved, before drifting

up further through the remainder of 2020 and

early 2021. The TIPS-based measure of 5-to-

10-year-forward ination compensation and

the analogous measure from ination swaps

are now about 2¼ percent and 2½ percent,

respectively, a bit above the average levels seen

in 2019.

The plunge and rebound in gross

domestic product reected unusual

patterns of spending during the pandemic

After contracting with unprecedented speed

and severity in the rst half of 2020, gross

domestic product (GDP) rose rapidly in the

third quarter and continued to pick up, albeit

at a much slower pace, in the fourth quarter

(gure11). The rebound in activity reected a

relaxation of voluntary and mandatory social

distancing, as well as unprecedented scal and

monetary support. Nevertheless, the recovery

remains incomplete: At the end of 2020, GDP

was 2.5percent below its level four quarters

earlier. This incomplete recovery reected

weakness in services consumption and overall

exports that resulted largely from ongoing

social-distancing measures to contain the virus,

both at home and abroad. The concentration

of the recession in services is unprecedented in

the United States. Indeed, the sectors that are

typically responsible for the cyclical dynamics

of GDP have shown remarkable resilience:

Activity in the housing market and consumer

spending on goods were both above their

5. As these measures are based on consumer price

index (CPI) ination, one should probably subtract about

¼percentage point—the average dierential between CPI

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

ination compensation on a PCE basis.

Ination swaps

1.0

1.5

2.0

2.5

3.0

3.5

Percent

20212019201720152013

10. 5-to-10-year-forward ination compensation

Weekly

TIPS breakeven rates

OTE

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

February 12, 2021. TIPS is Treasury Ination-Protected Securities.

OURCE

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

eserve

Board sta estimates.

Gross domestic product

Billions of chained 2012 dollars

20202018201620142012201020082006

11. Real gross domestic product and gross

domestic income

Quarterly

Gross domestic income

OTE: Gross domestic income extends through 2020:Q3.

OURCE

: Bureau of Economic Analysis via Haver Analytics.

18 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

pre-pandemic levels in the fourth quarter, and

business xed investment and manufacturing

output also recovered rapidly from their

initial plunges.

Consumer spending, particularly on

goods, bounced back in the second half

of 2020 . . .

Household consumption rebounded rapidly

during the late spring and summer from its

COVID-induced plunge, and it continued to

make gains through the fourth quarter, ending

the year 2.6percent below its year-earlier

level. Notably, purchases of both durable

and nondurable goods rose above their pre-

COVID levels in the second half of 2020, as

spending shifted away from services curtailed

by voluntary and mandatory social distancing

(gure12). Within durable goods, sales of light

motor vehicles moved up quickly in the second

half and are now close to their pre-pandemic

level; any residual weakness in sales may be

attributable to low supply, as production

has failed to keep pace with demand.

Services spending also rebounded from the

extraordinarily low level seen in April, but

it remained well below its pre-pandemic

pace through the fourth quarter, as concerns

about the virus continued to limit in-person

interactions. Notably, consumer sentiment has

also remained well below pre-pandemic levels

(gure13).

. . . assisted by government income

support . . .

Consumer spending has been bolstered by

government income support in the form

of unemployment insurance and stimulus

measures targeted at households. These

payments were largest in the spring and

summer of last year, but even in the fourth

quarter aggregate real disposable personal

income (DPI) was 3.7percent above the level

prevailing in late 2019, despite the low level of

employment.

The still-elevated level of DPI,

6. The Consolidated Appropriations Act, 2021,

which was enacted in late December, should provide a

Michigan survey

100

110

120

1966 = 100

110

130

150

170

202120182015201220092006

1985 = 100

13. Indexes of consumer sentiment

Conference Board

OTE: The data are monthly. Michigan survey data extend through

February 2021; the February data are preliminary.

OURCE: University of Michigan Surveys of Consumers; Conference

Board.

Goods

6.5

7.0

7.5

8.0

8.5

9.0

9.5

Billions of chained 2012 dollars

2.5

3.0

3.5

4.0

4.5

5.0

5.5

202020172014201120082005

12. Real personal consumption expenditures

Billions of chained 2012 dollars

Services

OTE: The data are monthly and extend through December 2020.

OURCE

: Bureau of Economic Analysis via Haver Analytics.

MONETARY POLICY REPORT: FEBRUARY 2021 19

combined with the low level of consumption,

resulted in an aggregate saving rate of more

than 13percent in the fourth quarter, nearly

double its level from a year earlier (gure14).

That said, these aggregate gures mask

important variation across households, and

many low-income households, especially

those whose earnings declined as a result of

the pandemic and recession, have seen their

nances stretched.

. . . but spending fell back late in the year

As COVID cases began rising again

in November, some states retightened

restrictions, and many households likely cut

back voluntarily on their activities, leading

to a retrenchment in spending on services

such as restaurants and travel. Spending

on durable goods also stepped down late in

the fourth quarter, possibly in part because

many households had already purchased

durable items such as furniture and electronics

earlier in the year. Further, while higher-

income households accrued substantial

savings over the course of 2020, some lower-

income consumers likely began to reduce

their spending toward the end of the year,

as support provided by the Coronavirus

Aid, Relief, and Economic Security Act

(CARES Act) waned. More recently,

however, retail sales data and high-frequency

indicators suggest that consumer spending

substantial further boost to DPI in the rst quarter of

this year.

7. The saving rate reached 26percent in the second

quarter of 2020—by far the highest level since World

War II—before falling back as consumption rebounded

and government transfers declined over the course of

the year. Even so, the saving rate in the fourth quarter

remained higher than in any other period since the 1970s.

8. Food pantries saw a signicant increase in demand

in 2020, and there was a sharp increase in the number of

families reporting that they did not have sucient money

to buy food. See, for example, Marianne Bitler, Hilary

W. Hoynes, and Diane Whitmore Schanzenbach (2020),

“The Social Safety Net in the Wake of COVID-19,”

NBER Working Paper Series 27796 (Cambridge, Mass.:

National Bureau of Economic Research, September),

https://www.nber.org/system/files/working_papers/

w27796/w27796.pdf.

PercentMonthly

20202018201620142012201020082006

14. Personal saving rate

NOTE: The data extend through December 2020.

OURCE

: Bureau of Economic Analysis via Haver Analytics.

20 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

rose appreciably in January, likely in part

because of additional scal support from the

Consolidated Appropriations Act, 2021, which

was enacted in late December.

Soaring equity and house prices have

pushed aggregate household wealth to

record highs

Stock markets rallied after plunging in the

spring and, more recently, have reached

record highs, largely reecting the arrival of

eective vaccines, optimism about further

scal stimulus, and notable improvement in

the outlook for corporate earnings. House

prices—which are of particular importance for

the value of assets held by many households—

have also soared, boosted by strong demand

from record-low mortgage rates, a shift in

demand from multifamily to single-family

homes during the pandemic, and a shortage

of inventory (gure15). As a result, aggregate

household wealth is elevated relative to income,

which is supporting consumption, particularly

of relatively well-o households

(gure16).

Lending standards for households are

less accommodative than before the

pandemic, but credit is still available to

households with good credit proles

Consumer lending standards remain less

accommodative than before the pandemic,

on balance, and are particularly tight for

individuals with low credit ratings. Banks

tightened lending standards substantially in the

rst half of 2020, but the tightening moderated

in the second half and credit remains available

to higher-score borrowers. Banks also reported

considerably weaker demand for consumer

credit on balance. Credit card lending volumes

have been weak, consistent with the incomplete

recovery in overall consumer spending, but

auto lending has been stronger amid the rapid

recovery in motor vehicle sales to consumers

(gure17). Mortgage lending has also been

robust, boosted both by record-low mortgage

interest rates and by mortgage credit that is

generally available to those with good credit

scores who are seeking traditional mortgage

Billions of dollars, monthly rate

2020201820162014201220102008

17. Consumer credit ows

NOTE:

The data are seasonally adjusted by the Federal Reserve Board.

SOURCE: Federal Reserve Board, Statistical Release G.19, “Consumer

Credit.”

Student loans

Auto loans

Credit cards

S&P/Case-Shiller

national index

CoreLogic

price index

100

110

120

2005 = 100

20202018201620142012201020082006

15. Real prices of existing single-family houses

Quarterly

Zillow index

OTE

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

2020:Q3. Series are deated by the personal consumption expenditure

price index.

OURCE

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

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

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

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

5.0

5.5

6.0

6.5

7.0

7.5

Ratio

20202017201420112008200520021999

16. Wealth-to-income ratio

Quarterly

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

personal income. Data extend through 2020:Q3.

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

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

Economic Analysis via Haver Analytics.

MONETARY POLICY REPORT: FEBRUARY 2021 21

products (gure18). Overall, loan defaults

have remained low despite the weak labor

market, supported by various forbearance

programs.

The housing sector made a remarkable

recovery in the second half of 2020 . . .

Residential investment grew at a robust

pace of 14percent over the four quarters

of2020, as booming home sales and housing

construction in the second half more than

oset the outsized declines in the second

quarter that resulted from the COVID-19

outbreak and mitigation eorts. Historically

low mortgage rates and the swift adaptation

of the real estate sector to the pandemic

boosted housing activity later in the year,

with both single-family housing starts and

existing home sales rising to their highest levels

since the mid-2000s (gures 19 and20).

The

burst of housing demand has left inventories

of both new and existing homes at all-time

lows, putting upward pressure on home

prices and supporting new construction.

Some of these patterns in the data likely

reect changes in preferences during the

pandemic, with households opting for larger

homes and housing in less dense areas, but

the degree to which these changes will persist

remains unclear.

. . . and business xed investment also

rebounded rapidly . . .

Business xed investment—that is, private

expenditures for equipment, structures,

research and development, and other

intellectual property—contracted sharply

in the rst half of 2020 but largely retraced

its decline in the second half. The recovery

in business investment has been centered in

equipment and intellectual property, which

rose 2.4percent over the four quarters of 2020,

supported by stronger business sentiment,

improved nancing conditions, and the

9. In particular, during the pandemic, the real estate

sector has made increased use of virtual tours, remote

closings, and waivers on inspections and appraisals.

Percent

202120192017201520132011

18. Mortgage rates

Weekly

NOTE: The data extend through February 11, 2021.

SOURCE: Freddie Mac Primary Mortgage Market Survey.

Single-family

permits

Multifamily starts

1.0

1.2

1.4

1.6

1.8

2.0

Millions of units, annual rate

20202018201620142012201020082006

19. Private housing starts and permits

Monthly

Single-family starts

OTE: The data extend through December 2020.

OURCE

: Census Bureau via Haver Analytics.

Existing home sales

1.0

1.2

1.4

Millions, annual rate

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

20202018201620142012201020082006

20. New and existing home sales

Millions, annual rate

New home sales

OTE:Data are monthly and extend through December 2020.

New

home sales include only single-family sales. Existing home sales include

single-family, condo, and co-op sales.

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

National Association of Realtors; all via Haver Analytics.

22 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

unwinding of direct disruptions from social

distancing (gure21). In addition, the health

crisis and the shift to widespread teleworking

have led to a surge in investment in both

medical equipment and computers. In contrast,

investment in nonresidential structures

continued to decline sharply in the second

half. Drilling investment was particularly

hard hit and fell 30percent in2020 as a result

of declines in energy demand and oil prices.

Investment in nondrilling structures also fell,

although more moderately. Long build times

imply that the decline in new construction

projects started in the rst half of 2020 led

to less ongoing spending in the second half;

moreover, rms likely remain uncertain about

future demand for many types of structures in

the wake of the pandemic.

. . . amid notable improvements in

corporate nancing conditions

Financing conditions for nonnancial rms

through capital markets have improved

notably since June. In particular, interest

rates have remained very low and corporate

bond spreads have narrowed. Gross issuance

of nonnancial corporate bonds was solid

in the second half of the year, although it

slowed from the exceptional pace in the second

quarter (gure22). In contrast, aggregate

bank lending to businesses contracted in the

second half, reecting lower demand for new

loans, the repayment of outsized draws on

credit lines earlier this year, the forgiveness

of some loans under the Paycheck Protection

Program, and tighter bank credit standards. In

part because of policy actions to foster smooth

market functioning, corporations have been

able to take advantage of favorable funding

conditions in capital markets to renance debt

and bolster their balance sheets; as a result,

corporate cash holdings are at record levels.

In the small business sector, privately nanced

lending also picked up over the summer, and

loan performance improved, supported by the

Paycheck Protection Program. Nevertheless,

120

160

200

Billions of dollars, monthly rate

2020201820162014201220102008

22. Selected components of net debt nancing for

nonnancial businesses

Sum

OURCE: Mergent Inc., Fixed Income Securities Database; S&P

Global, Leveraged Commentary & Data; DTCC Solutions LLC,

aliate of The Depository Trust & Clearing Corporation. This

publication includes data licensed from DTCC Solutions LLC,

aliate of The Depository Trust & Clearing Corporation. (For the

DTCC licensing disclaimer, see the note on the Contents page.)

Commercial paper

Bonds

Bank loans

Structures

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

Billions of chained 2012 dollars

350

400

450

500

550

600

650

202020172014201120082005

21. Real business xed investment

Billions of chained 2012 dollars

Equipment and

intangible capital

OTE: Business xed investment is known as “private nonresidential

xed investment” in the national income and product accounts. The data

are quarterly.

OURCE

: Bureau of Economic Analysis via Haver Analytics.

MONETARY POLICY REPORT: FEBRUARY 2021 23

credit availability for small businesses remains

fairly tight, demand for such credit is weak,

and default risk is still elevated.

Exports remain lower, but imports have

recovered

U.S. exports remain well below pre-pandemic

levels. With many foreign economies still weak,

U.S. exports of goods have not quite fully

recovered from their earlier sharp declines,

while exports of services remain depressed

because of the continued suspension of most

international travel. In contrast, imports have

regained most of their lost ground. Reduced

imports of services have been oset by a full

rebound of goods imports, which reects

strong U.S. demand for household goods

(gure23). Both the nominal trade decit

and current account decit, relative to GDP,

widened since 2019 (gure24).

Federal scal stimulus provided

substantial support to economic activity

while also signicantly boosting the

budget decit and debt

Federal scal policy measures enacted in

response to the pandemic continue to provide

crucial income support to households and

businesses, as well as grants-in-aid to state

and local governments. These measures

have also facilitated loans to businesses,

households, states, and localities.

In total,

the Congressional Budget Oce projects that

in scal years 2020 and 2021, the additional

federal government expenditures and foregone

revenues from these policies will total roughly

$3trillion—around 15percent of nominal

GDP.

In addition, the decline in economic

10. These policy measures include the CARES Act

from last spring and the Consolidated Appropriations

Act, 2021, enacted in December. Passage of additional

scal support remains under discussion.

11. The CBO’s projection and estimate can be found

at Congressional Budget Oce (2020), An Update to

the Budget Outlook: 2020 to 2030 (Washington: CBO,

September2), https://www.cbo.gov/publication/56517;

and Congressional Budget Oce and Joint Committee

Imports

1,500

1,750

2,000

2,250

2,500

2,750

3,000

3,250

3,500

3,750

Billions of chained 2012 dollars

2020201820162014201220102008

23. Real imports and exports of goods

and services

Quarterly

Exports

OURCE: Bureau of Economic Analysis via Haver Analytics.

Current account

Percent of nominal GDP

2020201820162014201220102008200620042002

24. U.S. trade and current account balances

Annual

Trade

OTE

: GDP is gross domestic product. The data for the trade balance

extend through 2020. The data for the current account balance

extend

through 2019. The blue dot refers to the average current account balance

for 2020:Q1–2020:Q3.

OURCE

: Bureau of Economic Analysis via Haver Analytics.

24 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

activity has pushed down tax receipts while

pushing up outlays for certain transfer

programs—most notably for unemployment

insurance and Medicaid (gure25). These tax

decreases and transfer increases (referred to as

automatic stabilizers) worked in tandem with

the discretionary stimulus to support aggregate

demand and blunt the extent of the economic

downturn.

The combination of the discretionary stimulus

measures and the automatic stabilizers caused

the budget decit in scal 2020 to rise to

15percent of nominal GDP—the largest

decit as a share of GDP in the post–World

War II era—up from its already elevated level

of 4½percent in scal 2019. Consequently,

the ratio of federal debt held by the public to

nominal GDP rose from 79percent in scal

2019 to 100percent by the end of scal 2020,

the highest debt-to-GDP ratio since 1947

(gure26). Even so, the cost of servicing the

federal debt is not particularly elevated by

historical standards, because Treasury rates are

extremely low.

State and local governments are facing

challenging scal conditions

State and local governments are confronting

challenging budget conditions because of

weak tax collections and extraordinary

expenses related to the pandemic. Nominal

state government tax collections in 2020 were

about 1percent below their 2019 level and

well below levels generally expected before

the pandemic (gure27).

The magnitude of

on Taxation (2021), “H.R. 133, Summary Estimate for

Divisions M Through FF Consolidated Appropriations

Act, 2021 Public Law 116–260,” cost estimate,

January14, https://www.cbo.gov/publication/56963.

12. State tax collection data are available through

November2020. For additional details, see Urban

Institute (2020), “State Tax and Economic Review,”

State and Local Finance Initiative, November, https://

www.urban.org/policy-centers/cross-center-initiatives/

state-and-local-finance-initiative/projects/state-tax-and-

economic-review (accessed January 2021).

Although depressed, tax receipts have not fallen as

signicantly as economic activity, for several reasons.

First, some of the federal scal aid to households (for

Debt held by

the public

100

110

120

Percent of nominal GDP

1.0

1.5

2.0

2.5

3.0

3.5

4.0

26. Federal government debt and net interest outlays

Percent of nominal GDP

1900 1920 1940 1960 1980 2000 2020

Net interest outlays

on federal debt

NOTE: The data for net interest outlays are annual, begin in 1948, and

extend through 2020. Net interest outlays are the cost of servicing the

debt held by the public. Federal debt held by the public equals federal

debt less Treasury securities held in federal employee dened-benet

retirement accounts, evaluated at the end of the quarter. The data for

federal debt begin in 1900 and are annual from 1900 to 1951 and

quarterly thereafter. The data for gross domestic product (GDP) and

federal debt extend through 2020:Q3.

OURCE: For GDP, Bureau of Economic Analysis via Haver

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

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

Expenditures

Percent change from year earlier

202120192017201520132011200920072005

Monthly

25. Federal receipts and expenditures

Receipts

OTE

: The data are 12-month moving sums.

OURCE

: Oce of Management and Budget via Haver Analytics.

MONETARY POLICY REPORT: FEBRUARY 2021 25

these revenue shortfalls varied considerably

across states, with the largest shortfalls in

states that rely heavily on sales taxes, tourism,

and energy production. In contrast, property

taxes—the principal local government

tax—have continued to rise apace, and

state and local governments have received

federal aid that has assisted with COVID-

related expenses and helped ease budget

strains. Meanwhile, bond market conditions

for state and local governments have been

generally accommodative in the second

half of the year, as robust municipal bond

issuance has been supported by historically

low yields and tax-exempt municipal bond

funds have seen solid inows. Even so, in

response to social-distancing restrictions

(including virtual learning), current budget

pressures, and concerns over future budgetary

challenges, state and local governments have

cut payrolls—particularly in the education

sector—an unprecedented 6½ percent over the

past year (gure28). Notably, public-sector

employment is down signicantly in nearly all

states, including those that have experienced

relatively smaller revenue shocks.

Vaccines offer hope of an end to the

pandemic, but risks to the outlook are

still substantial

The economic outlook presented in Part3

depends crucially on the course of the

COVID-19 pandemic. The vaccination

campaign now under way oers the prospect

of a return to more normal conditions

by the end of this year. But the pace of

vaccinations, the rate of decline in the spread

of the virus, and the speed with which people

return to normal activities all remain highly

uncertain, particularly given the emergence

of new, apparently more contagious strains.

The longer-run economic eects of the

pandemic are also dicult to predict. Many

example, unemployment benets) is taxable. Second,

goods consumption, which is likelier to be subject to

sales taxes than services, has largely held up. Finally,

unemployment has been concentrated among low-income

individuals, who pay less in income taxes.

18.0

18.5

19.0

19.5

20.0

Millions

202120182015201220092006

Monthly

28. State and local government payroll employment

NOTE: The data are seasonally adjusted.

OURCE

: Bureau of Labor Statistics, National Compensation Survey.

Total state taxes

Year-over-year percent change

202020192018201720162015

27. State and local tax receipts

NOTE: State tax data are 12-month percent changes of 4-quarter

moving averages, extend through November 2020, and are aggregated

over all states except Wyoming, for which data are not available.

Revenues from Washington, DC, are also excluded. Data for October

and November are missing for New Mexico, as this state has longer

reporting lags than others. Property tax data are 4-quarter percent

changes of 4-quarter moving averages, extend through 2020:Q3, and are

primarily collected by local governments.

OURCE: State Tax and Economic Review Project; State and Local

Finance Initiative at Urban Institute; Census Bureau.

Property taxes

26 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

small businesses have shut down and may

not reopen. Some pandemic-driven shifts in

economic activity, such as from in-person

to online shopping and from oce-based to

remote work, may prove to be permanent.

These shifts could increase productivity by

substituting remote interactions for costly

travel and commuting, but they could also put

persistent upward pressure on unemployment,

as aected workers may need to seek new jobs

and perhaps new occupations. The pandemic

has also disrupted schooling at all levels,

which could have persistent negative eects

on educational attainment and economic

outcomes for aected students.

Financial Developments

The expected level of the federal funds

rate over the next few years has remained

near zero

Economic forecasters and nancial market

participants expect the federal funds rate over

the next several years to remain at the eective

lower bound. Market-based measures of

federal funds rate expectations over the next

few years have increased moderately since June

and remain below 0.25percent until the second

quarter of 2023 (gure29).

According to

the results of the Survey of Primary Dealers

and the Survey of Market Participants, both

conducted by the Federal Reserve Bank of

New York in January, the median respondent

views the most likely path of the federal funds

rate as remaining in its current range of 0 to

¼percent until the rst half of 2024.

13. These measures are based on a straight read of

market quotes and are not adjusted for term premiums.

14. The results of the Survey of Primary Dealers

and the Survey of Market Participants are available

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

https://www.newyorkfed.org/markets/primarydealer_

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

markets/survey_market_participants, respectively.

February 16, 2021

.25

.50

.75

1.00

1.25

Percent

202520242023202220212020

29. Market-implied federal funds rate path

Quarterly

June 11, 2020

OTE

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

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

The implied path as of June 11, 2020, is compared with that as o

February 16, 2021. The path is estimated with a spline approach,

assuming a term premium of 0 basis points. The June 11, 2020, path

extends through June 2024 and the February 16, 2021, path through

January 2025.

OURCE

:Bloomberg; Federal Reserve Board sta estimates.

MONETARY POLICY REPORT: FEBRUARY 2021 27

Yields on longer-term U.S. nominal

Treasury securities increased markedly . . .

Yields on nominal Treasury securities at longer

maturities increased markedly since mid-2020

after falling sharply in late February and early

March as investors’ concerns regarding the

implications of the COVID-19 outbreak for

the economic outlook led to both falling policy

rate expectations and ight-to-safety ows

(gure30). The increase in yields on longer-

term Treasury securities followed news of the

imminent arrival of multiple highly eective

COVID-19 vaccines in the fall of 2020 and

expectations of further scal support, as well

as an increase in the issuance of longer-term

Treasury securities. Near-term uncertainty

about longer-dated nominal Treasury

yields—as measured by volatility of near-

term swaptions of 10-year interest rates—has

remained low.

. . . while spreads of other long-term debt

to Treasury securities narrowed . . .

Despite the rise in Treasury yields, yields on

30-year agency mortgage-backed securities

(MBS)—an important determinant of

mortgage interest rates—decreased somewhat,

on balance, amid the Federal Reserve’s

ongoing purchases of MBS and have remained

near their historical lows (gure31). Thus, the

spread between yields on 30-year agency MBS

and comparable-maturity Treasury yields has

narrowed.

Approval of the eective vaccines late last

year, optimism about further scal support,

and notable improvement in the outlook

for corporate earnings boosted investors’

optimism, and improvement in the credit

quality of rms drove declines in yields on

investment- and speculative-grade corporate

bonds (gure32). As with mortgage securities,

spreads on corporate bond yields over

comparable-maturity nominal Treasury

yields have narrowed considerably since

the end of June—as corporate bond yields

declined and yields on nominal Treasury

5-year

2-year

Percent

202120192017201520132011

30. Yields on nominal Treasury securities

Daily

10-year

OURCE

: Department of the Treasury via Haver Analytics.

Yield

100

150

200

250

Basis points

202120192017201520132011

31. Yield and spread on agency mortgage-backed

securities

Percent

Spread

OTE

: The yield is on mortgage-backed securities from Fannie Mae

through May 31, 2019, and from uniform mortgage-backed securities

thereafter. Data are daily.

OURCE

: Department of the Treasury; J.P. Morgan. Courtesy of J.P

28 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

securities increased—and have returned to

levels observed before the pandemic. Yields

on municipal debt continued to decline in the

second half of 2020, and spreads on municipal

bonds over comparable-maturity nominal

Treasury yields have narrowed substantially

since the end of June, as nominal Treasury

yields increased and investors grew more

optimistic about further scal stimulus and

aid to state and local governments. The year-

end expiration of lending facilities that were

authorized under section 13(3) of the Federal

Reserve Act and that use CARES Act funding

did not lead to upward pressure on corporate

or municipal bond spreads.

. . . and market functioning for Treasury

securities, corporate bonds, mortgage-

backed securities, and municipal bonds

continued to improve . . .

After having improved substantially in the

spring of last year, measures of market

liquidity for Treasury securities—such as

measures of market depth and trade sizes—

continued to improve somewhat in the second

half of 2020 and moved closer to pre-

pandemic levels, especially for shorter-dated

Treasury securities. However, measures of

liquidity for longer-dated Treasury securities

and in some portions of the MBS market—

notably for those securities excluded from

Federal Reserve open market purchases—

remained somewhat below pre-pandemic

levels. Measures of market functioning of the

corporate bond market continued to improve

as bid-ask spreads narrowed considerably

and returned to their pre-pandemic levels

and issuance of corporate bonds in primary

markets was robust. Measures of market

functioning of the municipal bond market—

such as robust issuance of municipal bonds in

primary markets and round-trip transaction

costs—indicate that market conditions

remained stable in the second half of 2020.

Municipal

High-yield corporate

Percent

202120192017201520132011

32. Corporate bond yields, by securities rating, and

municipal bond yield

Daily

Investment-grade corporate

OTE

: Investment-grade corporate is the 10-year triple-B, which

reects the eective yield of the ICE BofAML 7-to-10-year triple-B U.S.

Corporate Index (C4A4). High-yield corporate is the 10-year high yiel

and reects the eective yield of the ICE BofAML 7-to-10-year U.S.

Cash Pay High Yield Index (J4A0). Municipal is the Municipal Market

Advisors 20-year yield.

OURCE

:ICE Data Indices, LLC, used with permission; Municipal

Market Advisors.

MONETARY POLICY REPORT: FEBRUARY 2021 29

. . . while conditions in short-term

funding markets remained stable

The eective federal funds rate and other

secured and unsecured short-term rates

continued to trade within the target range

of the federal funds rate, as ample liquidity,

primarily due to substantial increases in

reserves, has kept markets functioning

smoothly. Since June, measures of stress

in short-term funding markets—including

trading volumes, issuance, and spreads to

overnight index swaps—have remained stable

at or near pre-pandemic levels, and year-end

funding pressures were minimal.

Broad stock prices have risen notably

After starting to rebound last spring from

their COVID-related declines, broad stock

prices have risen notably further since

mid-2020, as the arrival of eective vaccines,

optimism about further scal support, and

notable improvement in the outlook for

corporate earnings outweighed investor

concerns regarding the rise in COVID-19

cases (gure33). The prospect of an economic

recovery aided by eective vaccines and

scal support led to outsized price gains in

some cyclical sectors, such as the consumer

discretionary, materials, and information

technology sectors. Similarly, stock prices

of smaller corporations considerably

outperformed large-cap stock price indexes.

After experiencing depressed levels through

early fall, bank stock price indexes increased

considerably in late 2020, boosted by positive

vaccine news, a generally improved investor

outlook for loan losses and bank protability,

and the release of favorable stress-test results

in late 2020. Measures of realized and

implied stock price volatility for the S&P 500

index—the 20-day realized volatility and the

VIX—decreased sharply from their very high

levels at the end of the second quarter but

remained moderately above their historical

medians, respectively (gure34). (For a

discussion of nancial stability issues, see

the box “Developments Related to Financial

Stability.”)

S&P 500 index

100

150

200

250

300

350

December 31, 2009 = 100

202120192017201520132011

33. Equity prices

Daily

Dow Jones bank index

OURCE: S&P Dow Jones Indices LLC via Bloomberg. (For Dow

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

VIX

Percent

202120192017201520132011

34. S&P 500 volatility

Daily

Realized volatility

OTE

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

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

days. For realized volatility, 5-minute S&P 500 returns are used in an

exponentially weighted moving average with 75 percent of weight

distributed over the past 20 days.

OURCE

: Cboe Volatility Index® (VIX®) via Bloomberg; Federal

Reserve Board sta estimates.

30 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

elevated before the outbreak of the pandemic. Business

leverage now stands near historical highs. While near-

term risks associated with debt service may be limited

by large cash balances at large  rms, low interest rates,

and recently improved earnings prospects, insolvency

risks at small and medium-sized  rms, as well as at

some large  rms, remain considerable. The household

sector entered the downturn with relatively low debt

but experienced signi cant  nancial strains because

of the unprecedented spike in unemployment and

business closures. Government programs—including

expanded unemployment insurance and direct stimulus

payments in the Coronavirus Aid, Relief, and Economic

Security Act, or CARES Act—and a rebound in

economic activity in the second half of 2020 reduced

economic hardship for households and mitigated the

deterioration in household credit quality.

In the  nancial sector, bank pro tability and capital

positions, which were strained by the outbreak of

the pandemic, improved in the second half of 2020

because of a combination of lower-than-expected

losses, a better economic outlook, and restrictions

imposed by the Federal Reserve on capital distributions

by the largest banks. In particular, the capitalization of

U.S. global systemically important banks, or G-SIBs,

exceeds pre-pandemic levels. In addition, the results

of stress tests released in June and December2020

indicated that banks would generally remain well

capitalized under extremely severe recession scenarios.

Leverage at broker-dealers changed little over 2020 and

remains at historically low levels. While the liquidity

deterioration across dealer-intermediated markets in

March2020 demonstrated potential fragility despite

dealers’ low leverage, this fragility has been likely

mitigated by emergency lending facilities and the

supervisory action of the Federal Reserve. By contrast,

leverage at life insurance companies has risen to post-

2008 highs. Vulnerabilities from leverage at hedge

funds remain elevated. Finally, securitization volumes

increased after coming to a halt in March2020 but

remain signi cantly below pre-pandemic levels.

Over the course of 2020, banks relied only modestly

on short-term wholesale funding and maintained

signi cant levels of high-quality liquid assets. By

contrast, developments at the onset of the pandemic

demonstrated signi cant structural vulnerabilities at

money market mutual funds and open-end investment

funds, particularly those that invest substantially in

This discussion reviews vulnerabilities in the

U.S.  nancial system since the COVID-19 outbreak

and summarizes recent actions and developments

at facilities established by the Federal Reserve to

support the  ow of credit throughout the economy.

The framework used by the Federal Reserve Board for

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

focuses on  nancial vulnerabilities in four broad areas:

asset valuations, business and household debt, leverage

in the  nancial sector, and funding risks.

Overall, asset valuation pressures, which were

elevated before the COVID-19 outbreak in the United

States, brie y subsided at the onset of the outbreak as

asset prices plummeted but have since retraced in most

markets. In particular, prices in equity, corporate bond,

and residential real estate (RRE) markets have returned

to or exceeded pre-pandemic levels, buoyed in part by

recent developments related to vaccines. Equity prices

have more than recovered from the steep declines

at the onset of the pandemic, with investor appetite

broadly rebounding across most sectors. Equity market

volatility remains high, indicating persistent uncertainty

regarding the pandemic and the related course of

economic activity. Yields on corporate bonds over

comparable-maturity Treasury securities have narrowed

considerably. Treasury yields across the maturity

spectrum declined at the onset of the pandemic and

remain near historical lows. The credit quality of

outstanding leveraged loans deteriorated early this year,

but investor appetite remains strong and new issuance

has increased in the second half of 2020. RRE prices

also rose rapidly in the second half of 2020, outpacing

rent increases. Commercial real estate prices remain

at historically high levels despite high vacancy rates

and appear susceptible to sharp declines, particularly

if the pace of distressed transactions picks up or, in the

longer term, the pandemic leads to permanent changes

in demand.

Vulnerabilities associated with business and

household debt increased over the course of 2020.

Business debt has risen from levels that were already

1. The Financial Stability Report published in November

2020 presents the most recent, detailed assessment of U.S.

 nancial system vulnerabilities and a summary of Federal

Reserve actions and developments at facilities during the

COVID-19 crisis. See Board of Governors of the Federal

Reserve System (2020), Financial Stability Report (Washington:

Board of Governors, November), https://www.federalreserve.

gov/publications/files/financial-stability-report-20201109.pdf.

Developments Related to Financial Stability

(continued)

MONETARY POLICY REPORT: FEBRUARY 2021 31

The Paycheck Protection Program Liquidity Facility

(PPPLF) was established to extend credit to lenders

that participate in the Paycheck Protection Program of

the Small Business Administration (SBA), which has

provided payroll support for small businesses. Through

mid-January2021, the Federal Reserve has made nearly

15,000 PPPLF advances to more than 850 banking

institutions, totaling more than $110billion in liquidity.

The Federal Reserve has taken actions that reduce

spillovers to the U.S. economy from foreign  nancial

stresses. Temporary U.S. dollar liquidity swap lines

were established in March2020, in addition to the

preexisting standing lines, and have improved liquidity

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

institutions in their jurisdictions during times of market

stress. The FIMA (Foreign and International Monetary

Authorities) Repo Facility has helped support the

smooth functioning of the U.S. Treasury market by

providing a temporary source of U.S. dollars to a

broad range of countries, many of which do not have

swap line arrangements with the Federal Reserve. The

temporary swap lines and the FIMA Repo Facility will

continue to serve as liquidity backstops until their

scheduled expiration at the end of September2021.

Other facilities established at the onset of the

pandemic expired either at the end of December2020

or at the beginning of January2021. The Primary

Market Corporate Credit Facility, the Secondary

Market Corporate Credit Facility, and the Municipal

Liquidity Facility were established to improve the  ow

of credit through bond markets, where large  rms and

municipalities obtain most of their long-term funding.

The Term Asset-Backed Securities Loan Facility was

also set up to support the issuance of securities backed

by student loans, auto loans, credit card loans, loans

backed by the SBA, and certain other assets. Altogether,

before expiring at the end of 2020, these facilities

brought rapid improvements to credit markets, with

only modest direct interventions. The Main Street

Lending Program (Main Street) expired at the beginning

of January2021. In its period of operation, Main Street

purchased about 1,800 loan participations, totaling

more than $16billion, which helped small and

medium-sized businesses from some of the hardest-

hit areas of the country and covered a wide range of

industries.

corporate and municipal debt. These funds experienced

large, sudden redemptions in March2020, which

contributed to strains in broader short-term funding

markets and  xed-income debt markets. Federal

Reserve actions, including emergency lending

facilities, have mitigated these vulnerabilities for now,

but without structural reforms, the vulnerabilities

demonstrated in March2020 will persist and could

signi cantly amplify future shocks.

The outlook for the pandemic and economic

activity remains uncertain globally. In response to

the economic disruptions caused by the pandemic,

many foreign governments have ramped up spending

to support households and businesses. Nevertheless,

 nancial systems in some foreign economies are

more vulnerable than before the pandemic, and these

vulnerabilities may grow in the near term. Risks from

widespread and persistent stresses in emerging markets

and dollar funding markets could interact with risks

associated with the course of COVID-19 for the U.S.

 nancial system. In turn, these risks could be ampli ed

by the vulnerabilities identi ed in this discussion and

produce additional strains for the U.S.  nancial system

and economic activity.

Developments Associated with Facilities

to Support the Economy during the

COVID-19 Crisis

In the immediate wake of the pandemic, the

Federal Reserve took forceful actions and established

emergency lending facilities, with the approval of the

Secretary of the Treasury as needed. These actions

and facilities have supported the  ow of credit to

households and businesses and have served as

backstop measures that have given investors con dence

that support will be available should conditions

deteriorate substantially.

Some of the facilities established at the onset of the

pandemic are still operational. The Commercial Paper

Funding Facility (CPFF), the Money Market Mutual

Fund Liquidity Facility (MMLF), and the Primary Dealer

Credit Facility (PDCF) stabilized short-term funding

markets and improved the  ow of credit to households

and businesses. Although balances in the PDCF,

CPFF, and MMLF have fallen from their initial highs

to low levels, the facilities will continue to serve as

important backstops against further market stress until

their scheduled expiration at the end of March2021.

32 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

Bank credit contracted, while bank

protability improved

In contrast with strong debt issuance through

securities markets, outstanding bank loan

balances across most major loan categories

have contracted since mid-June amid generally

weak borrower demand and tight lending

standards. Commercial and industrial (C&I)

loans at banks declined sharply in the second

half of 2020, reecting the repayment of

large credit-line draws made earlier in the

year and the forgiveness of some loans under

the Paycheck Protection Program, as well as

generally weak borrower demand for such

loans and tighter bank lending standards.

However, overall C&I loan balances at banks

remained higher compared with a year earlier

(gure35). Measures of bank protability,

such as return on assets and return on

equity, rebounded in the second half of 2020

following very low readings in the second

quarter, when banks signicantly increased

their loan loss provisions, but have remained

below pre-pandemic levels (gure36).

Delinquency rates on bank loans remained

low, as banks’ loss-mitigation and forbearance

programs allowed many borrowers to stay

current on their loans. Large banks posted

higher-than-expected earnings in the fourth

quarter, bolstered by capital market activity

and loan loss reserve releases, while low rates

continued to weigh on prot margins.

International Developments

Economic activity abroad snapped back

in the third quarter . . .

As in the United States, foreign GDP partially

rebounded in the third quarter of 2020

(gure37). Nonetheless, foreign economic

100

110

120

130

140

150

160

2005 average = 100

20202018201620142012201020082006

37. Foreign real gross domestic product

Quarterly

NOTE: The data extend through 2020:Q3. Foreign GDP computed on

a representative sample of 40 countries and aggregated using U.S. trade

weights.

OURCE: Federal Reserve Bank of Dallas, Database of Global

Economic Indicators, https://www.dallasfed.org/institute/dgei/gdp.aspx.

Return on assets

Percent, annual rate

2.0

1.5

1.0

1.5

2.0

202020182016201420122010200820062004

36. Protability of bank holding companies

Percent, annual rate

Return on equity

OTE:The data are quarterly, extend through 2020:Q3, and are

seasonally adjusted.

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

Consolidated

Financial Statements for Bank Holding Companies.

Percent

20212019201720152013201120092007

35. Commercial and industrial loan growth

Monthly

NOTE:Data are calculated as monthly year-over-year growth rates.

OURCE: Federal Reserve Board, Statistical Release H.8, “Assets a

Liabilities of Commercial Banks in the United States.”

MONETARY POLICY REPORT: FEBRUARY 2021 33

activity remains well below its pre-pandemic

level, as a resurgence of infections in many

economies has recently led to renewed social-

distancing restrictions. The accompanying

slowdown in economic activity appears to

have been less dramatic than that in the

spring, as economies have adjusted to function

better under social-distancing restrictions. In

addition, many current containment measures

have been less stringent relative to those in

the spring, and scal and monetary policies

continue to support the path to recovery.

Since last spring, manufacturing has generally

recovered more than services, which remain

depressed because consumers have avoided

socially intensive activities, especially in the

hospitality and leisure sectors (gure38).

Some higher-income Asian economies, where

infections are more under control, experienced

relatively better GDP growth than many

advanced economies and beneted from

increased export demand in the second half

of 2020. Most notably, China’s GDP was

6.5percent higher in the fourth quarter of2020

compared with a year ago. In many Latin

American countries and advanced foreign

economies (AFEs), fourth-quarter GDP

contracted relative to a year earlier (gure39).

Although the ongoing spread of the virus—

including new variants—is concerning,

many AFEs have already started immunizing

their populations and have commitments

to purchase substantial stocks of vaccines.

Controlling the virus globally, however, will be

challenging, in part because many emerging

market economies (EMEs) have more limited

access to vaccines and face greater distribution

challenges.

Euro area

Japan

Index

2016 2017 2018 2019 2020 2021

38. Services purchasing managers index in

selected foreign economies

Monthly

China

OTE: 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.

OURCE

: IHS Markit, Global Sector PMI.

Percent change from year earlier

Euro area Canada China Mexico South Korea

39. Real gross domestic product in selected

foreign economies

NOTE: The data are for 2020:Q4. For Canada, the euro area, and

Mexico, the values correspond to ash estimates of GDP. For South

Korea, the value is the advance GDP estimate. For China, the value

corresponds to preliminary GDP.

OURCE: For the euro area, Eurostat; for Canada, Statistics Canada;

for China, National Bureau of Statistics of China; for Mexico, Instituto

Nacional de Estadística y Geografía; for South Korea, Bank of Korea;

all via Haver Analytics.

34 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

. . . with considerable policy support and

subdued ination

Eorts to contain the virus’s resurgence in

the fourth quarter prompted some foreign

central banks and scal authorities to

provide additional support to households

and businesses, particularly in the AFEs.

High debt levels limited the scal space in

some EMEs, and emergency aid to sustain

employment and household spending

expired in some EMEs with elevated scal

concerns. Monetary policy across foreign

economies was highly accommodative, and

nancing conditions remained supportive of

growth, with a few major AFE central banks

introducing new stimulus measures late last

year. Indeed, market-implied policy paths

for the Japanese, U.K., and European central

banks signal a prolonged period of monetary

accommodation (gure40).

Even with substantial policy support, AFE

unemployment rates at the end of 2020 are

higher than they were before the pandemic.

Unemployment rates in Europe and Japan

rose moderately during the spring and have

remained relatively unchanged (gure41).

Canada, however, endured a large and rapid

increase in unemployment during the spring

and a commensurate decline by year-end,

similar to the U.S. experience. The country-

specic dynamics of unemployment partly

reect dierences in labor market structures,

employment protection regulations, and the

expansion of wage subsidy programs. In

general, unemployment rates in the EMEs

increased since the start of the pandemic, and

some Asian economies adopted direct wage

subsidies to avert large dislocations in their

labor markets.

United States

Euro area

Canada

Japan 2

Percent

202120192017201520132011200920072005

41. Unemployment rate in selected advanced economies

Monthly

United Kingdom

OTE: The data for the United Kingdom extend through October

2020 and are centered 3-month averages of monthly data. The data for

the euro area and Japan extend through December 2020.

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

Japan, Ministry of Health, Labour, and Welfare; for the euro area,

Statistical Oce of the European Communities; for Canada, Statistics

Canada; for the United States, Bureau of Labor Statistics; all via Haver

Analytics.

Euro area

Japan

100

150

Basis points

2016 2017 2018 2019 2020 2021

40. 24-month policy expectations for selected advanced

foreign economies

Weekly

United Kingdom

OTE

: The data are weekly averages of daily 24-month market-implied

central bank policy rates. The 24-month policy rates are implied by

quotes on overnight index swaps tied to the policy rates. The data begin

on Thursdays and extend through February 10, 2021.

OURCE

: Bloomberg; Federal Reserve Board sta estimations.

MONETARY POLICY REPORT: FEBRUARY 2021 35

Despite the recovery in activity and

employment in some sectors of the economy,

lower overall demand and continued

uncertainty about the path of the virus helped

keep ination subdued abroad. In many

foreign economies, ination remains below

central banks’ targets. In the euro area and

Japan, the consumer price index fell in 2020,

reecting subdued ination expectations and

persistent economic slack (gure42).

Longer-term sovereign yields remained

low, while risk sentiment improved . . .

Longer-term sovereign yields in major

AFEs have moved up, on net, but remained

near historically low levels amid continued

monetary policy accommodation (gure43).

Foreign equity markets rebounded in the

second half of2020, reecting not only

supportive monetary and scal policies, but

also the development of eective vaccines.

Although AFE stock markets largely

recovered, they still underperformed U.S.

equities, with greater restrictions on activity

abroad and a lower share of companies that

beneted from the digital economy (gure44).

United States

Germany

Japan

Percent

2005 2007 2009 2011 2013 2015 2017 2019 2021

43. Nominal 10-year government bond yields in

selected advanced economies

Weekly

United Kingdom

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

data begin on Thursdays and extend through February 10, 2021.

OURCE

: Bloomberg.

Euro area

Canada

Japan

12-month percent change

2016 2017 2018 2019 2020

42. Consumer price ination in selected advanced

foreign economies

Monthly

United Kingdom

OTE: The data extend through December 2020.

OURCE

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

for

Japan,

Ministry of Internal Aairs and Communications; for the eur

area,

Statistical Oce of the European Communities; for C

anada,

Statistics Canada; all via Haver Analytics.

United States

Euro area

Japan

100

120

140

160

180

200

Week ending January 6, 2016 = 100

2016 2017 2018 2019 2020 2021

44. Equity indexes for selected advanced economies

Weekly

United

Kingdom

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

Thursdays and extend through February 10, 2021.

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

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

States, S&P 500 Index; all via Bloomberg. (For Dow Jones Indices

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

36 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

EME equity markets have recovered since

the spring, with recent strong capital inows

(gure45). Asian equity indexes rose well

above pre-pandemic levels, while those in Latin

America posted modest gains relative to a year

ago, largely reecting Asian economies’ lower

infection rates, better fundamentals, and larger

scal space to provide additional stimulus

(gure46). Along with the improvement in

equity markets, sovereign borrowing spreads

generally narrowed, although they are still

above pre-pandemic levels.

. . . and the broad dollar depreciated

The broad dollar index—a measure of the

trade-weighted value of the dollar against

Taiwan

South Korea

Brazil

Mexico

100

150

200

250

300

Week ending January 6, 2016 = 100

2016 2017 2018 2019 2020 2021

46. Equity indexes for selected emerging market

economies

Weekly

China

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

Thursdays and extend through February 10, 2021.

OURCE: For China, Shanghai Composite Index; for Brazil, Bovespa

Index; for South Korea, Korean Composite Index; for Mexico, IPC

Index; for Taiwan, TAIEX; all via Bloomberg.

EMBI+ (left scale)

100

Billions of dollars

900

600

300

600

900

20212019201720152013201120092007

45. Emerging market mutual fund ows and spreads

Basis points

Jan.

OTE

: The bond and equity fund ows data are semiannual sums of

weekly data from December 28, 2006, to December 30, 2020, and a monthly

sum of weekly data from December 31, 2020, to January 26, 2021. Weekly

data span Thursday through Wednesday, and the semiannual and monthly

values are sums over weekly data for weeks ending in that half year or

month. The fund ows data exclude funds located in China. The J.P.

Morgan Emerging Markets Bond Index Plus (EMBI+) data are weekly

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

through February 10, 2021. The EMBI+ data exclude Venezuela.

OURCE

: For bond and equity fund ows, EPFR Global; for EMBI+, J.P.

Morgan Emerging Markets Bond Index Plus via Bloomberg.

Equity fund ows (right scale)

Bond fund ows (right scale)

MONETARY POLICY REPORT: FEBRUARY 2021 37

foreign currencies—fell in the second half of

last year. Both the continued improvement

in market conditions following the stresses

of last March and highly accommodative

U.S. monetary policy contributed to dollar

depreciation. On balance, the dollar has

depreciated about 3.5 percent relative to a year

ago (gure 47). The dollar broadly weakened

against AFE currencies, notably the euro. The

dollar also fell against some Asian emerging

market currencies, particularly the Chinese

renminbi and Korean won (gure 48).

AFE dollar index

EME dollar index

100

105

110

115

120

Week ending January 6, 2016 = 100

2016 2017 2018 2019 2020 2021

47. U.S. dollar exchange rate indexes

Weekly

Broad dollar index

Dollar appreciation

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

weekly averages of daily values of the broad dollar index, advanced

foreign economies (AFE) dollar index, and emerging market economies

(EME) dollar index. The weekly data begin on Thursdays and extend

through February 10, 2021. As indicated by the leftmost arrow, increases

in the data reﬂect U.S. dollar appreciation and decreases reﬂect U.S.

dollar depreciation.

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

Exchange Rates.”

Korean won

Brazilian real

Mexican peso

100

110

120

130

140

150

Week ending January 6, 2016 = 100

2016 2017 2018 2019 2020 2021

48. Exchange rate indexes for selected emerging market

economies

Weekly

Chinese renminbi

Dollar appreciation

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

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

extend through February 10, 2021. As indicated by the leftmost arrow,

increases in the data reﬂect U.S. dollar appreciation and decreases reﬂect

U.S. dollar depreciation.

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

Exchange Rates.”

The Federal Open Market Committee

maintained the federal funds rate near

zero as it seeks to achieve maximum

employment and ination at the rate of

2percent over the longer run . . .

In light of the eects of the continuing

public health crisis on the economy and the

associated risks to the outlook, the Federal

Open Market Committee (FOMC) has

maintained the target range for the federal

funds rate at 0 to ¼percent since March2020,

when the global pandemic led the Committee

to quickly lower the target range to the

eective lower bound (gure49).

In its

revised Statement on Longer-Run Goals and

Monetary Policy Strategy, issued in August,

the Committee rearmed its commitment to

achieving maximum employment and ination

at the rate of 2 percent over the longer run and

noted that “following periods when ination

has been running persistently below 2percent,

15. See the FOMC statements issued since the

March meetings, which are available (along with other

postmeeting statements) on the Monetary Policy portion

of the Board’s website at https://www.federalreserve.gov/

monetarypolicy.htm.

appropriate monetary policy will likely

aim to achieve ination moderately above

2percent for some time” so that ination

averages 2percent over time and longer-term

ination expectations remain well anchored

at 2percent. (See the box “The FOMC’s

Revised Statement on Longer-Run Goals and

Monetary Policy Strategy.”) The Committee

expects to maintain an accommodative stance

of monetary policy until these outcomes are

achieved and has indicated that it expects

it will be appropriate to maintain the target

range for the federal funds rate at 0 to

¼percent until labor market conditions have

reached levels consistent with the Committee’s

assessments of maximum employment and

ination has risen to 2percent and is on track

to moderately exceed 2percent for some time.

. . . and the Committee increased the

holdings of Treasury securities and agency

mortgage-backed securities in the System

Open Market Account

In addition, the Federal Reserve has continued

to expand its holdings of Treasury securities

by $80billion per month and its holdings of

Part 2

monetary PoLiCy

2-year Treasury rate

Target federal funds rate

Percent

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

49.

Selected interest rates

Daily

10-year Treasury rate

OTE

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

OURCE

: Department of the Treasury; Federal Reserve Board.

40 PART 2: MONETARY POLICY

the Congress to promote maximum employment, price

stability, and moderate long-term interest rates. It also

describes the bene ts of explaining policy actions to

the public as clearly as possible. The statement then

outlines important changes to the characterization of

the Committee’s policy framework for achieving its

dual-mandate goals of maximum employment and

price stability. After stating that economic variables

 uctuate in response to disturbances and that monetary

policy plays an important role in stabilizing the

economy, the statement notes that the Committee’s

primary means of adjusting policy is through changes in

the policy interest rate (the target range for the federal

funds rate). Furthermore, because the neutral level of

the policy rate is now lower than its historical average,

“the federal funds rate is likely to be constrained by

its effective lower bound more frequently than in the

past.” Therefore, “the Committee judges that downward

risks to employment and in ation have increased.” The

statement then notes that the “Committee is prepared

to use its full range of tools to achieve its maximum

employment and price stability goals,” indicating that

it could deploy other policy tools, such as forward

guidance and asset purchases, when the policy rate is

at its ELB.

In its revised statement, the Committee characterizes

maximum employment as a “broad-based and inclusive

goal” in addition to saying—as it did in the 2012

statement—that maximum employment is not directly

measurable and that it changes over time and depends

largely on nonmonetary factors. During the Fed Listens

events that were a pillar of the review of monetary

policy strategy, tools, and communication practices,

policymakers heard from a broad range of stakeholders

in the U.S. economy about how monetary policy affects

peoples’ daily lives and livelihoods.

2. Between February2019 and May2020, the Federal

Reserve System hosted 15 Fed Listens events with

representatives of the public. See Board of Governors of the

Federal Reserve System (2020), Fed Listens: Perspectives

On August27, 2020, the Federal Open Market

Committee (FOMC) issued a revised Statement on

Longer-Run Goals and Monetary Policy Strategy.

This

document,  rst released in January2012, lays out

the Committee’s goals, articulates its framework for

monetary policy, and serves as the foundation for its

policy actions. The revised statement encapsulates the

key conclusions from the Federal Reserve’s review of

the monetary policy strategy, tools, and communication

practices it uses to pursue its statutory dual-mandate

goals of maximum employment and price stability.

The review, which commenced in early 2019, was

undertaken because the U.S. economy has changed

in ways that matter for monetary policy. In particular,

the neutral level of the policy interest rate—the policy

rate consistent with the economy operating at full

strength and with stable in ation—has fallen over

recent decades in the United States and abroad. This

decline in the neutral policy rate increases the risk

that the effective lower bound (ELB) on interest rates

will constrain central banks from reducing their policy

interest rates enough to effectively support economic

activity during downturns. In addition, during the

economic expansion that followed the Global Financial

Crisis—the longest U.S. expansion on record—the

unemployment rate hovered near 50-year lows for

roughly 2 years, resulting in new jobs and opportunities

for many who have typically been left behind. At the

same time, with brief exceptions, in ation ran below

the Committee’s 2percent objective.

The revised statement begins by reaf rming the

Committee’s commitment to its statutory mandate from

1. The FOMC’s revised Statement on Longer-Run Goals

and Monetary Policy Strategy, which was unanimously

reaf rmed at the FOMC’s January2021 meeting, appears in

the front matter of this report. Additional information about

the Federal Reserve’s review of monetary policy strategy, tools,

and communication practices and the revised statement is

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

gov/monetarypolicy/review-of-monetary-policy-strategy-tools-

and-communications.htm.

The FOMC’s Revised Statement on Longer-Run Goals and

Monetary Policy Strategy

(continued)

MONETARY POLICY REPORT: FEBRUARY 2021 41

the FOMC’s policy actions to achieve maximum

employment and price stability will be most effective

if longer-term in ation expectations remain well

anchored at 2percent. However, if in ation runs

below 2percent following economic downturns but

never moves above 2percent even when the economy

is strong, then, over time, in ation will average less

than 2percent. Households and businesses will

come to expect this result, meaning that in ation

expectations would tend to move below the 2percent

in ation goal and pull down realized in ation. Lower

in ation expectations also pull down the level of

nominal interest rates, further diminishing the scope

for monetary policy to reduce the policy rate during a

downturn and further worsening economic outcomes.

To prevent in ation expectations from falling below

2percent and the adverse cycle that could ensue,

the statement indicates that “the Committee seeks to

achieve in ation that averages 2percent over time,

and therefore judges that, following periods when

in ation has been running persistently below 2percent,

appropriate monetary policy will likely aim to achieve

in ation moderately above 2percent for some time.”

The revised statement acknowledges that

“sustainably achieving maximum employment and

price stability depends on a stable  nancial system.”

Therefore, as with the 2012 statement, the Committee’s

policy decisions will take into account “its assessments

of the balance of risks, including risks to the  nancial

system that could impede the attainment” of the

statutory goals.

The Committee concludes its revised statement by

indicating its intention to undertake a review of the

Federal Reserve’s monetary policy strategy, tools, and

communication practices roughly every  ve years.

Conducting a review at regular intervals is a good

institutional practice, provides valuable feedback, and

enhances transparency and accountability.

expenditures, is most consistent over the longer run with the

Federal Reserve’s statutory mandate.”

A key takeaway from these events was that a strong

labor market during the late stages of an economic

expansion—conditions that were in effect in 2019 and

early 2020—offers signi cant bene ts to residents of

low- and moderate-income communities, primarily by

providing employment opportunities for people who

have had dif culty  nding jobs in the past.

The revised statement says that “the Committee’s

policy decisions must be informed by assessments of

the shortfalls [emphasis added] of employment from

its maximum level” rather than by “deviations”—

the word used in the earlier statement.

In previous

decades, in ation tended to rise noticeably in response

to a strengthening labor market. It was sometimes

appropriate for the Fed to tighten monetary policy as

employment rose toward its estimated maximum level

in order to stave off an unwelcome rise in in ation.

The change to “shortfalls” clari es that, in the

future, the Committee will not have concerns when

employment runs at or above real-time estimates of

its maximum level unless accompanied by signs of

unwanted increases in in ation or the emergence of

other risks that could impede the attainment of the

dual-mandate goals.

The Committee’s longer-run goal for in ation

remains 2percent, unchanged from the 2012

statement.

The revised statement emphasizes that

from the Public (Washington: Board of Governors,

June), https://www.federalreserve.gov/publications/files/

fedlistens-report-20200612.pdf. In addition, see the box

“Federal Reserve Review of Monetary Policy Strategy, Tools,

and Communication Practices” in Board of Governors

of the Federal Reserve System (2020), Monetary Policy

Report (Washington: Board of Governors, February),

pp.40–41, https://www.federalreserve.gov/monetarypolicy/

files/20200207_mprfullreport.pdf.

3. The most recent version of the 2012 statement is

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

gov/monetarypolicy/files/FOMC_LongerRunGoals_201901.pdf.

4. The in ation goal is measured by the annual change

in the price index for personal consumption expenditures.

The statement says: “The Committee reaf rms its judgment

that in ation at the rate of 2percent, as measured by the

annual change in the price index for personal consumption

the Congress to promote maximum employment, price

stability, and moderate long-term interest rates. It also

describes the bene ts of explaining policy actions to

the public as clearly as possible. The statement then

outlines important changes to the characterization of

the Committee’s policy framework for achieving its

dual-mandate goals of maximum employment and

price stability. After stating that economic variables

 uctuate in response to disturbances and that monetary

policy plays an important role in stabilizing the

economy, the statement notes that the Committee’s

primary means of adjusting policy is through changes in

the policy interest rate (the target range for the federal

funds rate). Furthermore, because the neutral level of

the policy rate is now lower than its historical average,

“the federal funds rate is likely to be constrained by

its effective lower bound more frequently than in the

past.” Therefore, “the Committee judges that downward

risks to employment and in ation have increased.” The

statement then notes that the “Committee is prepared

to use its full range of tools to achieve its maximum

employment and price stability goals,” indicating that

it could deploy other policy tools, such as forward

guidance and asset purchases, when the policy rate is

at its ELB.

In its revised statement, the Committee characterizes

maximum employment as a “broad-based and inclusive

goal” in addition to saying—as it did in the 2012

statement—that maximum employment is not directly

measurable and that it changes over time and depends

largely on nonmonetary factors. During the Fed Listens

events that were a pillar of the review of monetary

policy strategy, tools, and communication practices,

policymakers heard from a broad range of stakeholders

in the U.S. economy about how monetary policy affects

peoples’ daily lives and livelihoods.

2. Between February2019 and May2020, the Federal

Reserve System hosted 15 Fed Listens events with

representatives of the public. See Board of Governors of the

Federal Reserve System (2020), Fed Listens: Perspectives

On August27, 2020, the Federal Open Market

Committee (FOMC) issued a revised Statement on

Longer-Run Goals and Monetary Policy Strategy.

This

document,  rst released in January2012, lays out

the Committee’s goals, articulates its framework for

monetary policy, and serves as the foundation for its

policy actions. The revised statement encapsulates the

key conclusions from the Federal Reserve’s review of

the monetary policy strategy, tools, and communication

practices it uses to pursue its statutory dual-mandate

goals of maximum employment and price stability.

The review, which commenced in early 2019, was

undertaken because the U.S. economy has changed

in ways that matter for monetary policy. In particular,

the neutral level of the policy interest rate—the policy

rate consistent with the economy operating at full

strength and with stable in ation—has fallen over

recent decades in the United States and abroad. This

decline in the neutral policy rate increases the risk

that the effective lower bound (ELB) on interest rates

will constrain central banks from reducing their policy

interest rates enough to effectively support economic

activity during downturns. In addition, during the

economic expansion that followed the Global Financial

Crisis—the longest U.S. expansion on record—the

unemployment rate hovered near 50-year lows for

roughly 2 years, resulting in new jobs and opportunities

for many who have typically been left behind. At the

same time, with brief exceptions, in ation ran below

the Committee’s 2percent objective.

The revised statement begins by reaf rming the

Committee’s commitment to its statutory mandate from

1. The FOMC’s revised Statement on Longer-Run Goals

and Monetary Policy Strategy, which was unanimously

reaf rmed at the FOMC’s January2021 meeting, appears in

the front matter of this report. Additional information about

the Federal Reserve’s review of monetary policy strategy, tools,

and communication practices and the revised statement is

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

gov/monetarypolicy/review-of-monetary-policy-strategy-tools-

and-communications.htm.

The FOMC’s Revised Statement on Longer-Run Goals and

Monetary Policy Strategy

(continued)

42 PART 2: MONETARY POLICY

agency mortgage-backed securities (MBS) by

$40billion per month. These asset purchases

help foster smooth market functioning and

accommodative nancial conditions, thereby

supporting the ow of credit to households

and businesses. The Committee’s current

guidance regarding asset purchases indicates

that increases in the holdings of Treasury

securities and agency MBS in the System Open

Market Account will continue at least at this

pace until substantial further progress has been

made toward its maximum-employment and

price-stability goals. In addition, the minutes

of the January2021 FOMC meeting noted the

importance attached to clear communications

about the Committee’s assessment of progress

toward its longer-run goals well in advance

of the time when progress could be judged

substantial enough to warrant a change in the

pace of purchases.

The FOMC is committed to using its full

range of tools to promote maximum

employment and price stability

The ongoing public health crisis continues to

weigh on economic activity, employment, and

ination, and it poses considerable risks to

the economic outlook. The Federal Reserve is

committed to using its full range of tools to

support the U.S. economy in this challenging

time, thereby promoting its maximum-

employment and price-stability goals. The

Committee will continue to monitor the

implications of incoming information for the

economic outlook and is prepared to adjust

the stance of monetary policy as appropriate if

risks emerge that could impede the attainment

of the Committee’s goals. The Committee’s

assessments will take into account a wide

range of information, including readings

on public health, labor market conditions,

ination pressures and ination expectations,

and nancial and international developments.

In addition to evaluating a wide range of

economic and nancial data and information

16. The minutes for the January 2021 FOMC meeting

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

federalreserve.gov/monetarypolicy/fomccalendars.htm.

gathered from business contacts and other

informed parties around the country,

policymakers routinely consult prescriptions

for the policy interest rate provided by various

monetary policy rules. Such prescriptions can

provide useful benchmarks for the FOMC.

Although simple rules cannot capture the

complexities of monetary policy and many

practical considerations make it undesirable

for the FOMC to adhere strictly to the

prescriptions of any specic rule, some

principles of good monetary policy can be

illustrated by these policy rules (see the box

“Monetary Policy Rules and Shortfalls from

Maximum Employment”).

The size of the Federal Reserve’s balance

sheet has grown since the end of June,

reecting continued asset purchases

of U.S. Treasury securities and agency

mortgage-backed securities

The Federal Reserve’s balance sheet has grown

to $7.4 trillion from $7trillion at the end of

June, reecting continued asset purchases to

help foster accommodative nancial conditions

and smooth market functioning, thereby

supporting the ow of credit to households

and businesses (gure50). The Federal

Reserve has continued rolling over at auction

all principal payments from its holdings

of Treasury securities. Principal payments

received from agency MBS and agency

debt continue to be reinvested into agency

MBS. Agency commercial mortgage-backed

securities purchases have also continued, but in

very small amounts.

The increase in asset holdings on the Federal

Reserve’s balance sheet due to Treasury

securities and agency MBS purchases has been

partially oset by declines in several other

asset categories. Outstanding balances at many

of the Federal Reserve’s emergency liquidity

and credit facilities have declined since June.

17. A list of funding, credit, liquidity, and loan

facilities established by the Federal Reserve in response to

COVID-19 is available on the Board’s website at

https://www.federalreserve.gov/funding-credit-liquidity-

and-loan-facilities.htm.

MONETARY POLICY REPORT: FEBRUARY 2021 43

In particular, outstanding balances for the

Primary Dealer Credit Facility, Commercial

Paper Funding Facility, and Money Market

Mutual Fund Liquidity Facility have all fallen

to near zero. Draws on central bank liquidity

swap lines have decreased substantially, and,

despite continued large-scale oerings, usage

of repurchase operations has been essentially

zero since their minimum bid rate was

increased in mid-June (gure51).

The expansion in the balance sheet was

accompanied by a substantial increase in

Federal Reserve liabilities, including reserve

balances held by depository institutions as well

as nonreserve liabilities such as currency and

other deposits.

The Federal Reserve concluded the

review of its strategic framework for

monetary policy in the second half

of2020

Over 2019 and 2020, the Federal Reserve

conducted a broad review of the monetary

policy strategy, tools, and communication

practices it uses to pursue its statutory dual-

mandate goals of maximum employment and

price stability. In addition to the release of

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Billions of dollars

Feb. May Aug. Nov. Feb.

2020 2021

51. Federal Reserve open market operations

Daily

NOTE: The data are at a business-day frequency, excluding

federal

holidays. The data begin January 1, 2020. Repo is repurchase agreement.

MBS is mortgage-backed security. Key identies bars in order from

top

to bottom.

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

oard

sta calculations.

Overnight repos

Outstanding term repos

Cumulative MBS purchases

Cumulative coupon purchases

Cumulative bill purchases

Trillions of dollars

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

50.

Federal Reserve assets and liabilities

Weekly

Other assets

Credit and liquidity

Agency debt and mortgage-backed securities holdings

Treasury securities held outright

Federal Reserve notes in circulation

Deposits of depository institutions

Capital and other liabilities

OTE

: “Agency debt and mortgage-backed securities holdings” includes agency residential mortgage-backed securities and agency commercial

mortgage-backed

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

support

for Maiden Lane, Bear Stearns Companies, Inc., and AIG; and other credit and liquidity facilities, including the Primary Dealer Credit Facility, the

Asset-Backed

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

Loan

Facility, the Primary and Secondary Market Corporate Credit Facilities, the Paycheck Protection Program Liquidity Facility, the Municipal Liquidity

Facility,

and the Main Street Lending Program. “Other assets” includes repurchase agreements, FIMA (Foreign and International Monetary Authorities)

repurchase

agreements, and unamortized premiums and discounts on securities held outright. “Capital and other liabilities” includes reverse repurchase

agreements,

the U.S. Treasury General Account, and the U.S. Treasury Supplementary Financing Account. The data extend through February 10, 2021. Key

identies shaded areas in order from top to bottom.

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

44 PART 2: MONETARY POLICY

the revised Statement on Longer-Run Goals

and Monetary Policy Strategy in August (see

the box “The FOMC’s Revised Statement

on Longer-Run Goals and Monetary Policy

Strategy”), analytical work that was prepared

by Federal Reserve System sta and that

served as background to the review was

released to the public.

In December, two changes were made to the

Summary of Economic Projections (SEP)

18. A report on the Fed Listens initiative, a key

component of the review process, was released in

June2020 and is available on the Board’s website at

https://www.federalreserve.gov/publications/files/

fedlistens-report-20200612.pdf. The analytical materials

prepared by System sta are accessible from the Board’s

main webpage on the review (https://www.federalreserve.

gov/monetarypolicy/review-of-monetary-policy-strategy-

tools-and-communications.htm).

to enhance the information provided to the

public. First, the release of the full set of

SEP exhibits was accelerated by three weeks:

Starting with the December2020 meeting,

the FOMC began releasing all SEP exhibits

on the day of the policy decision (following

the conclusion of an FOMC meeting) rather

than with the release of the FOMC meeting

minutes. As such, the written summary of

the projections that had been included as an

addendum to the minutes of the corresponding

FOMC meeting was discontinued. Second, two

new exhibits were added that display a time

series of diusion indexes for participants’

judgments of uncertainty and risks. These

diusion indexes illustrate how FOMC

participants’ assessments of uncertainties and

risks have evolved over time.

MONETARY POLICY REPORT: FEBRUARY 2021 45

considerations, the Federal Open Market Committee’s

(FOMC) revised Statement on Longer-Run Goals

and Monetary Policy Strategy refers to “shortfalls

of employment” from the Committee’s assessment

of its maximum level rather than the “deviations of

employment” used in the previous statement.

This

change has important implications for the design of

simple interest rate rules.

This discussion examines the prescriptions from

a number of commonly studied monetary policy

rules, along with the prescriptions from a modi ed

simple rule that, all else being equal, would not call

for increasing the policy rate as employment moves

higher and unemployment drops below its estimated

longer-run level. This modi ed rule aims to illustrate,

in a simple way, the Committee’s focus on shortfalls

of employment from assessments of its maximum

level. Other key changes to the Committee’s monetary

policy strategy, including the aim of having in ation

average 2percent over time to ensure that longer-

term in ation expectations remain well anchored, are

not incorporated in the simple rules analyzed in this

discussion.

Policy Rules: Some Key Design Principles

and Limitations

In many stylized models of the economy, desirable

economic outcomes can be achieved by following a

monetary policy rule that incorporates key principles

of good monetary policy. One such principle is that

monetary policy should respond in a predictable way to

changes in economic conditions, thus fostering public

understanding of policymakers’ goals and strategy.

A second principle is that, to stabilize in ation, the

policy rate should be adjusted over time in response

to persistent increases or decreases in in ation to an

extent suf cient to ensure a return of in ation to the

longer-run objective.

2. See the box “The FOMC’s Revised Statement on Longer-

Run Goals and Monetary Policy Strategy” (earlier in Part 2)

for a discussion of this change and other changes made to the

statement.

3. The effectiveness of monetary policy is enhanced when

it is well understood by the public. For a discussion of how

the public’s understanding of monetary policy matters for the

effectiveness of monetary policy, see Janet L. Yellen (2012),

“Revolution and Evolution in Central Bank Communications,”

speech delivered at the Haas School of Business, University

of California, Berkeley, November13, https://www.

federalreserve.gov/newsevents/speech/yellen20121113a.htm.

Simple interest rate rules relate a policy interest

rate, such as the federal funds rate, to a small number

of other economic variables—typically including

the deviation of in ation from its target value

and a measure of resource slack in the economy.

Policymakers consult policy rate prescriptions derived

from a variety of policy rules as part of their monetary

policy deliberations without mechanically following the

prescriptions of any particular rule. Most rules analyzed

in the research literature respond to deviations—both

positive and negative—of resource utilization from its

longer-run level because their design was informed

by historical periods and economic models in which

high resource utilization and a strong labor market

are accompanied by in ation pressure and in which

policy rates remain well above the effective lower

bound(ELB).

Economic performance in recent decades,

including during the previous economic expansion,

has demonstrated that a strong labor market can be

sustained without inducing an unwanted increase in

in ation. During that expansion, the unemployment

rate fell to low levels—it remained at or below

4percent from early 2018 until the start of the

pandemic—bringing many bene ts to families and

communities that, all too often, had been left behind,

with no sign of excessive pressures on prices. The

lack of undue in ation pressures during this period

illustrates that a strong labor market, by itself, need

not cause concern unless accompanied by signs of

unwanted increases in in ation or the emergence

of other risks that could impede the attainment of

the Committee’s goals. In addition, the expansion

reinforced the view that assessments of the maximum

level of employment are imprecise and may change

over time.

Tightening monetary policy in the absence

of evidence of excessive in ation pressures may

result in an unwarranted loss of opportunity for

many Americans, whereas if an undue increase in

in ation were to arise, policymakers would have the

tools to address such an increase. Re ecting these

1. In recent years, forecasters covered by the Blue Chip

Survey, as well as FOMC participants in the Summary of

Economic Projections, have substantially reduced their

implied estimates of the unemployment rate that is sustainable

in the longer run. For a discussion, see the box “Monetary

Policy Rules and Uncertainty in Monetary Policy Settings”

in Board of Governors of the Federal Reserve System (2020),

Monetary Policy Report (Washington: Board of Governors,

February), pp. 33–37, https://www.federalreserve.gov/

monetarypolicy/files/20200207_mprfullreport.pdf.

Monetary Policy Rules and Shortfalls from Maximum Employment

(continued on next page)

46 PART 2: MONETARY POLICY

Policy Rules: Historical Prescriptions

Economists have analyzed many monetary policy

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

“balanced approach” rule, the “adjusted Taylor(1993)”

rule, and the “ rst difference” rule.

In addition to these

rules,  gure A shows a “balanced approach (shortfalls)”

rule, which represents one simple way to illustrate

the Committee’s focus on shortfalls from maximum

employment. All of the policy rules analyzed in this

discussion embody the key principles of good monetary

policy previously noted. They are also subject to the

associated limitations. Thus, the balanced-approach

(shortfalls) rule, as is the case with all simple rules, does

not fully capture the monetary policy strategy that the

FOMC announced in August2020.

All  ve rules feature the unemployment rate gap,

measured as the difference between an estimate of the

rate of unemployment in the longer run (u

) and the

current unemployment rate; the  rst-difference rule

includes the change in the unemployment rate gap

rather than its level.

All of the rules abstract from the

uncertainty affecting estimates of the unemployment

rate gap. In addition, all of the rules include the

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

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

Rochester Conference Series on Public Policy, vol. 39

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

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

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

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

adjusted Taylor(1993) rule was studied in David Reifschneider

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

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

Banking, vol. 32 (November), pp. 936–66. The  rst-difference

rule is based on a rule suggested in Athanasios Orphanides

(2003), “Historical Monetary Policy Analysis and the Taylor

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

1022. A review of policy rules is in John B. Taylor and John

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

Policy,” in Benjamin M. Friedman and Michael Woodford,

eds., Handbook of Monetary Economics, vol.3B (Amsterdam:

North-Holland), pp. 829–59. The same volume of the

Handbook of Monetary Economics also discusses approaches

other than policy rules for deriving policy rate prescriptions.

7. The original Taylor(1993) rule represented slack in

resource utilization using an output gap (the difference

between the current level of real gross domestic product

(GDP) and the level that GDP would be if the economy

were operating at maximum employment, measured in

percent of the latter). The rules in  gure A represent slack in

resource utilization using the unemployment rate gap instead,

because that gap better captures the FOMC’s statutory goal

to promote maximum employment. However, movements in

these alternative measures of resource utilization are highly

correlated. For more information, see the note below  gure A.

Simple monetary policy rules also have important

limitations. A  rst limitation is that many formulations

of simple rules do not recognize that the ELB limits the

extent that the policy rate can be lowered to support

the economy, which may impart a downward bias to

both in ation and in ation expectations. As part of

the FOMC’s revised strategy to mitigate the challenges

posed by the ELB and anchor longer-term in ation

expectations at 2percent, the Committee states that it

“seeks to achieve in ation that averages 2percent over

time, and therefore judges that, following periods when

in ation has been running persistently below 2percent,

appropriate monetary policy will likely aim to achieve

in ation moderately above 2percent for some time.”

None of the simple rules analyzed in this discussion

take into account average in ation performance or

developments in measures of in ation expectations. As

such, they do not re ect this important aspect of the

FOMC’s monetary policy strategy.

A second limitation is that simple rules respond

to only a small set of economic variables and thus

necessarily abstract from many of the considerations

taken into account by the FOMC. For example,

a simple rule might respond to movements in a

speci c labor market indicator, such as the overall

unemployment rate. However, no single labor market

indicator can precisely capture the size of the shortfall

from maximum employment or identify when a strong

labor market can be sustained without putting undue

upward pressure on in ation.

A third limitation of

simple rules for the policy rate is that they generally

do not recognize the fact that the monetary policy

toolkit includes other tools—notably, large-scale asset

purchases and forward guidance, which are especially

relevant when the policy rate is near or at the ELB.

4. For a discussion of policy strategies that seek to make up

for past in ation shortfalls, see Jonas Arias, Martin Bodenstein,

Hess Chung, Thorsten Drautzburg, and Andrea Raffo (2020),

“Alternative Strategies: How Do They Work? How Might They

Help?” Finance and Economics Discussion Series 2020-068

(Washington: Board of Governors of the Federal Reserve

System, August), https://dx.doi.org/10.17016/FEDS.2020.068;

and James Hebden, Edward P. Herbst, Jenny Tang, Giorgio

Topa, and Fabian Winkler (2020), “How Robust Are Makeup

Strategies to Key Alternative Assumptions?” Finance and

Economics Discussion Series 2020-069 (Washington: Board of

Governors of the Federal Reserve System, August),

https://dx.doi.org/10.17016/FEDS.2020.069.

5. See Lael Brainard (2020), “Achieving a Broad-Based and

Inclusive Recovery,” speech delivered at “Post-COVID—Policy

Challenges for the Global Economy,” Society of Professional

Economists Annual Online Conference (via webcast),

October21, https://www.federalreserve.gov/newsevents/

speech/brainard20201021a.htm.

(continued)

Monetary Policy Rules (continued)

MONETARY POLICY REPORT: FEBRUARY 2021 47

Contrary to the other simple rules featured here,

the adjusted Taylor(1993) rule recognizes that the

federal funds rate cannot be reduced materially below

the ELB. To make up for the cumulative shortfall in

accommodation following a recession during which

the federal funds rate has fallen to its ELB, the adjusted

Taylor(1993) rule prescribes only a gradual return of

the policy rate to the (positive) levels prescribed by the

standard Taylor(1993) rule after the economy begins

torecover.

Figure B shows historical prescriptions for the

federal funds rate from the  ve rules. For each period,

the  gure reports the policy rates prescribed by

the rules, taking as given the prevailing economic

conditions and estimates of u

and r

at the time.

The four rules whose formulas do not impose the ELB

imply prescriptions of strongly negative policy rates in

response to the pandemic-driven recession, well below

their respective troughs in the 2008–09 recession. These

deeply negative prescribed policy rates show the extent

to which policymakers’ ability to support the economy

through cuts in the policy rate was constrained by

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

run objective of 2percent. All but the  rst-difference

rule include an estimate of the neutral real interest rate

in the longer run (r

By construction, the balanced-approach (shortfalls)

rule prescribes identical policy rates to those prescribed

by the balanced-approach rule at times when the

unemployment rate is above its estimated longer-run

level. However, when the unemployment rate is below

that level, the balanced-approach (shortfalls) rule is

more accommodative than the balanced-approach rule

because it does not call for the policy rate to rise as the

unemployment rate drops further.

8. The neutral real interest rate in the longer run (r

) is

the level of the real federal funds rate that is expected to be

consistent, in the longer run, with maximum employment

and stable in ation. Like u

, r

is determined largely by

nonmonetary factors. The expression of the  rst-difference

rule shown in  gure A does not involve an estimate of r

However, this rule has its own shortcomings. For example,

research suggests that this sort of rule often results in greater

volatility in employment and in ation relative to what

would be obtained under the Taylor(1993) and balanced-

approachrules. (continued on next page)

Taylor (1993) rule

= + +0.5

(

−

)

− )

= + +0.5

(

−

)

+2(

− )

+0.5

(

−

)

(

{, 0}

−

)

Adjusted Taylor (1993) rule

= {

− , ELB}

−1

+0.5

(

−

)

(

−

)

−(

−4

−

−4

)

A. Monetary policy rules

Balanced-approach rule

Balanced-approach (shortfalls) rule

First-dierence rule

N: R

T93

, R

BAS

, R

T93adj

, and R

represent the values of the nominal federal funds rate prescribed by the Taylor

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

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

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

is the

unemployment rate in quarter

t, and r

is the level of the neutral real federal funds rate in the longer run that is expected to be

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

. In

addition,

is the rate of unemployment expected in the longer run. Z

is the cumulative sum of past deviations of the federal

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

ELB of 12.5 basis points.

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

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

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

rate gap. The rules are implemented as responding to core PCE ination rather than to headline PCE ination because current

and near-term core ination rates tend to outperform headline ination rates as predictors of the medium-term behavior of

headline ination. Box note 6 provides references for the policy rules.

48 PART 2: MONETARY POLICY

Although these two rules prescribe identical

policy rates over most of the period shown, including

departure from the ELB about two years before the

actual departure in December2015, one should not

conclude that they generally offer a similar degree of

policy accommodation. Had the previous economic

expansion not been cut short by the pandemic, the

balanced-approach (shortfalls) rule would likely have

continued to prescribe a lower policy rate than the

balanced-approach rule. In addition, knowledge on the

part of households and businesses that policymakers

will respond to shortfalls rather than deviations from

maximum employment can, in practice, help foster

more accommodative  nancial conditions even when

employment is below its maximum level because

 nancial conditions are affected by the expected path

of the policy rate. Expectations of lower policy rates

in the future—once employment has recovered—

can reduce longer-term interest rates, support

accommodative  nancial conditions, and encourage

aggregate spending in the present. These observations

underline the importance of communication

about future policy actions and demonstrate how

a shift in focus to employment shortfalls, in the

context of a simple rule, can provide more policy

accommodation—even during times like today when

employment remains depressed.

the ELB during the pandemic-driven recession—a

constraint that helped motivate the FOMC’s other

policy actions at the time, including forward guidance

and asset purchases.

Regarding the recovery from the 2008–09 recession,

all of the simple rules shown here prescribe departure

from the ELB well before the FOMC determined

that it was appropriate to do so. The FOMC’s

judgment that it was appropriate to maintain a more

accommodative path of the federal funds rate than

prescribed by these rules was informed by a wide

range of information, including measures of labor

market conditions, indicators of in ation pressures and

in ation expectations, and readings on  nancial and

international developments.

The balanced-approach (shortfalls) rule calls for

lower policy rates than the balanced-approach rule

at times when unemployment is below its estimated

longer-run level, thus providing somewhat more policy

accommodation during the 2006–07 period and from

late 2016 until the start of the pandemic. The fact that

the policy rate prescriptions for the balanced-approach

and balanced-approach (shortfalls) rules coincide

from the 2008–09 recession up to the end of 2016

re ects the slow recovery in this period, during which

unemployment remained above real-time estimates of

its longer-run level.

Monetary Policy Rules (continued)

First-dierence rule

Taylor (1993) rule

Balanced-approach rule

Target federal funds rate

Balanced-approach (shortfalls) rule

Percent

202020192018201720162015201420132012201120102009200820072006

Historical federal funds rate prescriptions from simple policy rules

Quarterly

Adjusted Taylor (1993) rule

OTE: The rules use historical values of the federal funds rate, core personal consumption expenditure ination, 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 ination is taken as 2 percent.

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

In conjunction with the Federal Open

Market Committee (FOMC) meeting held on

December15–16, 2020, meeting participants

submitted their projections of the most likely

outcomes for real gross domestic product

(GDP) growth, the unemployment rate, and

ination for each year from 2020 to 2023

and over the longer run. Each participant’s

projections were based on information

available at the time of the meeting, together

with her or his assessment of appropriate

monetary policy—including a path for the

federal funds rate and its longer-run value—

and assumptions about other factors likely

to aect economic outcomes. The longer-

run projections represent each participant’s

assessment of the value to which each variable

would be expected to converge, over time,

under appropriate monetary policy and in the

absence of further shocks to the economy.

“Appropriate monetary policy” is dened as

the future path of policy that each participant

deems most likely to foster outcomes for

economic activity and ination that best

satisfy his or her individual interpretation of

the statutory mandate to promote maximum

employment and price stability.

Beginning with the December2020 FOMC

meeting, all Summary of Economic

The following material was released after the conclusion of the December15–16, 2020, meeting of

the Federal Open Market Committee.

Part 3

summary of eConomiC ProjeCtions

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

individual assumptions of projected appropriate monetary policy, December 2020

Percent

Variable

Median

Central tendency

Range

2020 2021 2022 2023

Longer

run

2020 2021 2022 2023

Longer

run

2020 2021 2022 2023

Longer

run

Change in real GDP ....

-2.4 4.2

3.2 2.4 1.8

-2.5–-2.2 3.7–5.0

3.0–3.5 2.2–2.7 1.7–2.0

-3.3 –-1.0 0.5–5.5

2.5–4.0

2.0–3.5 1.6–2.2

September projection -3.7 4.0 3.0 2.5 1.9 -4.0–-3.0 3.6 – 4.7 2.5–3.3 2.4–3.0 1.7–2.0 -5.5–1.0 0.0–5.5 2.0–4.5 2.0–4.0 1.6–2.2

Unemployment rate ....

6.7 5.0

4.2 3.7 4.1

6.7–6.8 4.7–5.4

3.8–4.6 3.5–4.3 3.9–4.3

6.6–6.9 4.0–6.8

3.5–5.8

3.3–5.0 3.5–4.5

September projection 7.6 5.5 4.6 4.0 4.1 7.0–8.0 5.0–6.2 4.0–5.0 3.5–4.4 3.9–4.3 6.5–8.0 4.0–8.0 3.5–7.5 3.5–6.0 3.5 – 4.7

PCE ination ..........

1.2 1.8

1.9 2.0 2.0

1.2 1.7–1.9

1.8–2.0 1.9–2.1 2.0

1.1–1.4 1.2–2.3

1.5–2.2

1.7–2.2 2.0

September projection 1.2 1.7 1.8 2.0 2.0 1.1–1.3 1.6 –1.9 1.7–1.9 1.9–2.0 2.0 1.0–1.5 1.3 –2.4 1.5 –2.2 1.7–2.1 2.0

Core PCE ination

....

1.4 1.8

1.9 2.0

1.4 1.7–1.8

1.8–2.0 1.9–2.1

1.3–1.5 1.5–2.3

1.6–2.2

1.7–2.2

September projection

1.5 1.7

1.8 2.0

1.3–1.5 1.6 –1.8

1.7–1.9 1.9–2.0

1.2–1.6 1.5–2.4

1.6–2.2

1.7–2.1

Memo: Projected

appropriate policy path

Federal funds rate .....

0.1 0.1

0.1

0.1 2.5

0.1 0.1

0.1

0.1–0.4 2.3–2.5

0.1 0.1

0.1–0.4

0.1–1.1 2.0–3.0

September projection 0.1 0.1 0.1 0.1 2.5 0.1 0.1 0.1 0.1–0.4 2.3–2.5 0.1 0.1 0.1–0.6 0.1–1.4 2.0–3.0

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

year to the fourth quarter of the year indicated. PCE ination and core PCE ination are the percentage rates of change in, respectively, the price index for personal 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 specied calendar year or over the longer run. The September projections were made in conjunction with the meeting of

the Federal Open Market Committee on September 15–16, 2020. One participant did not submit longer-run projections for the change in real GDP, the unemployment rate, or

the federal funds rate in conjunction with the September 15–16, 2020, meeting, and one participant did not submit such projections in conjunction with the December 15–16,

2020, meeting.

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

average of the two middle projections.

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

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

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

50 Part 3: Summary of Economic ProjEctionS

Table 2. Average historical projection error ranges

Percentage points

Variable 2020 2021 2022 2023

Change in real GDP

...... ±0.8 ±1.5 ±1.9 ±2.0

Unemployment rate

...... ±0.1 ±0.8 ±1.4 ±1.9

Total consumer prices

.... ±0.2 ±0.9 ±1.0 ±0.9

Short-term interest rates

.. ±0.1 ±1.4 ±2.0 ±2.4

N: Error ranges shown are measured as plus or minus the root mean squared

error of projections for 2000 through 2019 that were released in the winter by var-

ious private and government forecasters. As described in the box “Forecast Un-

certainty,” 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. Denitions 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 sta 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.

Projections charts and tables previously

released with the minutes of a meeting will be

released following the conclusion of an FOMC

meeting. That is, the release of the distribution

of participants’ projections (Figures 3.A.

through 3.E.), participants’ assessments of

uncertainty and risks associated with the

projections (Figures 4.A. through 4.C. and

Figure 5), and Table 2 and associated box,

which describe projection error ranges, have

been accelerated by three weeks. Two new

exhibits, Figures 4.D. and 4.E., have been

added to further enhance the information

provided on uncertainty and risks by showing

how FOMC participants’ assessments of

uncertainties and risks have evolved over time.

MONETARY POLICY REPORT: FEBRUARY 2021 51

Figure 1. Medians, centraltendencies, and rangesofeconomic projections, 2020–23 and over the longer run

−4

−3

−2

−1

Median of projections

Central tendency of projections

Range of projections

Actual

Percent

Change in real GDP

Percent

Unemployment rate

Percent

PCE ination

Percent

Core PCE ination

Longer

run

2015 2016 2017 2018 2019 2020 2021 2022 2023

Longer

run

2015 2016 2017 2018 2019 2020 2021 2022 2023

Longer

run

2015 2016 2017 2018 2019 2020 2021 2022 2023

Longer

run

2015 2016 2017 2018 2019 2020 2021 2022 2023

N: Denitions of variables and other explanations are in the notes to table 1. The data for the actual values of the

variables are annual.

52 PART 3: SUMMARY OF ECONOMIC PROJECTIONS

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2020 2021 2022 2023 Longer run

Percent

N: 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 specied calendar year or over the longer run. One participant did not submit longer-run projec-

tions for the federal funds rate.

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

level for the federal funds rate

MONETARY POLICY REPORT: FEBRUARY 2021 53

Figure 3.A. Distribution of participants’ projections for the changein real GDP, 2020–23 and overthe longer run

−5.8−

−5.7

−5.2−

−5.1

−4.6−

−4.5

−4.0−

−3.9

−3.4−

−3.3

−2.8−

−2.7

−2.2−

−2.1

−1.6−

−1.5

−1.0−

−0.9

−0.4−

−0.3

0.2−

0.3

0.8−

0.9

1.4−

1.5

2.0−

2.1

2.6−

2.7

3.2−

3.3

3.8−

3.9

4.4−

4.5

5.0−

5.1

Percent range

December projections

September projections

Number of participants

2020

−5.8−

−5.7

−5.2−

−5.1

−4.6−

−4.5

−4.0−

−3.9

−3.4−

−3.3

−2.8−

−2.7

−2.2−

−2.1

−1.6−

−1.5

−1.0−

−0.9

−0.4−

−0.3

0.2−

0.3

0.8−

0.9

1.4−

1.5

2.0−

2.1

2.6−

2.7

3.2−

3.3

3.8−

3.9

4.4−

4.5

5.0−

5.1

Percent range

Number of participants

2021

−5.8−

−5.7

−5.2−

−5.1

−4.6−

−4.5

−4.0−

−3.9

−3.4−

−3.3

−2.8−

−2.7

−2.2−

−2.1

−1.6−

−1.5

−1.0−

−0.9

−0.4−

−0.3

0.2−

0.3

0.8−

0.9

1.4−

1.5

2.0−

2.1

2.6−

2.7

3.2−

3.3

3.8−

3.9

4.4−

4.5

5.0−

5.1

Percent range

Number of participants

2022

−5.8−

−5.7

−5.2−

−5.1

−4.6−

−4.5

−4.0−

−3.9

−3.4−

−3.3

−2.8−

−2.7

−2.2−

−2.1

−1.6−

−1.5

−1.0−

−0.9

−0.4−

−0.3

0.2−

0.3

0.8−

0.9

1.4−

1.5

2.0−

2.1

2.6−

2.7

3.2−

3.3

3.8−

3.9

4.4−

4.5

5.0−

5.1

Percent range

−5.8−

−5.7

−5.2−

−5.1

−4.6−

−4.5

−4.0−

−3.9

−3.4−

−3.3

−2.8−

−2.7

−2.2−

−2.1

−1.6−

−1.5

−1.0−

−0.9

−0.4−

−0.3

0.2−

0.3

0.8−

0.9

1.4−

1.5

2.0−

2.1

2.6−

2.7

3.2−

3.3

3.8−

3.9

4.4−

4.5

5.0−

5.1

Percent range

Number of participants

2023

Number of participants

Longer run

N: Denitions of variables and other explanations are in the notes to table 1.

54 PART 3: SUMMARY OF ECONOMIC PROJECTIONS

Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2020–23 and over the longer run

2.8−

2.9

3.4−

3.5

4.0−

4.1

4.6−

4.7

5.2−

5.3

5.8−

5.9

6.4−

6.5

7.0−

7.1

7.6−

7.7

Percent range

December projections

September projections

Number of participants

2020

2.8−

2.9

3.4−

3.5

4.0−

4.1

4.6−

4.7

5.2−

5.3

5.8−

5.9

6.4−

6.5

7.0−

7.1

7.6−

7.7

Percent range

Number of participants

2021

2.8−

2.9

3.4−

3.5

4.0−

4.1

4.6−

4.7

5.2−

5.3

5.8−

5.9

6.4−

6.5

7.0−

7.1

7.6−

7.7

Percent range

Number of participants

2022

2.8−

2.9

3.4−

3.5

4.0−

4.1

4.6−

4.7

5.2−

5.3

5.8−

5.9

6.4−

6.5

7.0−

7.1

7.6−

7.7

Percent range

Number of participants

2023

2.8−

2.9

3.4−

3.5

4.0−

4.1

4.6−

4.7

5.2−

5.3

5.8−

5.9

6.4−

6.5

7.0−

7.1

7.6−

7.7

Percent range

Number of participants

Longer run

N: Denitions of variables and other explanations are in the notes to table 1.

MONETARY POLICY REPORT: FEBRUARY 2021 55

Figure 3.C. Distribution of participants’ projections for PCE ination, 2020–23 and over the longer run

0.7−

0.8

0.9−

1.0

1.1−

1.2

1.3−

1.4

1.5−

1.6

1.7−

1.8

1.9−

2.0

2.1−

2.2

2.3−

2.4

Percent range

0.7−

0.8

0.9−

1.0

1.1−

1.2

1.3−

1.4

1.5−

1.6

1.7−

1.8

1.9−

2.0

2.1−

2.2

2.3−

2.4

Percent range

December projections

September projections

Number of participants

2020

Number of participants

2021

Number of participants

2022

Number of participants

2023

Number of participants

Longer run

0.7−

0.8

0.9−

1.0

1.1−

1.2

1.3−

1.4

1.5−

1.6

1.7−

1.8

1.9−

2.0

2.1−

2.2

2.3−

2.4

Percent range

0.7−

0.8

0.9−

1.0

1.1−

1.2

1.3−

1.4

1.5−

1.6

1.7−

1.8

1.9−

2.0

2.1−

2.2

2.3−

2.4

Percent range

0.7−

0.8

0.9−

1.0

1.1−

1.2

1.3−

1.4

1.5−

1.6

1.7−

1.8

1.9−

2.0

2.1−

2.2

2.3−

2.4

Percent range

N: Denitions of variables and other explanations are in the notes to table 1.

56 PART 3: SUMMARY OF ECONOMIC PROJECTIONS

Figure 3.D. Distribution of participants’ projections for core PCEination, 2020–23

0.9−

1.0

1.1−

1.2

1.3−

1.4

1.5−

1.6

1.7−

1.8

1.9−

2.0

2.1−

2.2

2.3−

2.4

Percent range

Number of participants

2020

Number of participants

2021

Number of participants

2022

Number of participants

2023

December projections

September projections

0.9−

1.0

1.1−

1.2

1.3−

1.4

1.5−

1.6

1.7−

1.8

1.9−

2.0

2.1−

2.2

2.3−

2.4

Percent range

0.9−

1.0

1.1−

1.2

1.3−

1.4

1.5−

1.6

1.7−

1.8

1.9−

2.0

2.1−

2.2

2.3−

2.4

Percent range

0.9−

1.0

1.1−

1.2

1.3−

1.4

1.5−

1.6

1.7−

1.8

1.9−

2.0

2.1−

2.2

2.3−

2.4

Percent range

N: Denitions of variables and other explanations are in the notes to table 1.

MONETARY POLICY REPORT: FEBRUARY 2021 57

0.13−

0.37

0.38−

0.62

0.63−

0.87

0.88−

1.12

1.13−

1.37

1.38−

1.62

1.63−

1.87

1.88−

2.12

2.13−

2.37

2.38−

2.62

2.63−

2.87

2.88−

3.12

Percent range

Number of participants

2020

Number of participants

2021

Number of participants

2022

Number of participants

2023

Number of participants

Longer run

December projections

September projections

0.13−

0.37

0.38−

0.62

0.63−

0.87

0.88−

1.12

1.13−

1.37

1.38−

1.62

1.63−

1.87

1.88−

2.12

2.13−

2.37

2.38−

2.62

2.63−

2.87

2.88−

3.12

Percent range

0.13−

0.37

0.38−

0.62

0.63−

0.87

0.88−

1.12

1.13−

1.37

1.38−

1.62

1.63−

1.87

1.88−

2.12

2.13−

2.37

2.38−

2.62

2.63−

2.87

2.88−

3.12

Percent range

0.13−

0.37

0.38−

0.62

0.63−

0.87

0.88−

1.12

1.13−

1.37

1.38−

1.62

1.63−

1.87

1.88−

2.12

2.13−

2.37

2.38−

2.62

2.63−

2.87

2.88−

3.12

Percent range

0.13−

0.37

0.38−

0.62

0.63−

0.87

0.88−

1.12

1.13−

1.37

1.38−

1.62

1.63−

1.87

1.88−

2.12

2.13−

2.37

2.38−

2.62

2.63−

2.87

2.88−

3.12

Percent range

N: Denitions of variables and other explanations are in the notes to table 1.

Figure 3.E. Distribution of participants’ judgments of the midpoint of the appropriate target range for the

feder

al funds rate or the appropriate target level for the federal funds rate, 2020–23 and over the longer run

58 PART 3: SUMMARY OF ECONOMIC PROJECTIONS

Figure 4.A. Uncertainty and risksinprojections of GDPgrowth

Median projection and condence interval basedonhistorical forecast errors

−4

−3

−2

−1

Median of projections

70% condence interval

Actual

Percent

Change in real GDP

FOMC participants’ assessments of uncertainty andrisks around their economic projections

Lower

similar

Higher

Number of participants

Uncertainty about GDP growth

Weighted to

downside

Broadly

balanced

Weighted to

upside

Number of participants

Risks to GDP growth

December projections

September projections

December projections

September projections

2015 20172016 2019 20202018 202320222021

Broadly

: The blue and red lines in the top panel show actual values and median projected values, respectively, of the percent

change in r

eal gross domestic product (GDP) from the fourth quarter of the previous year to the fourth quarter of the year

indica

ted. The condence interval around the median projected values is assumed to be symmetric and is based on root mean

squar

ed errors of various private and government forecasts made over the previous 20 years; more information about these da

is a

vailable in table 2. Because current conditions may dier from those that prevailed, on average, over the previous 20 years,

the width and sha

pe of the condence interval estimated on the basis of the historical forecast errors may not reect FOMC

participants’

current assessments of the uncertainty and risks around their projections; these current assessments are summa-

riz

ed 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 condence interval shown in the historical fan

chart as lar

gely consistent with their assessments of the uncertainty about their projections. Likewise, participants who judge

the

risks to their pr

ojections as “broadly balanced” would view the condence interval around their projections as approximately

symmetric. For denitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.”

MONETARY POLICY REPORT: FEBRUARY 2021 59

Figure 4.B. Uncertainty andrisks in projections of the unemployment rate

Median projection and condence interval basedonhistorical forecast errors

Median of projections

70% condence interval

Actual

Percent

Unemployment rate

FOMC participants’ assessmentsof uncertainty and risks around their economic projections

Number of participants

Uncertainty about the unemployment rate

Number of participants

Risks to the unemployment rate

2015 20172016 2019 20202018 202320222021

December projections

September projections

December projections

September projections

Lower

similar

Higher

Weighted to

downside

Broadly

balanced

Weighted to

upside

Broadly

N: 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 condence 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 dier from

those that prevailed, on average, over the previous 20 years, the width and shape of the condence interval estimated on the

basis of the historical forecast errors may not reect 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 wid

of the condence 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

condence interval around their projections as approximately symmetric. For denitions of uncertainty and risks in economic

projections, see the box “Forecast Uncertainty.”

60 PART 3: SUMMARY OF ECONOMIC PROJECTIONS

Figure 4.C. Uncertainty and risksin projections of PCEination

Median projection and condence interval basedonhistorical forecasterrors

Median of projections

70% condence interval

Actual

Percent

PCE ination

FOMC participants’ assessments of uncertainty andrisks around their economic projections

Number of participants

Uncertainty about PCE ination

Number of participants

Risks to PCE ination

Number of participants

Uncertainty about core PCE ination

Number of participants

Risks to core PCE ination

2015 20172016 2019 20202018 202320222021

December projections

September projections

December projections

September projections

December projections

September projections

December projections

September projections

Lower

similar

Higher

Weighted to

downside

Broadly

balanced

Weighted to

upside

Broadly

Lower

similar

Higher

Weighted to

downside

Broadly

balanced

Weighted to

upside

Broadly

N: 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 condence 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 dier from those that prevailed, on

average, over the previous 20 years, the width and shape of the condence interval estimated on the basis of the historical

forecast errors may not reect 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 condence

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 condence interval ar

ound

their projections as approximately symmetric. For denitions of uncertainty and risks in economic projections, see the box

“Forecast Uncertainty.”

MONETARY POLICY REPORT: FEBRUARY 2021 61

Figure 4.D. Diusion indexesof participants’ uncertainty assessments

−1.00

−0.75

−0.50

−0.25

0.00

0.25

0.50

0.75

1.00

Diusion index

Change in real GDP

−1.00

−0.75

−0.50

−0.25

0.00

0.25

0.50

0.75

1.00

Diusion index

Unemployment rate

−1.00

−0.75

−0.50

−0.25

0.00

0.25

0.50

0.75

1.00

Diusion index

PCE ination

−1.00

−0.75

−0.50

−0.25

0.00

0.25

0.50

0.75

1.00

Diusion index

Core PCE ination

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

: For each SEP, participants provided responses to the question “Please indicate your judgment of the uncertainty

ttached to your projections relative to the levels of uncertainty over the past 20 years.” Each point in the diusion indexes

epresents the number of participants who responded “Higher” minus the number who responded “Lower,” divided by the total

number of participants. Figure excludes March 2020 when no projections were submitted.

62 PART 3: SUMMARY OF ECONOMIC PROJECTIONS

Figure 4.E. Diusion indexesof participants’ risk weightings

−1.00

−0.75

−0.50

−0.25

0.00

0.25

0.50

0.75

1.00

Diusion index

Change in real GDP

−1.00

−0.75

−0.50

−0.25

0.00

0.25

0.50

0.75

1.00

Diusion index

Unemployment rate

−1.00

−0.75

−0.50

−0.25

0.00

0.25

0.50

0.75

1.00

Diusion index

PCE ination

−1.00

−0.75

−0.50

−0.25

0.00

0.25

0.50

0.75

1.00

Diusion index

Core PCE ination

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

N: For each SEP, participants provided responses to the question “Please indicate your judgment of the risk weighting

around your projections.” Each point in the diusion indexes represents the number of participants who responded “Weighted

to the Upside” minus the number who responded “Weighted to the Downside,” divided by the total number of participants.

Figure excludes March 2020 when no projections were submitted.

MONETARY POLICY REPORT: FEBRUARY 2021 63

Figure5. Uncertainty and risks in projectionsof the federal funds rate

Midpoint of target range

Median of projections

70% condence interval*

Actual

Percent

Federal funds rate

2015 2016 2017 2018 2019 2020 2021 2022 2023

N: 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 condence 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 condence 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 variab

les as

well as additional adjustments to monetary policy that may be appropriate to onset the eects of shocks to the economy.

The condence interval is assumed to be symmetric except when it is truncated at zero - the bottom of the lowest tar

get 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 dier from those that

prevailed, on average, over the previous 20 years, the width and shape of the condence interval estimated on the basis of the

historical forecast errors may not reect FOMC participants’ current assessments of the uncertainty and risks around their

projections.

* The condence 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

condence interval if the condence interval has been truncated at zero.

64 PART 3: SUMMARY OF ECONOMIC PROJECTIONS

reported in table2 would imply a probability of about

70percent that actual GDP would expand within a

range of 2.2 to 3.8percent in the current year, 1.5 to

4.5percent in the second year, 1.1 to 4.9percent in

the third year, and 1.0 to 5.0percent in the fourth year.

The corresponding 70percent con dence intervals

for overall in ation would be 1.8 to 2.2percent in

the current year, 1.1 to 2.9percent in the second

year, 1.0 to 3.0percent in the third year, and 1.1 to

2.9percent in the fourth year. Figures 4.A through

4.C illustrate these con dence bounds in “fan charts”

that are symmetric and centered on the medians of

FOMC participants’ projections for GDP growth, the

unemployment rate, and in ation. However, in some

instances, the risks around the projections may not

be symmetric. In particular, the unemployment rate

cannot be negative; furthermore, the risks around a

particular projection might be tilted to either the upside

or the downside, in which case the corresponding fan

chart would be asymmetrically positioned around the

median projection.

Because current conditions may differ from those

that prevailed, on average, over history, participants

provide judgments as to whether the uncertainty

attached to their projections of each economic variable

is greater than, smaller than, or broadly similar to

typical levels of forecast uncertainty seen in the past

20years, as presented in table2 and re ected in

the widths of the con dence intervals shown in the

top panels of  gures 4.A through 4.C. Participants’

The economic projections provided by the members

of the Board of Governors and the presidents of

the Federal Reserve Banks inform discussions of

monetary policy among policymakers and can aid

public understanding of the basis for policy actions.

Considerable uncertainty attends these projections,

however. The economic and statistical models and

relationships used to help produce economic forecasts

are necessarily imperfect descriptions of the real world,

and the future path of the economy can be affected

by myriad unforeseen developments and events. Thus,

in setting the stance of monetary policy, participants

consider not only what appears to be the most likely

economic outcome as embodied in their projections,

but also the range of alternative possibilities, the

likelihood of their occurring, and the potential costs to

the economy should they occur.

Table 2 summarizes the average historical accuracy

of a range of forecasts, including those reported in

past Monetary Policy Reports and those prepared

by the Federal Reserve Board’s staff in advance of

meetings of the Federal Open Market Committee

(FOMC). The projection error ranges shown in the

table illustrate the considerable uncertainty associated

with economic forecasts. For example, suppose a

participant projects that real gross domestic product

(GDP) and total consumer prices will rise steadily at

annual rates of, respectively, 3percent and 2percent.

If the uncertainty attending those projections is similar

to that experienced in the past and the risks around

the projections are broadly balanced, the numbers

Forecast Uncertainty

(continued)

MONETARY POLICY REPORT: FEBRUARY 2021 65

rather are projections of participants’ individual

assessments of appropriate monetary policy and are

on an end-of-year basis. However, the forecast errors

should provide a 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

would be appropriate to offset the effects of shocks to

the economy.

If at some point in the future the con dence interval

around the federal funds rate were to extend below

zero, it would be truncated at zero for purposes of

the fan chart shown in  gure5; zero is the bottom of

the lowest target range for the federal funds rate that

has been adopted by the Committee in the past. This

approach to the construction of the federal funds rate

fan chart would be merely a convention; it would

not have any implications for possible future policy

decisions regarding the use of negative interest rates to

provide additional monetary policy accommodation

if doing so were appropriate. In such situations, the

Committee could also employ other tools, including

forward guidance and asset purchases, to provide

additional accommodation.

While  gures 4.A through 4.C provide information

on the uncertainty around the economic projections,

 gure1 provides information on the range of views

across FOMC participants. A comparison of  gure1

with  gures 4.A through 4.C shows that the dispersion

of the projections across participants is much smaller

than the average forecast errors over the past 20years.

current assessments of the uncertainty surrounding

their projections are summarized in the bottom-left

panels of those  gures. Participants also provide

judgments as to whether the risks to their projections

are weighted to the upside, are weighted to the

downside, or are broadly balanced. That is, while

the symmetric historical fan charts shown in the top

panels of  gures 4.A through 4.C imply that the risks to

participants’ projections are balanced, participants may

judge that there is a greater risk that a given variable

will be above rather than below their projections. These

judgments are summarized in the lower-right panels of

 gures 4.A through 4.C.

As with real activity and in ation, the outlook

for the future path of the federal funds rate is subject

to considerable uncertainty. This uncertainty arises

primarily because each participant’s assessment of

the appropriate stance of monetary policy depends

importantly on the evolution of real activity and

in ation over time. If economic conditions evolve

in an unexpected manner, then assessments of the

appropriate setting of the federal funds rate would

change from that point forward. The  nal line in

table2 shows the error ranges for forecasts of short-

term interest rates. They suggest that the historical

con dence intervals associated with projections

of the federal funds rate are quite wide. It should

be noted, however, that these con dence intervals

are not strictly consistent with the projections for

the federal funds rate, as these projections are not

forecasts of the most likely quarterly outcomes but

AFE advanced foreign economy

BLS Bureau of Labor Statistics

CARES Act Coronavirus Aid, Relief, and Economic Security Act

CES Current Employment Statistics

C&I commercial and industrial

COVID-19 coronavirus disease 2019

CPFF Commercial Paper Funding Facility

CPI consumer price index

DPI disposable personal income

ELB eective lower bound

EME emerging market economy

EPOP ratio employment-to-population ratio

FIMA Foreign and International Monetary Authorities

FOMC Federal Open Market Committee; also, the Committee

GDP gross domestic product

G-SIBs global systemically important banks

LFPR labor force participation rate

Main Street Main Street Lending Program

MBS mortgage-backed securities

MMLF Money Market Mutual Fund Lending Facility

OPEC Organization of the Petroleum Exporting Countries

PCE personal consumption expenditures

PDCF Primary Dealer Credit Facility

PPPLF Paycheck Protection Program Liquidity Facility

QSS Quarterly Services Survey

repo repurchase agreement

RRE residential real estate

SBA Small Business Administration

SEP Summary of Economic Projections

TIPS Treasury Ination-Protected Securities

VIX implied volatility for the S&P 500 index

abbreviations

Board of Governors of the Federal Reserve System

For use at 11:00 a.m. EST

February 19, 2021

Monetary Policy rePort

February 19, 2021