Monetary Policy Report, June 17, 2022

Board of Governors of the Federal Reserve System

For use at 11:00 a.m. EDT

June 17, 2022

Monetary Policy rePort

June 17, 2022

Letter of transmittaL

B  G  

F R S

Washington, D.C., June 17, 2022

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 reafrmed effective January25, 2022

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 4 p.m. EDT on June15, 2022.

Unless otherwise stated, the time series in the gures extend through, for daily data, June14, 2022; for

monthly data, May2022; and, for quarterly data, 2022:Q1. 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 23, 36, and 42, 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

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.

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

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

Monetary Policy

........................................................... 3

Special Topics

............................................................. 3

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

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

Financial Developments

.................................................... 27

International Developments

................................................. 35

Part 2: Monetary Policy ..................................................43

Part 3: Summary of Economic Projections

................................51

Abbreviations ............................................................69

List of Boxes

Developments in Global Supply Chains ......................................... 8

Developments in Employment and Earnings across Groups

......................... 14

Developments Related to Financial Stability

..................................... 31

Global Ination

.......................................................... 37

Monetary Policy in Foreign Economies

......................................... 39

Monetary Policy Rules in the Current Environment

................................ 46

Developments in the Federal Reserve’s Balance Sheet and Money Markets

.............. 49

Forecast Uncertainty

....................................................... 66

summary

In the rst part of the year, ination remained

well above the Federal Open Market

Committee’s (FOMC) longer-run objective

of 2percent, with some ination measures

rising to their highest levels in more than

40years. These price pressures reect supply

and demand imbalances, higher energy and

food prices, and broader price pressures,

including those resulting from an extremely

tight labor market. In the labor market,

demand has remained strong, and supply

has increased only modestly. As a result, the

unemployment rate fell noticeably below the

median of FOMC participants’ estimates of

its longer-run normal level, and nominal wages

continued to rise rapidly. Although overall

economic activity edged down in the rst

quarter, household spending and business xed

investment remained strong. The most recent

indicators suggest that private xed investment

may be moderating, but consumer spending

remains strong.

In response to sustained inationary pressures

and a strong labor market, the FOMC has

been adjusting its policies and communications

since last fall. At its March meeting, the

FOMC raised the target range for the federal

funds rate o the eective lower bound to ¼ to

½percent. The Committee continued to raise

the target range in May and June, bringing

it to 1½ to 1¾percent following the June

meeting, and indicated that ongoing increases

are likely to be appropriate. The Committee

ceased net asset purchases in early March and

began reducing its securities holdings in June.

The Committee is acutely aware that high

ination imposes signicant hardship,

especially on those least able to meet the

higher costs of essentials. The Committee’s

commitment to restoring price stability—

which is necessary for sustaining a strong labor

market—is unconditional.

Recent Economic and Financial

Developments

Ination. Consumer price ination, as

measured by the 12-month change in the

price index for personal consumption

expenditures (PCE), rose from 5.8percent

in December2021 to 6.3percent in April, its

highest level since the early 1980s and well

above the FOMC’s objective of 2percent.

This increase was driven by an acceleration of

retail food and energy prices, reecting further

increases in commodity prices due to Russia’s

invasion of Ukraine. The 12-month measure

of ination that excludes the volatile food and

energy categories (so-called core ination)

rose initially and then fell back to 4.9percent

in April, unchanged from last December.

Three-month measures of core ination have

softened since December but remain far

above levels consistent with price stability.

Measures of near-term ination expectations

continued to rise markedly, while longer-term

expectations moved up by less.

The labor market. Demand for labor continued

to outstrip available supply across many parts

of the economy, and nominal wages continued

to increase at a robust pace. While labor

demand remained very strong, labor supply

increased only modestly. As a result, the labor

market tightened further between December

and May, with job gains averaging 488,000per

month and the unemployment rate falling

from 3.9percent to 3.6percent—just above the

bottom of its range over the past 50years.

Economic activity. Real gross domestic

product (GDP) is reported to have surged at a

6.9percent annual rate in the fourth quarter of

2021 and then to have declined at a 1.5percent

annual rate in the rst quarter. The large

swings in growth rates reected uctuations

in the volatile expenditure categories of net

2 SUMMARY

exports and inventory investment. Abstracting

from these volatile components, growth in

private domestic nal demand (consumer

spending plus residential and business xed

investment—a measure that tends to be more

stable and better reects the strength of

overall economic activity) was strong in the

rst quarter, supported by some unwinding

of supply bottlenecks and a further reopening

of the economy. The most recent indicators

suggest that private xed investment may be

moderating, but consumer spending remains

strong. As a result, real GDP appears on track

to rise moderately in the second quarter.

Financial conditions. Financial conditions have

tightened signicantly this year. The expected

path of the federal funds rate over the next few

years shifted up substantially, and yields on

nominal Treasury securities across maturities

have risen considerably since late February

amid sustained inationary pressures and

associated expectations for further monetary

policy tightening. Equity prices were volatile

and declined sharply, on net, while corporate

bond yields increased substantially and spreads

increased notably, partly reecting some

concerns about the future corporate credit

outlook. Mortgage rates also rose sharply. In

turn, tighter nancial conditions may have

begun to weigh on some nancing activity. On

the business side, nonnancial corporate bond

issuance was solid in the rst quarter but slowed

somewhat in April and May, with speculative-

grade bond issuance being particularly

weak. That said, the growth of bank loans to

businesses picked up, and business credit quality

has remained strong thus far. For households,

mortgage originations declined materially.

Nevertheless, mortgage credit remained

broadly available for a wide range of potential

borrowers. For other consumer loans (such as

auto loans and credit cards), credit standards

eased somewhat further or changed little, and

credit outstanding grew briskly.

Financial stability. Despite experiencing

a series of adverse shocks—higher-than-

expected ination, the ongoing supply

disruptions related to COVID-19, and Russia’s

invasion of Ukraine—the nancial system

has been resilient, though portions of the

commodities markets temporarily experienced

elevated levels of stress. The drop in equity

prices and rising bond spreads suggest that

valuation pressures in corporate securities

markets have eased some from their previously

elevated levels, but real estate prices have

risen further this year. While business and

household debt has been growing solidly, the

ratio of credit to GDP has decreased to near

pre-pandemic levels and most indicators of

credit quality remained robust, suggesting that

vulnerabilities from nonnancial leverage are

moderate. Large bank capital ratios dipped

in the rst quarter, but overall leverage in the

nancial sector appears moderate and little

changed this year. Recent strains experienced

in markets for stablecoins—digital assets that

aim to maintain a stable value relative to a

national currency or other reference assets—

and other digital assets have highlighted the

structural fragilities in that rapidly growing

sector. A few signs of funding pressures

emerged amid the geopolitical tensions,

particularly in commodities markets. However,

broad funding markets proved resilient,

and with direct exposures of U.S. nancial

institutions to Russia and Ukraine being small,

nancial spillovers have been limited to date.

International developments. Economic

activity has continued to recover in many

foreign economies, albeit with new signicant

headwinds from Russia’s invasion of Ukraine

and COVID lockdowns in China. These

headwinds have, on net, pushed commodity

prices higher, worsened supply disruptions, and

lowered household and business condence,

thus damping the rebound in foreign economic

activity. As in the United States, consumer

price ination abroad is high and has

continued to rise in many economies, boosted

by higher energy, food, and other commodity

prices as well by supply chain constraints. In

response, many foreign central banks have

MONETARY POLICY REPORT: JUNE 2022 3

raised policy rates, and some have started to

reduce the size of their balancesheets.

Foreign nancial conditions have tightened

notably since the beginning of the year, in part

reecting the tightening in foreign monetary

policy and concerns about persistently high

ination. Sovereign bond yields in many

advanced foreign economies rose. Foreign

risky asset prices declined, also driven by

downside risks to the growth outlook amid

the lockdowns in China and Russia’s invasion

of Ukraine. The trade-weighted value of the

dollar appreciated notably.

Monetary Policy

In response to signicant ongoing ination

pressures and the tightening labor market, the

Committee has been adjusting its policies and

communications since last fall. The Committee

wound down net purchases of securities and

began reducing those securities holdings more

rapidly than expected, and also initiated a swift

increase in interest rates. Adjustments to both

interest rates and the balance sheet are playing

a role in rming the stance of monetary policy

in support of the Committee’s maximum-

employment and price-stability goals.

Interest rate policy. In March, after holding

the federal funds rate near zero since the

onset of the pandemic, the FOMC raised the

target range for that rate to ¼ to ½percent.

The Committee raised the target range again

in May and June, bringing it to the current

range of 1½ to 1¾percent, and conveyed

its anticipation that ongoing increases in the

target range will be appropriate.

Balance sheet policy. The Federal Reserve

began reducing its monthly net asset purchases

last November and accelerated the reductions

in December, bringing net purchases to an

end in early March. In January, the FOMC

issued a set of principles regarding its planned

approach for signicantly reducing the size of

the Federal Reserve’s balance sheet. Consistent

with those principles, the Committee

announced in May its specic plans for

signicantly reducing its securities holdings

and that these reductions would begin on

June1.

The Committee acutely recognizes the

signicant hardship caused by elevated

ination, especially on those least able to meet

the higher costs of essentials. The Committee

is strongly committed to restoring price

stability, which is necessary for sustaining a

strong labor market.

Special Topics

Labor market disparities. The labor market

recovery over the past year and a half has

been robust and widespread as the labor

market eects of the pandemic have eased,

with particularly strong improvement among

groups that had suered the most. As a result,

employment and earnings of nearly all major

demographic groups are near or above their

levels before the pandemic, and employment

rates are again near multidecade highs.

However, there remain notable dierences in

employment and earnings across groups that

predate the pandemic.

Developments in global supply chains. Supply

chain bottlenecks remain a major impediment

for domestic and foreign rms. While U.S.

manufacturers have been recording solid

output growth for more than a year, order

backlogs and delivery times remain high, and

producer prices have risen rapidly. Further

risks to global supply chains abound. In

China, COVID-19 lockdowns drove the largest

monthly declines in industrial production there

since early 2020 while also disrupting internal

and international freight transportation. In

addition, the war in Ukraine continues to put

1. See the May4, 2022, press release regarding the

Plans for Reducing the Size of the Federal Reserve’s

Balance Sheet, available at https://www.federalreserve.

gov/newsevents/pressreleases/monetary20220504b.htm.

4 SUMMARY

upward pressure on energy and food prices

and has raised the risk of disruption in the

supply of inputs to some manufacturing

industries.

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.

Many simple policy rules prescribed strongly

negative values for the federal funds rate

during the pandemic-driven recession.

With ination running well in excess of the

Committee’s 2percent longer-run objective, a

strong U.S. economy, and tight labor market

conditions, the simple monetary policy rules

considered here call for raising the target range

for the federal funds rate signicantly.

Global ination. Ination abroad rose rapidly

over the past year, reecting soaring food and

commodity prices, pandemic-related supply

disruptions, and demand imbalances between

goods and services. The price pressures have

been amplied by the war in Ukraine and

COVID-19 lockdowns in China. Although

the recent ination surge was concentrated in

volatile components, such as food and energy,

price increases have broadened to core goods

and services.

Global monetary policy. With ination

rising sharply across the globe, many central

banks have tightened monetary policy.

Policy tightening started last year as some

emerging market central banks, particularly

those in Latin America, were concerned that

sharp increases in ination could become

entrenched in ination expectations. Since

fall 2021, many central banks in the advanced

foreign economies have also started tightening

monetary policy or are expected to do so soon,

and several central banks that had expanded

their balance sheets over the past two years are

now allowing them to shrink.

Developments in the Federal Reserve’s balance

sheet. Following the conclusion of net asset

purchases, the balance sheet remained stable

at around $9trillion. Alongside the removal of

policy accommodation—through actual and

expected increases in the policy rate—plans

for shrinking the size of the balance sheet

were announced in May and were initiated

in June. Despite the size of the balance sheet

remaining steady, reserve balances fell, in

large part because of increasingly elevated

take-up at the overnight reverse repurchase

agreement (ONRRP) facility, which reached a

record high of $2.2trillion. In an environment

of ample liquidity, limited Treasury bill

supply, and low repurchase agreement rates,

the ONRRP facility continued to serve its

intended purpose of helping to provide a oor

under short-term interest rates and to support

eective implementation of monetary policy.

Domestic Developments

Ination continued to run high . . .

After surging 5.8percent over 2021—the

largest increase since 1981—the price index

for personal consumption expenditures (PCE)

continued to post notable increases so far

this year, and the change over the 12 months

ending in April stood at 6.3percent (gure1).

This pace is well above the FOMC’s longer-run

objective of 2percent.

. . . reecting further large increases in

food and energy prices . . .

Grocery prices increased at a very rapid pace

of 10percent over the 12months ending in

April, more than 4percentage points faster

than over the 12 months ending in December

and the highest reading since 1981 (gure2).

Food commodity prices (such as wheat and

corn), which had already increased last year,

have risen further since Russia’s invasion of

Ukraine. At the same time, high fuel costs,

supply chain bottlenecks, and high wage

growth have also pushed up processing,

packaging, and transportation costs for food.

The PCE price index for energy increased

30percent over the 12 months ending in April,

Part 1

reCent eConomiC and finanCiaL deveLoPments

Excluding food

and energy

Trimmed mean

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

Percent change from year earlier

202220212020201920182017201620152014

1. Change in the price index for personal consumption

expenditures

Monthly

Total

NOTE: The data extend through April 2022.

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

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

2. Personal consumption expenditures price indexes

Food and

beverages

Percent change from year earlier

20222021202020192018

Percent change from year earlier

Energy

NOTE: The data are monthly and extend through April 2022.

SOURCE: Bureau of Economic Analysis via Haver Analytics.

Services

ex energy

and housing

Goods ex food,

beverages, and

energy

Percent change from year earlier

20222021202020192018

Monthly

Housing

services

NOTE: The data extend through April 2022.

SOURCE: Bureau of Economic Analysis via Haver Analytics.

6 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

12-month percent change

202220212020201920182017201620152014

5. Nonfuel import price index

Monthly

OTE

: The data extend through April 2022.

OURCE

: Bureau of Labor Statistics via Haver Analytics.

about the same pace as over the 12months

ending in December. Large increases in crude

oil and natural gas commodity prices have

boosted consumer prices for gasoline and

natural gas.

. . . which, in turn, partly reected rising

prices of commodities and imports

Because of Russia’s invasion of Ukraine, oil

prices rose sharply in early March, reaching

eight-year highs (gure3). Prices remain

elevated and volatile, boosted by a European

Union embargo of Russian oil imports

but weighed down at times by concerns

about global economic growth. In addition,

producers in other countries are struggling to

ramp up oil production.

Nonfuel commodity prices also surged after

the invasion, with large increases in the

prices of both agricultural commodities and

industrial metals (gure4). Although the price

of industrial metals has declined recently,

agricultural prices remain elevated. Ukraine

and Russia are notable exporters of wheat,

Russia is a major exporter of fertilizer, and

higher energy prices are spilling over into the

agricultural sector. Export restrictions and

unfavorable weather conditions in several

countries have also boosted agricultural prices.

(See the box “Developments in Global Supply

Chains.”)

With commodity prices surging and foreign

goods prices on the rise, import prices

increased signicantly (gure5).

Excluding food and energy prices,

monthly ination readings have softened

since the turn of the year but remain

far above levels consistent with price

stability

Supply chain issues, hiring diculties, and

other capacity constraints have prevented

the supply of products from rising quickly

enough to satisfy continued strong demand,

resulting in large price increases for many

goods and services over the past year. After

excluding consumer food and energy prices,

Brent spot price

100

120

140

160

Dollars per barrel

2007 2010 2013 2016 2019 2022

3. Spot and futures prices for crude oil

Weekly

24-month-ahead

futures contracts

OTE: The data are weekly averages of daily data and extend through

June 10, 2022.

OURCE

: ICE Brent Futures via Bloomberg.

Agriculture

and livestock

100

120

140

160

180

Week ending January 3, 2014 = 100

2014 2015 2016 2017 20182019 2020 2021 2022

4. Spot prices for commodities

Weekly

Industrial metals

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

June 10, 2022.

OURCE: For industrial metals, S&P GSCI Industrial Metals Index

Spot; for agriculture and livestock, S&P GSCI Agriculture & Livestock

Spot Index; both via Haver Analytics.

MONETARY POLICY REPORT: JUNE 2022 7

the 12-month measure of core PCE ination

rose initially and then fell back to 4.9percent

in April, unchanged from December.

That said, monthly core ination readings

have softened noticeably since the start of the

year, with the three-month measure of core

PCE ination falling from an annual rate of

6.0percent last December to 4.0percent in

April. In particular, ination stepped down for

durable goods, likely reecting some easing in

supply constraints.

Nevertheless, the recent ination readings have

been mixed, remain far above levels consistent

with price stability, and are far from conclusive

evidence on the direction of ination. Unlike

durable goods price ination, core services

ination has not declined signicantly.

Housing service prices continue to rise at a

brisk pace, and increased demand for travel is

markedly pushing up ination rates for lodging

and airfares. More generally, rapid growth of

labor costs is putting upward pressure on the

prices of all labor-intensive services.

Measures of near-term ination

expectations continued to rise markedly,

while longer-term expectations moved up

by less

The rst half of 2022 saw further increases in

expectations of ination for the year ahead in

surveys of both consumers and professional

forecasters (gure6). In the University of

Michigan Surveys of Consumers, the median

value for ination expectations over the

next year jumped to 5.4percent in March,

its highest level since November1981, and

has moved sideways since then. A portion

of the upward movement so far this year

likely reects the war in Ukraine and the

accompanying increases in the prices of

commodities, especially those related to energy

and food.

Longer-term expectations, which are more

likely to inuence actual ination over time,

moved up by less and remained above pre-

pandemic levels. The Michigan survey’s

median ination expectation for the next

CIE, projected onto

10-year SPF

Michigan survey,

next 12 months

SPF, 10 years ahead

CIE, projected onto

Michigan, next 5 to 10 years

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

Percent

202220202018201620142012201020082006

6. Measures of ination expectations

Michigan survey,

next 5 to 10 years

OTE: The Survey of Professional Forecasters (SPF) data are

quarterly, begin in 2007:Q1, and extend through 2022:Q2. The data for

the Index of Common Ination Expectations (CIE) and the Michigan

survey are monthly and extend through June 2022; the June data for the

Michigan survey and the CIE are preliminary.

OURCE: University of Michigan Surveys of Consumers;

Federal

Reserve Bank of Philadelphia, SPF; Federal Reserve Board, CIE;

Federal Reserve Board sta calculations.

8 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

mixed for bottlenecks in the transportation of goods.

The number of ships waiting for berths at West Coast

ports has declined noticeably, as port throughput has

remained high, although manufacturers continue to cite

logistics and transportation constraints as reasons for

loweroutput.

Bottlenecks in global production and transportation

remain a major impediment for both domestic and

foreign  rms. Russia’s invasion of Ukraine and the

widespread COVID-19 lockdowns in China have

exacerbated strains in global supply networks and

have led to greater uncertainty about the timing of

improvement in supply conditions.

Despite this turbulence in the global supply

network, U.S. manufacturers have been recording

solid output growth for more than a year. There have

been gains in domestic motor vehicle production,

as the supply of semiconductors has recovered

somewhat ( gure A). In addition, survey results

suggest shorter supplier delivery times and lower order

backlogs relative to their late 2021 levels ( gure B).

Notwithstanding these improvements, backlogs and

delivery times for the sector remain elevated, and light

vehicle assemblies are still a bit below pre-pandemic

levels, with low dealer inventories continuing to

constrain sales. For some materials that had previously

been in short supply—such as lumber and steel—

prices have declined from notable highs. Even so,

the overall producer price index for manufacturing

in April was more than 18percent above its year-

earlier level ( gureC). Progress has been similarly

Developments in Global Supply Chains

(continued)

100

110

January 2020 = 100

Feb. Apr. Jun. Aug. Oct. Dec. Feb.Apr.

2021 2022

A. U.S. light motor vehicle production

Monthly

OTE

: The data extend through April 2022. The data are a

djusted

using Federal Reserve Board seasonal factors.

OURCE

: Ward’s Automotive Group, AutoInfoBank and

Intelligence

Data

Query; Chrysler Group LLC, North American Production Data

;

General

Motors Corporation, GM Motor Vehicle Assembly Productio

Data.

Order backlogs

Diusion index

2022201720122007

B. Suppliers’ delivery times and order backlogs

Monthly

Delivery

times

OTE: Values greater than 50 indicate that more respondents reported

longer delivery times or order backlogs relative to a month earlier than

reported shorter delivery times or order backlogs.

OURCE:Institute for Supply Management, ISM Manufacturing Report

on Business.

Percent change from year earlier

202220212020201920182017

C. Producer price index for manufacturing

Monthly

OURCE

: Bureau of Labor Statistics via Haver Analytics.

MONETARY POLICY REPORT: JUNE 2022 9

Risks to supply chain conditions abound, including

those arising from COVID-19 lockdowns in China

beginning in mid-March and the ongoing war in

Ukraine.

Committed to their zero-COVID strategy,

Chinese authorities ratcheted up restrictions quickly

in the face of rising cases of the Omicron variant,

which included a complete lockdown of Shanghai.

The containment strategy managed to reduce case

counts, allowing authorities to begin relaxing some

citywide restrictions in late April. The lockdowns drove

the largest monthly declines in Chinese activity since

early 2020, with industrial production dropping about

13percent between February and April ( gure D)

before recovering some in May. With severely disrupted

domestic logistics, supplier delivery times increased

sharply in April and continued increasing in May, but

not as strongly ( gure E). Chinese international trade

was also hit, contracting in the three months before

April ( gure F). As Chinese production continues to

recover, the associated rebound in trade  ows may

further strain international transportation networks.

1. The July1 expiration of the contract between

dockworkers and West Coast port operators poses an

additional risk for shipping-related disruption.

Retail sales

Percent change

Jan. Mar. May July Sept. Nov.Jan.Mar.May

2021 2022

D. Chinese industrial production and retail sales

Monthly

Industrial production

OTE

: Industrial production data are adjusted using Federal Reserv

Board

seasonal factors. Retail sales data are seasonally adjusted by

the

National Bureau of Statistics of China.

OURCE

:National Bureau of Statistics of China via Haver Analytics

;

Federal Reserve Board sta calculations.

Diusion index

2022202120202019

E. China’s purchasing managers index: Supplier delivery times

Monthly

OTE

: The series is seasonally adjusted. Values greater than 50

indicate

that more respondents reported longer delivery times relative to

a month earlier than reported shorter delivery times.

OURCE: Caixin; S&P Global; both via Haver Analytics.

Imports

100

150

200

Percent change

Jan. Mar. May July Sept. Nov. Jan. Mar. May

2021 2022

F. Nominal trade growth in China

Monthly

Exports

OTE

: All series are seasonally adjusted at an annual rate using

Federal Reserve Board seasonal factors. The data are 3-month moving

averages.

OURCE

: General Administration of Customs, China, via Haver

Analytics.

The invasion of Ukraine by Russia is causing

economic hardship. For instance, the con ict has

disrupted global commodity markets in which Ukraine

and Russia account for signi cant shares of global

exports. Notably, energy prices have soared, as

(continued on next page)

10 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

increasing geopolitical tensions have put the supply

of Russian oil and gas to Europe at risk. Indeed,

Russian energy exports have already been falling amid

embargos on Russian oil, self-sanctioning by some

companies, transportation dif culties, and Russia’s

decision to halt gas deliveries to several European

countries. The prices of several nonfuel commodities

that are vital inputs to some manufacturing industries

jumped in the early days of the con ict, including

neon gas (an input in semiconductor chip production),

palladium (an input in semiconductors and catalytic

converters), nickel (an input in electric vehicles’

batteries), and platinum. However, prices have

since retreated to near pre-invasion levels as major

disruptions have failed to materialize thus far. Finally,

blocked shipping routes in the Black Sea have severed

the region’s agricultural exports, disrupting global food

markets. As a result, prices of corn, wheat, sun ower

oil, and fertilizer have climbed to record-high levels,

raising concerns of food insecurity across the globe.

Further aggravating the situation, a number of countries

introduced export bans on some food commodities to

contain rising domestic food prices.

Thus far, the war appears to have had more limited

effects on other aspects of global supply chains.

The effect on supplier delivery times across Europe

has been muted, suggesting that the repercussions

for manufacturers in the region have been relatively

modest so far outside of the shifts in commodity prices

Developments in Global Supply Chains (continued)

Euro area

Diusion index

2022202120202019

G. Purchasing managers index: Supplier delivery times

Monthly

United Kingdom

OTE: The series are seasonally adjusted. Values greater than 50

indicate

that more respondents reported longer delivery times relative

a month earlier than reported shorter delivery times.

SOURCE: For the United Kingdom, S&P Global and the

Chartered

Institute of Procurement & Supply; for the euro area, S&P Global; all via

Haver Analytics.

( gure G). The global transportation system has also

proved mostly resilient to the war, with signs of further

strain in only a couple of sectors. Oil tanker charter

rates spiked, boosted by a rise in demand as oil started

to move to new markets, while truck transportation

prices rose further, re ecting higher diesel fuel costs.

MONETARY POLICY REPORT: JUNE 2022 11

5to 10years rose to 3.3percent in the June

preliminary reading. If conrmed, this reading

would be near the top of the range from the

past 25years. Nevertheless, it remains well

below the corresponding measure of 1-year-

ahead ination expectations. In the second-

quarter Survey of Professional Forecasters, the

median expectation for 10-year PCE ination

edged up to 2.4percent, reecting noticeable

upward revisions to expected ination this

year and next but little change thereafter; the

median expectation for 6 to 10years ahead

held steady at 2percent.

Market-based measures of longer-term

ination compensation, which are based

on nancial instruments linked to ination,

are sending a similar message. A measure

of consumer price index (CPI) ination

compensation 5 to 10years ahead implied

by Treasury Ination-Protected Securities is

little changed (on balance) since late 2021 and

remains well below the corresponding measure

of ination compensation over the next 5years

(gure7).

The Index of Common Ination Expectations,

which is produced by Federal Reserve Board

sta and synthesizes information from a large

range of near-term as well as longer-term

expectation measures, edged up in the rst half

of this year and now stands at the high end of

the range from the past 20years.

The labor market continued to tighten

Payroll employment expanded an average of

488,000 per month in the rst ve months of

the year (gure8). Payroll gains so far this year

have been broad based across industries, with

the leisure and hospitality sector continuing to

see the largest gains as people continued their

return to activities that had been cut back by

the pandemic.

The increase in payrolls was accompanied

by further declines in the unemployment

rate, which fell 0.3percentage point over the

rst ve months of the year to 3.6percent

in May, just above the bottom of its range

125

130

135

140

145

150

155

Millions of jobs

202220202018201620142012201020082006

8. Nonfarm payroll employment

Monthly

SOURCE: Bureau of Labor Statistics via Haver Analytics.

5-year

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Percent

2022202020182016201420122010

7. Ination compensation implied by Treasury

Ination-Protected Securities

Daily

5-to-10-year

OTE: The data are at a business-day frequency and are estimated

from smoothed nominal and ination-indexed Treasury yield curves.

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

sta calculations.

12 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

over the past 50years (gure9). The

decline in the unemployment rate has been

fairly broad based across age, educational

attainment, gender, and ethnic and racial

groups (gure10). These declines have

helped employment of nearly all major

demographic groups recover to near or above

their levels before the pandemic. (See the box

“Developments in Employment and Earnings

across Groups.”)

While labor demand remained very

strong, labor supply increased only

modestly and stayed below

pre-pandemic levels

Demand for labor continued to be very

strong in the rst half of the year. At the

end of April, there were 11.4million job

openings—60percent above pre-pandemic

levels and down a bit from the all-time high

recorded in March.

Meanwhile, the supply of labor rose only

gradually and remained below pre-pandemic

levels. The labor force participation rate

(LFPR), which measures the share of people

Black or African American

Asian

Hispanic or Latino

Percent

202220202018201620142012201020082006

10. 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 Latino

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

the Bureau of Labor Statistics.

OURCE

: Bureau of Labor Statistics via Haver Analytics.

Percent

202220202018201620142012201020082006

9. Civilian unemployment rate

Monthly

OURCE

: Bureau of Labor Statistics via Haver Analytics.

MONETARY POLICY REPORT: JUNE 2022 13

either working or actively seeking work,

edged up just 0.1percentage point in the

rst ve months of the year—following a

0.4percentage point improvement last year—

to 62.3percent in May (gure11).

Despite these improvements, the LFPR

remains 1.1percentage points below its

February2020 level.

About one-half of

this decline in the participation rate was

to be expected even in the absence of the

pandemic, as additional members of the

large baby-boom generation have reached

retirement age. In addition, several pandemic-

related factors appear to be continuing to

hold down the participation rate, including

a pandemic-induced surge in retirements

(beyond that implied by the aging of the

baby boomers) and, to a diminishing extent,

increased caregiving responsibilities and

some continuing concerns about contracting

COVID-19.

In addition to subdued participation, a second

factor constraining the size of the labor force

has been a marked slowing in population

growth since the start of the pandemic. Over

2020 and 2021, the working-age (16 and over)

population grew by 0.4percent per year on

average—notably less than the 0.9percent

2. The Bureau of Labor Statistics incorporated new

population estimates beginning with the January2022

employment report. This development resulted in a

one-time jump in the estimate of the aggregate LFPR

of about 0.3percentage point due to a change in the

age distribution of the population. Accordingly, the

0.4percentage point increase in the published measure

from December to May overstates the improvement in

the LFPR by about 0.3percentage point.

3. This shortfall in the LFPR corresponds to

a shortfall in the labor force of about 2.8million

persons. (This calculation holds the LFPR constant

at its February2020 level and assumes population

growth equal to the actual growth observed since

February2020.)

Employment-to-

population ratio

Percent

202220202018201620142012201020082006

11. Labor force participation rate and

employment-to-population ratio

Monthly

Labor force participation rate

OTE: 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.

14 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

Employment for Blacks and Hispanics not only

declined by more than that for whites and Asians

early in the pandemic, but also recovered more

quickly since the end of last year ( gure A, upper-

right panel). In addition, men and women with high

school degrees or less saw larger declines and a faster

recovery ( gureA, lower-left panel). Similarly, gaps in

employment between prime-age mothers and non-

mothers that widened through 2020 have essentially

closed ( gureA, lower-right panel). By April2022,

employment for all of those groups was near or above

its pre-pandemiclevel.

These differences in the timing of the employment

recovery across different demographic groups partly

re ect the evolution of the pandemic’s effect on the

labor market. For instance, social-distancing restrictions

and concerns about contracting or spreading

COVID-19 had likely inhibited employment in in-

person services. As these restrictions and concerns

have waned, employment of groups more commonly

employed in in-person services, such as those with less

education and some minority groups, has recovered

quickly.

Further, the closing of many schools and

childcare facilities for the 2020–21 school year due

to elevated levels of COVID cases likely held back

the employment recovery of parents, as many families

faced uncertainties about the consistent availability

of in-person education for school-age children and

childcare for younger children. The effects appear to

have been particularly acute for mothers, especially

Black and Hispanic mothers, as well as those with less

3. Before the pandemic, Blacks and Hispanics were

less likely to be employed in jobs that could be performed

remotely, and women and Blacks were more likely to be

employed in occupations that involved greater face-to-face

interactions; for example, see Laura Montenovo, Xuan Jiang,

Felipe Lozano Rojas, Ian M. Schmutte, Kosali I. Simon,

Bruce A. Weinberg, and Coady Wing (2020), “Determinants

of Disparities in COVID-19 Job Losses,” NBER Working

Paper Series 27132 (Cambridge, Mass.: National Bureau of

Economic Research, May; revised June2021), https://www.

nber.org/system/files/working_papers/w27132/w27132.pdf.

Other research shows that even after accounting for

workers’ job characteristics, Hispanic and nonwhite workers

experienced a higher rate of job loss relative to other

workers; see Guido Matias Cortes and Eliza Forsythe (2021),

“The Heterogeneous Labor Market Impacts of the Covid-19

Pandemic,” unpublished paper, August, http://publish.illinois.

edu/elizaforsythe/files/2021/08/Cortes_Forsythe_Covid-demo_

revision_8_1_2021.pdf.

Labor market gains have been robust over the

past year and a half as the economy continues to

recover from the effects of the pandemic. Historically,

economic downturns have tended to exacerbate

long-standing differences in employment and earnings

across demographic groups, especially for minorities

and for those with less education, and this pattern was

especially true early on in the pandemic. However,

as pandemic-related factors have eased and the labor

market has recovered, groups with larger employment

declines early in the pandemic have had especially

large increases lately. Now employment and real

earnings of nearly all major demographic groups are

near or above their levels before the pandemic, and

employment rates are again near multidecade highs.

Different age groups have had very different

employment experiences over the course of the

pandemic.

Early in the pandemic, the employment-to-

population (EPOP) ratio for people aged 16 to 24 not

only declined by much more than that for people of

prime age (25 to 54) and those aged 55 to 64, but also

recovered much more quickly (see  gure A, upper-

left panel).

Conversely, employment recovered more

slowly for prime-age people throughout 2020 and

nearly all of 2021. But in late 2021 and early 2022,

the prime-age EPOP rose quickly, such that now all

three of these age groups’ EPOP ratios have essentially

recovered to their pre-pandemic levels. The EPOP ratio

for those aged 65 and over, however, remains about

1percentage point below its pre-pandemic level—a

level it has maintained through much of the pandemic.

The lower EPOP ratio for that group is entirely

attributable to a lower labor force participation rate,

which in turn largely re ects an increase in retirements

since the onset of the pandemic.

A closer look at the prime-age group shows that

there has been considerable heterogeneity in the pace

of the employment recovery across race and ethnicity,

educational attainment, and parental status.

1. The January2022 employment report incorporates

population controls that showed that the working-age

population was both larger and younger over the past

decade than the Census Bureau had previously estimated.

Those population controls had meaningful effects on the

aggregate EPOP ratio, but much smaller effects at the levels of

disaggregation examined in this discussion.

2. This discussion de nes the pre-pandemic baseline

EPOP ratio for each group as that group’s average EPOP ratio

over 2019.

Developments in Employment and Earnings across Groups

(continued)

MONETARY POLICY REPORT: JUNE 2022 15

year, these childcare burdens likely eased, allowing

many parents to reenter the workforce.

See Joshua Montes, Christopher Smith, and Isabel Leigh

(2021), “Caregiving for Children and Parental Labor Force

Participation during the Pandemic,” FEDS Notes (Washington:

Board of Governors of the Federal Reserve System,

November5), https://www.federalreserve.gov/econres/notes/

feds-notes/caregiving-for-children-and-parental-labor-force-

participation-during-the-pandemic-20211105.htm.

A. Changes in employment-to-population ratio compared with the 2019 average ratio, by group

16 to 24

Black or

African American

65+

Asian

55 to 64

Hispanic or Latino

Percentage points

2022202120202019

Age group

Monthly

25 to 54

Percentage points

2022202120202019

Race and ethnicity: Prime age

Monthly

White

Men, college

or more

Parents

Women, high school

or less

Women, college

or more

Percentage points

2022202120202019

Educational attainment: Prime age

Monthly

Men, high school

or less

OTE

: Prime age is 25 to 54. The age groups 16 to 24 and prime age show seasonally adjusted data published by the Bureau of Labor Statistics, whereas

all other groups’ data are seasonally adjusted by the Federal Reserve Board sta.

OURCE

: Bureau of Labor Statistics; Federal Reserve Board sta calculations from Current Population Survey microdata.

Percentage points

2022202120202019

Parental status: Prime-age women

Monthly

Nonparents

(continued on next page)

education.

However, with schools having generally

provided in-person education for the 2021–22 school

4. The increase in the share of mothers of school-age

children who reported being out of the labor force due to

caregiving closely tracked the degree to which schools were

fully closed to in-person learning over the 2020–21 school

year, and districts that serve more Blacks and Hispanics

were less likely to provide fully in-person education during

the 2020–21 school year, which may account for some

of the larger and more persistent declines in labor force

attachmentfor Black and Hispanic mothers over this period.

16 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

time real earnings for women versus men is slightly

smaller in 2022:Q1 than it was in 2019, as is the gap

in median real earnings between Black and white full-

time workers.

6. Some of a group’s earnings growth relative to 2019 may

re ect lingering pandemic-related compositional shifts in the

group’s full-time workers. Additionally, real earnings growth

accounts for aggregate in ation, but some demographic

groups may be disproportionately exposed to in ation due

to differences in groups’ consumption patterns—implying

lower real earnings growth for groups with greater exposure to

in ation.

Although the gaps in employment outcomes

across groups that widened during the pandemic have

diminished, the considerable gaps that existed before

the pandemic remain. For example, the EPOP ratio for

whites of prime age remains more than 3percentage

points above those for prime-age Black and Hispanic

people; the EPOP ratio of college-educated, prime-age

people is about 15percentage points higher than that

of prime-age people with high school degrees or less;

and the EPOP ratio for prime-age mothers is about

5percentage points below that of non-mothers—all

similar in size to the gaps that existed before the

pandemic.

The broad-based nature of the labor market recovery

is also apparent in workers’ earnings, which have

grown rapidly as employment surged in 2021 and early

2022. As of 2022:Q1, the median full-time worker’s

usual weekly earnings had grown 12.3percent relative

to pre-pandemic levels—implying real earnings growth

of 3.1percent ( gure B).

Although this earnings growth

has been widespread, it has been largest for women,

minorities, young workers, and workers with less than a

high school education. The growth in earnings for some

demographic groups has been suf ciently robust to

shrink some pre-pandemic disparities in real earnings

between groups. For instance, the gap in median full-

5. Just as with the change in the EPOP ratio, each group’s

pre-pandemic baseline is de ned as the group’s average

median usual weekly earnings in 2019. The reported growth in

real usual weekly earnings de ates nominal earnings growth

by total PCE (personal consumption expenditures) in ation.

If, instead, the CPI were used to de ate nominal earnings,

then reported real earnings growth since 2019 would be

2percentage points lower—but even when using the CPI to

de ate nominal earnings, real earnings have risen for most

groups since 2019.

B. Growth in median full-time usual weekly earnings

from 2019 to 2022:Q1

Percent change relative to 2019 average

NominalReal (PCE)

0246810121416

Hispanic or Latino

Asian

Black or African American

White

65+

55–64

25–54

16–24

Bachelor’s or more

Some college

High school

Less than high school

Women

Men

Overall

OTE: The percent change as of 2022:Q1 is relative to the 2019 average of

the

median usual weekly earnings for full-time workers in each group. Real

earnings growth deates the nominal earnings growth by the average growth in

the

personal consumption expenditures (PCE) price index as of 2022:Q1

relative

to its 2019 average level. The overall earnings, as well as those for men

and

women, use seasonally adjusted data, but the other groups’ earnings are

not seasonally adjusted. The key identies bars in order from left to right.

OURCE

: For median usual weekly earnings, Bureau of Labor Statistics; for

the PCE price index, Bureau of Economic Analysis.

Developments in Employment and Earnings across Groups (continued)

MONETARY POLICY REPORT: JUNE 2022 17

average rate over the previous ve years.

The slowing in population growth over

2020–21 was due to both a sharp decline in

net immigration and a spike in COVID-related

deaths.

Had the population increased over

2020–21 at the same rate as over the previous

ve years, the labor force would have been

about 1¾million larger as of the second

quarter of this year.

As a result, labor markets remained

extremely tight . . .

Reecting very strong demand for workers

alongside still-subdued supply, a wide range

of indicators have continued to point to an

extremely tight labor market despite the fact

that the level of payroll employment in May

remained about 820,000 below the level in

February2020.

The number of total available

jobs, measured by total employment plus

posted job openings, continued to far exceed

the number of available workers, measured by

the size of the labor force.

The gap was

4. Population forecasts just before the onset of the

pandemic also projected faster population growth

for 2021–22 than has been realized. For example, the

Congressional Budget Oce projected 0.8percent

growth per year in 2021–22 in its January2020 budget

and economic projections; see Congressional Budget

Oce (2020), The Budget and Economic Outlook: 2020

to 2030 (Washington: CBO, January), https://www.cbo.

gov/publication/56020. Before 2015, population growth

was even higher. For example, the average growth rate in

the working-age population between 1980 and 2014 was

1.2percent per year.

5. The eect of COVID-related deaths on the labor

force, however, was relatively smaller, because these

deaths have been concentrated among older individuals,

who tend to have low LFPRs.

6. This calculation uses the actual LFPR in May2022

and multiplies it by the level of the population that would

have been realized in that month had population growth

over 2020–21 been the same as the growth observed over

2015–19.

7. After adjusting for population growth since the

beginning of the pandemic, the shortfall in payrolls

relative to their pre-pandemic level was about 2.3million

in May.

8. The labor force includes all people aged 16

and older who are classied as either employed or

unemployed.

18 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

about 5½million at the end of April, near the

highest level on record.

The share of workers

quitting jobs each month, an indicator of the

availability of attractive job prospects, was

2.9percent at the end of April, near the all-

time high reported in November (gure12).

Initial claims for unemployment benets

remain near the lowest levels observed in

the past 50years. Households’ and small

businesses’ perceptions of labor market

tightness were near or above the highest

levels observed in the history of these series.

And, nally, employers continued to report

widespread hiring diculties.

That said, some possible signs of modest

easing of labor market tightness have recently

appeared. For example, as noted in the next

section, some measures of wage growth appear

to have moderated. And in the June2022 Beige

Book, employers in some Federal Reserve

Districts reported some signs of modest

improvement in worker availability.

. . . and nominal wages continued to

increase at a robust pace

Reecting very tight labor market conditions,

nominal wages continued to rise at historically

rapid rates. For example, the employment

cost index (ECI) of total compensation rose

4.8percent over the 12 months ending in

March, well above 2.8percent from a year

earlier (gure13). The most recent readings

include a surge in bonuses, which may reect

the challenges of retaining and hiring workers.

In addition, 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, picked up markedly this

year and rose more than 6percent in May, well

above the 3to 4percent pace reported over the

previous few years.

9. Another usual indicator of the gap between

available jobs and available workers is the ratio of job

openings to unemployment. At the end of April, this

indicator showed that there were 1.9 job openings per

unemployed person.

Compensation per hour,

business sector

Atlanta Fed’s

Wage Growth Tracker

Employment cost index,

private sector

Percent change from year earlier

20222020201820162014

13. Measures of change in hourly compensation

Average hourly earnings,

private sector

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

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

12 months ending in the last month of each quarter; for private-sector

average hourly earnings, the data are 12-month percent changes; for the

Atlanta Fed’s Wage Growth Tracker, the data are shown as a 3-month

moving average of the 12-month percent change.

OURCE: Bureau of Labor Statistics; Federal Reserve Bank of Atlanta,

Wage Growth Tracker; all via Haver Analytics.

Vacancy-to-

unemployment ratio

1.2

1.5

1.8

2.1

2.4

Ratio

1.2

1.6

2.0

2.4

2.8

3.2

202220202018201620142012201020082006

12. Ratio of job openings to job seekers and quits rate

Percent of employment

Nonfarm quits rate

OTE: The data are monthly and extend through April 2022. The

vacancy-to-unemployment ratio data are the ratio of job openings to

unemployed.

OURCE: Bureau of Labor Statistics, Job Openings and Labor

Turnover Survey.

MONETARY POLICY REPORT: JUNE 2022 19

That said, there are some signs that

nominal wage growth may be leveling o or

moderating. The growth of wages and salaries

as measured by the ECI moderated from

5.6percent at an annual rate in the second half

of last year to 5.2percent early this year. And

even as payroll employment continued to grow

rapidly and the unemployment rate continued

to fall, the three-month change in average

hourly earnings declined from about 6percent

at an annual rate late last year to 4.5percent

in May, with the moderation in earnings

growth particularly notable for employees in

the sectors that experienced especially strong

wage growth last year, such as leisure and

hospitality.

Following a period of solid growth, labor

productivity softened

The extent to which sizable wage gains

raise rms’ unit costs and act as a source of

ination pressure depends importantly on the

pace of productivity growth. Considerable

uncertainty remains around the ultimate

eects of the pandemic on productivity.

From 2019 through 2021, productivity growth

in the business sector picked up (albeit by

less than compensation growth), averaging

about 2¼percent at an annual rate—about

1percentage point faster than the average pace

of growth over the previous decade (gure14).

Some of this pickup in productivity growth

might reect persistent factors. For example,

the pandemic resulted in a high rate of new

business formation, the widespread adoption

of remote work technology, and a wave of

labor-saving investments.

The latest reading, however, showed a

decline in business-sector productivity in the

rst quarter of this year. While quarterly

productivity data are notoriously volatile, this

decline nevertheless highlights the possibility

that some of the earlier productivity gains

could prove transitory, perhaps reecting

worker eort initially surging in response to

employment shortages and hiring diculties

Percent, annual rate

14. Change in business-sector output per hour

1949–

1974–

1996–

2003

2004–

2009–

2019–

2022

OTE

: Changes are measured from Q4 of the year

immediately

preceding the period through Q4 of the nal year of the period, except

2022 changes, which are calculated from 2021:Q1 to 2022:Q1.

OURCE

: Bureau of Labor Statistics via Haver Analytics.

20 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

and then subsequently returning to more

normal levels.

If the gap between wage

growth and productivity growth remains

comparably wide in the future, the result

will be signicant upward pressure on rms’

laborcosts.

Gross domestic product declined in the

rst quarter of 2022 after having surged

in the fourth quarter of 2021 . . .

Real gross domestic product (GDP) is reported

to have surged at a 6.9percent annual rate in

the fourth quarter of 2021—and then to have

declined at a 1.5percent annual rate in the rst

quarter—because of uctuations in net exports

and inventory investment (gure15). These

two categories of expenditures are volatile even

in normal times, and they have been even more

so in recent quarters. Some improvement in

supply chain conditions late last year appears

to have enabled rms to rebuild depleted

inventories; inventory investment surged in

the fourth quarter and then moderated to a

still-elevated pace in the rst quarter, thereby

weighing on GDP growth. Other measures

of activity, including employment, industrial

production, and gross domestic income,

indicate continued growth in the rst quarter.

. . . while growth in consumer spending

and business investment was solid in the

rst quarter

After abstracting from these volatile

components, growth in private domestic nal

demand (consumer spending plus residential

and business xed investment—a measure

that tends to be more stable and better reects

the strength of overall economic activity)

was solid in the rst quarter, supported by

some unwinding of supply bottlenecks and a

further reopening of the economy. The most

recent spending data and other indicators

suggest that private xed investment may be

10. The November2021 Beige Book reported that

many employers were planning to increase hiring because

of concerns that their current workforce was being

overworked.

17.0

17.5

18.0

18.5

19.0

19.5

20.0

Trillions of chained 2012 dollars

20222021202020192018201720162015

15. Real gross domestic product

Quarterly

OURCE

: Bureau of Economic Analysis via Haver Analytics.

MONETARY POLICY REPORT: JUNE 2022 21

moderating, but consumer spending remains

strong and drag from inventory investment

and net exports may be dissipating. As a

result, private domestic nal demand and real

GDP appear on track to rise moderately in the

second quarter.

Real consumer spending growth

remained strong . . .

Real consumer spending—that is, spending

after adjusting for ination—continued to

grow briskly, supported by a partial unwinding

of supply bottlenecks and continued

normalization of spending patterns as the

pandemic fades. For example, spending

on motor vehicles grew markedly in the

rst quarter, reecting improvements in

both domestic and foreign production, and

spending on services (especially at restaurants)

grew briskly.

That said, consumer spending growth has

moderated from its very rapid pace from

early 2021 as scal support has declined

from historical highs, some households have

likely depleted excess savings accumulated

during the pandemic, and ination has eroded

households’ purchasing power.

The composition of spending remains more

tilted toward goods and away from services

than it was before the pandemic. Real goods

spending is still well above its trend, while

real spending on services remains below trend

(gure16). Nevertheless, the composition

continued to shift back toward services. While

goods spending was only modestly higher in

April compared with its average from late last

year, services spending rose signicantly.

. . . supported by high levels of wealth

Household wealth grew by roughly $30trillion

between late 2019 and late 2021 because of

rises in equity and house prices along with

the elevated rate of saving in 2020 and 2021

(gures17 and 18). Since the beginning of the

year, wealth has declined because of the drop

in equity prices. Nevertheless, wealth remains

PercentMonthly

202220202018201620142012201020082006

18. Personal saving rate

NOTE: The data extend through April 2022.

SOURCE: Bureau of Economic Analysis via Haver Analytics.

Goods

6.5

7.0

7.5

8.0

8.5

9.0

9.5

Trillions of chained 2012 dollars

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

202220202018201620142012201020082006

16. Real personal consumption expenditures

Trillions of chained 2012 dollars

Services

OTE: The data are monthly and extend through April 2022.

OURCE

: Bureau of Economic Analysis via Haver Analytics.

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

Ratio

202220202018201620142012201020082006

17. Wealth-to-income ratio

Quarterly

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

personal income.

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.

22 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

well above pre-pandemic levels, providing

continuing support for consumer spending.

Consumer nancing conditions were

generally accommodative, especially for

borrowers with stronger credit scores

Financing has been generally available to

support consumer spending. Following a

period of widespread reported easing last year,

standards on credit card loans eased somewhat

further in the rst quarter, whereas those on

auto and other consumer loans changed little.

Partly reecting higher credit card purchase

volumes, credit card balances grew rapidly in

recent months (gure19). Even so, many credit

card users still have ample unused credit. Auto

loans grew briskly during the rst quarter,

consistent with the concurrent rebound in

autosales.

Meanwhile, borrowing costs rose. However,

they remain below pre-pandemic levels for

credit cards and auto loans, partly reecting

strong consumer credit quality. Indeed,

delinquency rates on consumer loans remain

low relative to historical averages despite some

recent increases among nonprime borrowers.

Housing construction remained high but

may be moderating . . .

New single-family construction has remained

well above pre-pandemic levels. However,

new construction may be softening, with

single-family permits turning down some in

March and April (gure20). As in the past

year, still-tight supplies of materials, labor,

and other inputs may still be restraining new

construction. Also, builders have become

distinctly less optimistic about prospects for

housing sales, perhaps owing to the sharp rise

in mortgage rates (gure21).

. . . while home sales fell amid low

inventories and rising mortgage rates

Home sales stepped down substantially from

the very high levels prevailing late last year

and are now close to pre-pandemic levels

2.5

3.0

3.5

4.0

4.5

5.0

5.5

Percent

20222020201820162014

21. Mortgage rates

Weekly

OTE

: The data are contract rates on 30-year, xed-rate conventional

home mortgage commitments and extend through June 9, 2022.

OURCE

: 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

202220202018201620142012201020082006

20. Private housing starts and permits

Monthly

Single-family starts

OTE: The data extend through April 2022.

OURCE

: U.S. Census Bureau via Haver Analytics.

Billions of dollars, monthly rate

20222020201820162014201220102008

19. Consumer credit ows

Apr.

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

Consumer

Credit.”

Student loans

Auto loans

Credit cards

MONETARY POLICY REPORT: JUNE 2022 23

(gure22). Some of this decline may have

reected further reductions in inventories

of existing homes to historically low levels

early in the year. In addition, the sharp

increases in mortgage rates may have begun to

moderate housing demand. Even so, nancing

conditions in the residential mortgage market

remained accommodative for borrowers who

met standard loan criteria, and the terms of

mortgage credit for households with lower

credit scores continued to ease toward pre-

pandemic levels. Listings, sales, and price data

suggest that so far, demand remains strong

relative to the pace at which homes are being

made available for sale. For example, the share

of homes o market within two weeks remains

elevated, and as of April, several measures of

national house prices were up about 20percent

from a year earlier, though less in real terms

(gure23).

Business xed investment rose strongly

in the rst quarter but may now be

moderating

Investment in equipment and intangibles

surged at a 12½percent annual rate in the

rst quarter (gure24). Investment demand

remained strong, as worker shortages and

high-capacity utilization in manufacturing

likely maintained strong incentives for rms

to automate production and boost capital

expenditures. In turn, strong investment

demand continued to boost equipment prices

in an environment of constrained supply,

but there have been initial signs that supply

constraints may have begun to ease. In

particular, since late last year, shipments of

capital goods have begun to catch up with

orders. The most recent indicators suggest that

the growth of investment in equipment and

intangibles will slow signicantly in the second

quarter, possibly reecting drag from tighter

nancial conditions.

Investment in nonresidential structures

declined moderately in the rst quarter after

falling more rapidly over the second half of

CoreLogic

price index

S&P/Case-Shiller

national index

100

110

120

130

2005:Q1 = 100

202220202018201620142012201020082006

23. Real prices of existing single-family houses

Quarterly

Zillow index

OTE: Series are deated by the personal consumption expenditures

price index.

OURCE: Bureau of Economic Analysis via Haver Analytics;

CoreLogic Home Price Index; Zillow, Inc., Real Estate Data;

S&P/Case-Shiller U.S. National Home Price Index. The S&P/Case-Shiller

index is a product of S&P Dow Jones Indices LLC and/or its aliates.

(For Dow Jones Indices licensing information, see the note on the

Contents page.)

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

202220202018201620142012201020082006

22. New and existing home sales

Millions, annual rate

New home sales

OTE: The data are monthly and extend through April 2022.

New

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

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

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

sales, National Association of Realtors; all via Haver Analytics.

24 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

2021, and it appears on track to decline again

in the second quarter. Declines in spending on

nondrilling structures have been only partly

oset by rapid increases in drilling investment,

which reect the recent rise in energy prices.

Business nancing conditions tightened

somewhat but remained generally

accommodative

Credit remained available to most nonnancial

corporations, but nancing conditions

tightened somewhat, especially for lower-

rated rms. Gross nonnancial corporate

bond issuance was solid in the rst quarter

but slowed somewhat in April and May, with

speculative-grade bond issuance particularly

weak. Leveraged loan issuance also declined

notably in May, partly reecting weakening

demand from retail investors. The growth of

business loans at banks picked up from the

subdued pace of last year, reecting stronger

loan originations as well as a moderation in

loan forgiveness associated with the Paycheck

Protection Program.

Credit also remained broadly available to

small businesses. The share of small rms

reporting that it was more dicult to obtain

loans (compared with three months earlier)

remained low by historical standards. Loan

origination data through April were consistent

with credit availability being comparable

with pre-pandemic levels amid gradually

recovering demand for small business credit.

Most measures of loan performance remained

largely stable; through April, default and

delinquency rates remained below their pre-

pandemic levels.

The strong U.S. demand has partly been

met through a rapid rise in imports

Driven by the continued strength in domestic

economic activity, including still-strong

demand for goods consumption, U.S. imports

continued to grow at a rapid pace, surging well

above their pre-pandemic trend (gure25).

High levels of imported goods have kept

international logistics channels operating

Imports

1,500

1,750

2,000

2,250

2,500

2,750

3,000

3,250

3,500

3,750

4,000

Billions of chained 2012 dollars

20222020201820162014201220102008

25. Real imports and exports of goods

and services

Quarterly

Exports

OURCE

: Bureau of Economic Analysis via Haver Analytics.

Structures

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

Billions of chained 2012 dollars

350

400

450

500

550

600

650

202220192016201320102007

24. 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: JUNE 2022 25

under high pressure, which has continued to

impair the timely delivery of goods to U.S.

customers. Real goods exports have only

recovered to pre-pandemic levels. Real exports

and imports of services remain subdued,

reecting a slow recovery of international

travel. Given the recent strength of imports

relative to the milder recovery in exports, the

nominal trade decit widened further as a

share of GDP (gure26).

The support to economic activity

provided by federal scal actions

continued to diminish . . .

In response to the pandemic, the federal

government enacted scal policies to address

the economic consequences of the pandemic.

Because the boost to spending from these

policies ended last year, the eects on demand

are likely waning this year and weighing on

GDP growth.

. . . and, in turn, the budget decit has

fallen sharply from pandemic highs, and

the growth of federal debt has moderated

The Congressional Budget Oce estimates

that scal policies enacted since the start of

the pandemic will increase federal decits

roughly $5.4trillion by the end of scal

year2030, with the largest decit eects

having occurred in scal 2020 and 2021.

These policies, combined with the eects of

the automatic stabilizers—the reduction in tax

receipts and increase in transfers that occur

as a consequence of depressed economic

11. For more information, see Congressional Budget

Oce (2020), “The Budgetary Eects of Laws Enacted in

Response to the 2020 Coronavirus Pandemic, March and

April2020,” June, https://www.cbo.gov/system/files/2020-

06/56403-CBO-covid-legislation.pdf; Congressional

Budget Oce (2021), “The Budgetary Eects of Major

Laws Enacted in Response to the 2020–21 Coronavirus

Pandemic, December2020 and March2021,” September,

https://www.cbo.gov/system/files/2021-09/57343-

Pandemic.pdf; and Congressional Budget Oce

(2021), “Senate Amendment 2137 to H.R. 3684, the

Infrastructure Investment and Jobs Act, as Proposed on

August1, 2021,” August9, https://www.cbo.gov/system/

files/2021-08/hr3684_infrastructure.pdf.

Current account

Percent of nominal GDP

20222019201620132010200720042001

26. U.S. trade and current account balances

Quarterly

Trade

OTE: GDP is gross domestic product. Current account balance data

extend through 2021:Q4.

OURCE

: Bureau of Economic Analysis via Haver Analytics.

26 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

activity—caused the federal decit to surge to

15percent of nominal GDP in scal 2020 and

remain elevated at 12½percent in scal 2021.

But with pandemic scal programs having

largely ended and receipts surging, the decit

has fallen sharply thus far in scal 2022 relative

to scal 2021 and, by the end of the scal year,

is expected to be close to the decits prevailing

just before the pandemic (gure27).

As a result of the scal support enacted during

the pandemic, federal debt held by the public

jumped to around 100percent of nominal

GDP in scal 2020—the highest debt-to-

GDP ratio since 1947 (gure28). But with

decits falling and economic growth having

rebounded, the debt-to-GDP ratio has since

receded slightly from its recent peak.

State and local government budget

positions are remarkably strong . . .

Federal policymakers provided a historic

level of scal support to state and local

governments during the pandemic, with

aid totaling about $1trillion. This aid has

more than covered pandemic-related budget

shortfalls in the aggregate. Moreover, following

the pandemic-induced slump, total state tax

collections—pushed up by the economic

expansion—rose appreciably in 2021 and

continued to grow rapidly in early 2022

(gure29). In turn, this recovery in revenues

has led some state governments to enact or

consider enacting tax cuts. At the local level,

property taxes have continued to rise apace,

and the typically long lags between changes

in the market value of real estate and changes

in tax collections suggest that property tax

revenues will rise quite substantially going

forward, given the rise in house prices.

. . . but hiring and construction outlays

have continued to lag

Despite the return to in-person schooling and

the strong scal position of state and local

governments, state and local government

payrolls continued to expand only modestly

in the rst half of 2022. Employment levels

Expenditures

Percent of nominal GDP

202220172012200720021997

Annual

27. Federal receipts and expenditures

Receipts

OTE: Through 2021, the receipts and expenditures data are on a

unied-budget basis and are for scal years (October to

September);

gross domestic product (GDP) is for the 4 quarters ending in Q3. For

2022, receipts and expenditures are for the 12 months ending in May;

GDP is the average of 2021:Q4 and 2022:Q1.

OURCE: Department of the Treasury, Financial Management Service;

Oce of Management and Budget and Bureau of Economic Analysis via

Haver Analytics.

Debt held by

the public

100

120

Percent of nominal GDP

1.0

1.5

2.0

2.5

3.0

3.5

28. Federal government debt and net interest outlays

Percent of nominal GDP

1902 1922 1942 1962 1982 2002 2022

Net interest outlays

on federal debt

OTE

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

extend through 2021. 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 are annual from 1901 to 1951 and quarterly thereafter. GDP

is gross domestic product.

OURCE: For GDP, Bureau of Economic Analysis; for federal debt,

Congressional Budget Oce and Federal Reserve Board, Statistical

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

MONETARY POLICY REPORT: JUNE 2022 27

have regained about 60percent of their sizable

pandemic losses, falling well short of the

recovery in private payrolls (gure30). One

reason for this disparity appears to be that

public-sector wages have not kept pace with

the rapid gains in the private sector, which may

be inhibiting the ability of these governments

to sta back up to pre-pandemic levels.

Meanwhile, real construction outlays by state

and local governments continued to decline

in the rst half of the year and are currently

about 15percent below pre-pandemic levels.

Financial Developments

The expected level of the federal funds

rate over the next few years shifted up

substantially

In March, May, and June, the FOMC raised

the target range for the federal funds rate a

total of 1½percentage points. The expected

path of the federal funds rate over the next few

years also shifted up substantially since late

February (gure31). Economic data releases

and FOMC communications were viewed

by market participants as implying tighter

monetary policy than previously expected.

Market-based measures suggest that investors

anticipate the federal funds rate to exceed

3.6percent by the end of this year, which is

about 2percentage points higher than the level

expected in late February. The same measures

suggest that the federal funds rate is expected

to peak at about 4percent in mid-2023 before

gradually declining to about 3.1percent by

the end of 2025, which is about 1.4percentage

points higher than the end-2025 rate expected

in late February.

Similarly, 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 April,

the median of respondents’ projections for

18.0

18.5

19.0

19.5

20.0

20.5

Millions of jobs

202220202018201620142012201020082006

Monthly

30. State and local government payroll employment

OURCE

: Bureau of Labor Statistics via Haver Analytics.

Total state taxes

Percent change from year earlier

202220202018201620142012

29. State and local tax receipts

NOTE:State tax data are year-over-year percent changes of 12-month

moving averages, begin in June 2012, extend through April 2022, and are

aggregated over all states except Wyoming, for which data are not

available. Revenues from Washington, D.C., are also excluded. Data are

missing for March 2022 to April 2022 for New Mexico and Oregon and

April 2022 for Nevada, as these states have longer reporting lags than

others. Property tax data are year-over-year percent changes of 4-quarter

moving averages, begin in 2012:Q2, extend through 2021:Q4, and are

primarily collected by local governments.

OURCE: Monthly State Government Tax Revenue Data via Urban

Institute; U.S. Census Bureau, Quarterly Summary of State and Local

Government Tax Revenue.

Property taxes

28 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

the most likely path of the federal funds rate

shifted up signicantly since January.

Before late February, the expected path of

the federal funds rate had started to increase

notably in the third quarter of last year, in

anticipation of increases in the target range.

Consistent with the rise in the expected

path of the federal funds rate, yields on

Treasury securities and corporate bonds, as

well as mortgage rates, all started to increase

materially at a similar time. Meanwhile,

broad equity price indexes have declined

on net. Overall, these moves in asset prices

suggest tightening of nancial conditions even

before the initial increase in the target range

of the federal funds rate occurred in March

(gure32).

Yields on U.S. nominal Treasury securities

also rose considerably

Yields on nominal Treasury securities across

maturities have risen considerably since late

February (gure33). After a brief dip in

late February, following Russia’s invasion

of Ukraine, yields rose steadily amid higher

inationary pressures and associated

expectations for monetary policy tightening.

The increases in nominal Treasury yields

were primarily accounted for by rising

real yields. Uncertainty about longer-term

interest rates—as measured by the implied

volatility embedded in the prices of near-term

options on 10-year interest rate swaps—also

increased signicantly, reportedly reecting,

in part, an increase in uncertainty about the

policyoutlook.

Yields on other long-term debt increased

substantially

Across credit categories, corporate bond

yields have increased substantially and

12. 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.

10-year Treasury

Mortgage rate

Percent

20222021202020192018201720162015

32. Financial market indicators

Daily

Investment-grade corporate

OTE

: Investment-grade corporate reects the eective yield of the

ICE Bank of America Merrill Lynch triple-B U.S. Corporate Index

(C0A4). The mortgage rate is contract rates on 30-year, xed-rate

conventional home mortgage commitments. Mortgage rate data extend

through June 9, 2022.

OURCE

: Department of the Treasury via Haver Analytics; Freddie

Mac Primary Mortgage Market Survey; ICE Data Indices, LLC,

used

with permission.

2-year

5-year

Percent

202220202018201620142012

33. Yields on nominal Treasury securities

Daily

10-year

OURCE

: Department of the Treasury via Haver Analytics.

June 14, 2022

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Percent

20262025202420232022

31. Market-implied federal funds rate path

Quarterly

February 25, 2022

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 February 25, 2022, is compared with that as of

June 14, 2022. The path is estimated with a spline approach, assuming a

term premium of 0 basis points. The February 25, 2022, path extends

through 2026:Q1 and the June 14, 2022, path through 2026:Q2.

OURCE

: Bloomberg; Federal Reserve Board sta estimates.

MONETARY POLICY REPORT: JUNE 2022 29

spreads over yields on comparable-maturity

Treasury securities have increased notably

since late February. Corporate bond yields

and spreads are somewhat above the

historical median values of their respective

historical distributions since the mid-1990s

(gure34). Municipal bond yields also

increased signicantly while spreads increased

somewhat since late February. Spreads on

municipal bonds are now moderately above

their historical medians. On net, corporate

bond spreads are moderately above their pre-

pandemic levels, and municipal bond spreads

are near levels prevailing shortly before the

pandemic. While the widening of corporate

bond spreads since late February appears

to partly reect a deterioration in market

expectations of future credit quality, corporate

and municipal credit quality thus far in 2022

have remained strong. So far this year, defaults

have been low, and upgrades of bond ratings

have outpaced downgrades in both markets.

Since late February, yields on agency

mortgage-backed securities (MBS)—an

important pricing factor for home mortgage

rates—increased signicantly, as longer-term

Treasury yields increased and spreads over

comparable-maturity Treasury securities

widened (gure35). MBS spreads increased as

market participants’ expectations of a gradual

reduction in the Federal Reserve’s balance

sheet shifted to a faster reduction.

Broad equity price indexes declined

sharply, on net, amid substantial volatility

Broad equity price indexes were volatile and

declined sharply, on net, amid sustained

ination pressures and expectations of

monetary policy tightening, as well as

heightened uncertainty regarding Russia’s

invasion of Ukraine and the economic outlook

(gure36). Bank stock prices also declined on

net. One-month option-implied volatility on

the S&P 500 index—the VIX—rose notably to

elevated levels in the days following Russia’s

invasion of Ukraine. The VIX trended down

for some time only to increase again and

Yield

100

150

200

250

Basis points

202220202018201620142012

35. Yield and spread on agency mortgage-backed

securities

Percent

Spread

OTE: The data are daily. Yield shown is for the uniform

mortgage-backed securities 30-year current coupon, the coupon rate at

which new mortgage-backed securities would be priced at par, or face,

value, for dates after May 31, 2019; for earlier dates, the yield shown is

for the Fannie Mae 30-year current coupon. Spread shown is to the

average of the 5-year and 10-year nominal Treasury yields.

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

High-yield corporate

Municipal

Percent

2010 2012 2014 2016201820202022

34. Corporate bond yields, by securities rating, and

municipal bond yield

Daily

Investment-grade corporate

OTE: Investment-grade corporate reects the eective yield of the

ICE Bank of America Merrill Lynch (BofAML) triple-B U.S.

Corporate

Index (C0A4). High-yield corporate reects the eective yield of the ICE

BofAML High Yield Index (H0A0). Municipal reects the yield to worst

of the ICE BofAML U.S. Municipal Securities Index (U0A0).

OURCE

: ICE Data Indices, LLC, used with permission.

30 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

remain elevated since late April amid a notable

deterioration in risk sentiment (gure37). (For

a discussion of nancial stability issues, see

the box “Developments Related to Financial

Stability.”)

Markets for Treasury securities, mortgage-

backed securities, corporate and

municipal bonds, and equities generally

functioned in an orderly way, but some

measures of liquidity deteriorated

Liquidity conditions in the market for

Treasury securities, which had deteriorated

somewhat since late 2021, in part as a result

of heightened interest rate risk, worsened

further in late February following Russia’s

invasion of Ukraine. Market depth—a gauge

of the ability to transact in large volumes at

quotes posted by market makers—for Treasury

securities fell and remains at historically low

levels. Bid-ask spreads increased somewhat.

However, trading volumes remained within

normal ranges, suggesting that market

functioning was not materially impaired.

The decreases in depth were the greatest for

bonds with shorter maturities because the

prices of those securities are more sensitive to

expectations for monetary policy over the near

term. The market for MBS has functioned

in an orderly way since late February, even

as some measures of liquidity conditions

deteriorated. Measures of market functioning

in corporate and municipal bond markets

indicated that the markets have remained

liquid and trading conditions have stayed

stable since late February without substantive

disruptions around the time of Russia’s

invasion of Ukraine. Transaction costs in the

corporate bond market and in the municipal

bond market have both picked up somewhat

since late February, and in the corporate bond

market, bid-ask spreads are modestly above

pre-pandemic levels. Transaction costs remain

fairly low by historical standards.. Liquidity

in equity markets has declined since late 2021

in part because of rising uncertainty about

the outlook for monetary policy as well as

Russia’s invasion of Ukraine and has remained

VIX

Percent

2022202020182016201420122010

37. S&P 500 volatility

Daily

Expected 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. The expected volatility series shows a forecast of 1-month

realized volatility, using a heterogeneous autoregressive model based on

5-minute S&P 500 returns.

OURCE

: Cboe Volatility Index® (VIX®) via Bloomberg; Renitiv

DataScope; Federal Reserve Board sta estimates.

S&P 500 index

100

150

200

250

300

350

400

December 31, 2010 = 100

202220202018201620142012

36. 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.)

MONETARY POLICY REPORT: JUNE 2022 31

previously very elevated levels but were still above

their historical median. Corporate-to-Treasury spreads

widened but remained below their historical median.

Spreads on leveraged loans were little changed, and

leveraged loan issuance remained solid. House prices

continued to rise at a rapid pace that further outstripped

rent growth. Commercial real estate prices also rose

further, with some price indexes surpassing their

2006peaks.

The rapid growth of nominal GDP outpaced the

growth of total debt of non nancial businesses and

households. The ratio of the aggregate debt owed by

the private non nancial sector to nominal GDP further

declined to near pre-pandemic levels ( gure A). Net

leverage of large non nancial businesses held stable at

This discussion reviews vulnerabilities in the U.S.

 nancial system. 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. With in ation running higher than

expected, the invasion of Ukraine, and the pandemic’s

continued effects on supply chains and consumer

demand patterns, uncertainty about the economic

outlook increased, and prices of some  nancial assets

 uctuated widely. Treasury yields increased markedly,

and valuation pressures in corporate securities markets

eased, but real estate prices have risen further this year

despite a rise in mortgage rates. While business and

household debt has been growing solidly, the ratio of

private non nancial credit to gross domestic product

(GDP) decreased to near pre-pandemic levels and most

indicators of credit quality remained robust. Large bank

capital ratios dipped in the  rst quarter, but overall

leverage in the  nancial sector appears moderate

and little changed this year. A few signs of funding

pressures emerged amid the escalation of geopolitical

tensions. However, broad funding markets proved

resilient, and with direct exposures of U.S.  nancial

institutions to Russia and Ukraine being small,  nancial

spillovers have been limited to date. Nevertheless, the

effect of high in ation, supply chain disruptions, and

the ongoing geopolitical tensions remain substantial

sources of uncertainty with the potential to further

stress the  nancial system.

Valuation measures based on current expectations

of cash  ows decreased in some markets but continued

to be high relative to historical norms. Re ecting a less

accommodative monetary policy stance associated

with elevated in ation and a tight labor market, yields

on Treasury securities increased markedly and reached

somewhat above their pre-pandemic levels. Broad

equity prices  uctuated widely and declined sharply.

Prices relative to earnings forecasts declined from

Developments Related to Financial Stability

1.0

1.2

1.4

1.6

1.8

Ratio

202220172012200720021997199219871982

A. Private nonnancial-sector credit-to-GDP ratio

Quarterly

NOTE: The shaded bars indicate periods of business recession

dened

by the National Bureau of Economic Research:

January

1980–July

1980, July 1981–November 1982, July 1990–March

1991,

March

2001–November 2001, December 2007–June 2009, and

February

2020–April 2020. GDP is gross domestic product.

SOURCE: Federal Reserve Board, Statistical Release Z.1, “Financia

Accounts

of the United States”; Bureau of Economic Analysis, nationa

income and product accounts; Federal Reserve Board sta calculations.

(continued on next page)

32 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

(continued)

have been directly affected by the Russia–Ukraine

con ict, but loan exposures of large U.S. banks to

these  rms and borrowers in Ukraine and Russia are

small. However, several indirect channels—heightened

volatility in asset markets; new disruptions in payment,

clearing, or settlement systems; and interconnections

with large European banks—could adversely affect the

U.S. economy and  nancial system.

Funding risks at domestic banks and broker-

dealers are low, but structural vulnerabilities persist at

some money market funds (MMFs), bond funds, and

stablecoins. Banks relied only modestly on short-term

wholesale funding, and the share of high-quality liquid

assets at banks remained historically high. Assets

under management at prime and tax-exempt MMFs

have continued to decline, but these funds remain a

structural vulnerability due to their susceptibility to

runs. In December2021, the Securities and Exchange

Commission proposed reforms to MMFs, including

the adoption of swing pricing for certain fund types,

increased liquidity requirements, and other measures

meant to make them more resilient to redemptions. The

Russian invasion of Ukraine does not appear to have

left a material imprint on broader short-term funding

markets. Trading conditions in those markets have been

stable, issuance continued, and spreads remained well

below the levels reached in March2020. Although

depth in markets for Treasury securities and some

commodity and equity derivatives has been low by

historical standards, those markets have functioned

normally after the initial shock to the nickel market.

Elevated market volatility—particularly in commodity

markets—caused central counterparties (CCPs) to make

larger margin calls. To date, clearing members have

below pre-pandemic levels, supported by ample cash

holdings. Fueled by strong earnings and low borrowing

costs, the ratio of earnings to interest expenses for the

median  rm among public non nancial businesses rose

to its highest level in two decades, indicating that large

 rms were better able to service debt. However, for

 rms in industries hit hardest by the pandemic, leverage

remains elevated and interest coverage ratios are lower.

The  nancial position of many households continued to

improve. Household debt relative to nominal GDP as

well as mortgage, auto, and credit card delinquencies

were in the bottom range of the levels observed over

the past 20years. Household credit growth has been

almost exclusively among prime-rated borrowers,

including for residential mortgages. Nonetheless,

some households remained  nancially strained and

vulnerable to adverse shocks during this period of

heightened uncertainty.

Vulnerabilities from  nancial-sector leverage are

well within their historical range. Risk-based capital

ratios at domestic bank holding companies declined

some in the  rst quarter of 2022 but remained well

above regulatory requirements. Banks increased loan

loss provisions to re ect higher uncertainty about

the economic outlook and continued to report that

rising interest rates will support their pro tability

going forward. However, higher interest rates cause

losses in the market value of banks’ long-term  xed-

rate assets. Leverage remained high at life insurance

companies and was likely somewhat elevated at hedge

funds, though the most comprehensive data for hedge

funds are considerably lagged. Vulnerabilities of most

U.S.  nancial institutions to the Russian invasion of

Ukraine appear to be limited. Some nonbank  nancial

intermediaries—such as commodity trading  rms—

Developments Related to Financial Stability (continued)

MONETARY POLICY REPORT: JUNE 2022 33

in ation and greater-than-expected increases in interest

rates could negatively affect domestic economic

activity, asset prices, credit quality, and  nancial

conditions more generally. As concerns over cyber risk

have increased, U.S. government agencies and their

private-sector partners have been stepping up their

efforts to protect the  nancial system and other critical

infrastructures. These risks, if realized, could interact

with  nancial vulnerabilities and pose additional risks

to the U.S.  nancial system.

Invasion of Ukraine and Commodity Markets

Russia’s invasion of Ukraine and subsequent

international sanctions disrupted global trade in

commodities, leading to surging prices and heightened

volatility in agriculture, energy, and metals markets.

These markets include spot and forward markets for

physical commodities as well as futures, options,

and swaps markets that involve an array of  nancial

intermediaries and infrastructures. Stresses in  nancial

markets linked to commodities could disrupt the

ef cient production, processing, and transportation

of commodities by interfering with the ability of

commodity producers, consumers, and traders to

hedge risks. Such stresses can also increase liquidity

and credit risks for  nancial institutions that are active

in commodity markets. To date, however,  nancial

market stresses do not appear to have exacerbated

the negative effects on broader economic activity

or created substantial pressure on key  nancial

intermediaries, including banks. Since the invasion, for

most commodities, futures trading volumes and open

interest—the number of contracts outstanding at the

end of the day—have remained in normal ranges.

been able to meet these margin calls, and, in general,

CCPs effectively managed the increased risks and

higher trading volumes.

The aggregate value of stablecoins—digital assets

that aim to maintain a stable value relative to a

national currency or other reference assets—grew

rapidly over the past year to more than $180billion

in March2022. The stablecoin sector remained highly

concentrated, with the three largest stablecoin issuers—

Tether, USD Coin, and Binance USD—constituting

more than 80percent of the total market value.

The collapse in the value of certain stablecoins and

recent strains experienced in markets for other digital

assets demonstrate the fragility of such structures.

More generally, stablecoins that are not backed by

safe and suf ciently liquid assets and are not subject

to appropriate regulatory standards create risks to

investors and potentially to the  nancial system,

including susceptibility to potentially destabilizing runs.

These vulnerabilities may be exacerbated by a lack of

transparency regarding the riskiness and liquidity of

assets backing stablecoins. In addition, the increasing

use of stablecoins to meet margin requirements for

levered trading in other cryptocurrencies may amplify

volatility in demand for stablecoins and heighten

redemption risks. The President’s Working Group

on Financial Markets, the Federal Deposit Insurance

Corporation, and the Of ce of the Comptroller of the

Currency have made recommendations to address

prudential risks posed by stablecoins.

A routine survey of market contacts on salient

shocks to  nancial stability highlights several important

risks. Stresses in Europe related to Russia’s invasion of

Ukraine or in emerging markets could spill over to the

United States. In addition, higher or more persistent

34 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

Percent

2022202020182016201420122010200820062004

38. Ratio of total commercial bank credit to nominal

gross domestic product

Quarterly

SOURCE: Federal Reserve Board, Statistical Release H.8, “Assets and

Liabilities of Commercial Banks in the United States”; Bureau o

Economic Analysis via Haver Analytics.

at low levels since then. Market depth based

on the S&P 500 futures is below pre-pandemic

levels and currently in the bottom decile of its

historical distribution since 2018.

Short-term funding market conditions

remained stable . . .

Conditions in money markets have been stable

and orderly. Increases in the target range for

the federal funds rate fully passed through to

market overnight rates. The eective federal

funds rate and other unsecured overnight

rates have been a few basis points below the

interest rate on reserve balances since late

February. The Secured Overnight Financing

Rate has been at or below the oering rate at

the overnight reverse repurchase agreement

(ON RRP) facility, given ample liquidity and

a limited supply of Treasury bills. Softness

in repurchase agreement rates contributed to

ongoing increases in ON RRP take-up, which

reached an average of around $2.1trillion per

day in June. Russia’s invasion of Ukraine does

not appear to have left a material imprint in

the broad U.S. dollar funding markets to date.

In late February and early March, spreads

on some longer-tenor commercial paper and

negotiable certicates of deposit increased

notably amid uncertainties around monetary

policy tightening and Russia’s invasion of

Ukraine. These spreads have broadly narrowed

since mid-March.

Weighted average maturities for money market

funds (MMFs) stand at low levels, as MMFs

tend to adjust their portfolios toward shorter-

tenor instruments to position for rising interest

rates around monetary policy tighteningcycles.

Bank credit expanded in the rst quarter

amid strong loan demand

Strong loan growth pushed the ratio of bank

credit to GDP higher in the rst quarter

(gure38). The acceleration in growth was

broad based, with balance growth accelerating

for most major loan categories. Growth

was particularly strong for commercial and

industrial and credit card loans, for which

MONETARY POLICY REPORT: JUNE 2022 35

demand continued to strengthen in the rst

quarter according to the April2022 Senior

Loan Ocer Opinion Survey on Bank

Lending Practices. More recently, loan growth

moderated somewhat in May amid higher

rates and a more uncertain economic outlook

but remained strong. Bank protability also

remained strong but fell somewhat in the

rst quarter, in part as a result of declines

in investment banking revenue and the

fading boost to protability from the release

in previous quarters of loan loss reserves

accumulated in 2020 (gure39). Nevertheless,

higher interest rates and strong loan demand

are expected to support bank protability in

the near term. Delinquency rates on bank

loans remained low.

International Developments

Economic activity continued to recover

abroad . . .

Economic activity continued to recover in

many foreign economies in the rst quarter,

albeit at a slower pace than last year’s

strong performance. The still-robust growth

in many foreign economies reected the

recovery in many parts of the world from

previous pandemic shocks amid progress on

vaccinations and a greater ability to cope

with outbreaks without extensive lockdowns.

Moreover, unemployment rates in many

advanced foreign economies (AFEs) continued

to decline and are now below their pre-

pandemic levels (gure40).

More recently, headwinds from the war in

Ukraine and COVID-19 lockdowns in China

weighed on the foreign recovery. The slowing

of activity has been particularly sharp in

China, with recent indicators plunging amid

COVID-related mobility restrictions. In

Europe, recent indicators also show a sharp

slowing, reecting lower real incomes, reduced

condence of households and businesses in

the economy, and continued supply chain

disruptions.

Return on assets

Percent, annual rate

2.0

1.5

1.0

1.5

2.0

2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

39. Protability of bank holding companies

Percent, annual rate

Return on equity

OTE:The data are quarterly.

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

Financial Statements for Holding Companies.

United Kingdom

Canada

Japan 2

Percent

202220202018201620142012201020082006

40. Unemployment rate in selected advanced foreign

economies

Monthly

Euro area

OTE:The data for the United Kingdom extend through March 2022

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

euro area and Japan extend through April 2022.

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; all via Haver Analytics.

36 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

. . . while foreign ination remained on

the rise in most economies . . .

As in the United States, ination in many

foreign economies has continued to rise.

Soaring energy prices have remained a

major driver of higher ination in AFEs,

and rising food prices accounted for most of

the increase in ination in emerging market

economies (EMEs). Food and energy price

rises have made up the bulk of the increase,

though supply chain disruptions have

contributed as well, and inationary pressures

have broadened as elevated input costs are

increasingly passed through to prices of goods

and services. (See the box “Global Ination.”)

. . . and many foreign central banks are

tightening monetary policy

In response to elevated ination and

broadening price pressures, many AFE central

banks increased policy rates, and some started

to reduce the size of their balance sheets.

Concerns over the persistence of inationary

pressures led several EME central banks,

primarily those in Latin America, to raise

their policy rates further. Several central banks

in emerging Asia, where ination had been

more subdued but has recently begun to rise,

also started to raise policy rates. (See the box

“Monetary Policy in Foreign Economies.”)

Financial conditions abroad tightened

since the beginning of the year . . .

As central banks raised interest rates or

signaled that they would do so soon, market-

based policy expectations and sovereign

bond yields rose signicantly in many AFEs

(gure41). The rise in sovereign bond yields

reects increases in both real yields, arising

from less accommodative central bank

communications, and ination compensation.

Since the start of the year, short- and medium-

term ination compensation measures in

the euro area rose more than in many other

AFEs, reecting the region’s larger exposure

to the inationary pressures stemming from

Russia’s invasion of Ukraine. Sovereign bond

Germany

Canada

Percent

2006 2008 2010 2012 2014 2016 2018 2020 2022

41. Nominal 10-year government bond yields in

selected advanced foreign economies

Weekly

United Kingdom

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

extend through June 10, 2022.

OURCE

: Bloomberg.

MONETARY POLICY REPORT: JUNE 2022 37

Over the past year, in ation increased rapidly in

many foreign economies, re ecting soaring commodity

prices, pandemic-related supply disruptions, and

imbalances between demand for goods and services

( gure A). More recently, the war in Ukraine and the

renewals of COVID-19 lockdowns in China have

ampli ed in ationary pressures, particularly through

higher food and energy prices.

The recent surge in foreign in ation was mainly

concentrated in volatile components, such as food and

energy prices, with these components contributing

much more to in ation in recent months than in pre-

pandemic years ( gure B). In particular, energy prices

accounted for almost half of the 12-month headline

in ation rate for the advanced foreign economies (AFEs)

in April. Meanwhile, food prices are driving in ation

in emerging market economies, largely due to the war

and its threat to already fragile food security in these

economies.

Price pressures have recently broadened to core

in ation, as elevated input costs have been increasingly

passed through to prices of goods and services that

have not been directly affected by supply disruptions

and soaring commodity prices. This broadening

of in ationary pressure is re ected in increases in

the share of categories of core goods and services

prices rising more than 3percent in most major AFEs

( gureC). Furthermore, the rebalancing of demand

away from goods toward services—which would have

reduced upward pressures on prices of goods—has

been slower than expected so far, contributing to the

persistence of in ation pressures.

Persistent and widening price pressures are also

evident in increases in market- and survey-based

in ation expectations, although these expectations

generally remain anchored in historical ranges

( gureD). Even though such increases in in ation

expectations might be a welcome development for

economies such as Japan and the euro area that have

experienced persistently below-target in ation in

recent decades, many foreign central banks have been

tightening monetary policy amid broadened price

pressures and tight labor markets.

Global In ation

AFEs ex Japan

12-month percent change

2016 2017 2018 2019 2020 2021 2022

A. Consumer price ination in foreign economies

Monthly

EMEs ex China

OTE: The advanced foreign economy (AFE) aggregate is the averag

Canada, the euro area, and the United Kingdom, weighted by

U.S.

goods

imports. The emerging market economy (EME) aggregate is

the

average

of Brazil, Chile, Colombia, Hong Kong, India, Indonesia

Malaysia,

Mexico, Philippines, Singapore, South Korea, Taiwan, an

Thailand,

weighted by U.S. goods imports. The ination measure is

the

Harmonised

Index of Consumer Prices for the euro area and

the

consumer price index for other economies.

SOURCE:Haver Analytics.

(continued on next page)

38 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

United Kingdom

Euro area

Percent

2012 2014 2016 2018 2020 2022

D. 5-to-10-year ination swaps

Daily

Japan

OTE: The euro-area and United Kingdom data have been

adjusted

using

an interpolated price index to mitigate rollover jumps a

month-ends.

The United Kingdom’s ination swaps are based on

the

retail

price index (RPI). RPI ination is, on average, 75 to 100 basi

points

higher than consumer price index ination. The data are at

business-day frequency.

SOURCE: Bloomberg; Haver Analytics; Federal Reserve Board s

taff

calculations.

United Kingdom

Euro area

Share of prices rising more than 3 percent

2016 2017 2018 2019 2020 2021 2022

C.Diusion index for foreign core prices

Monthly

Canada

OTE: The data use the 12-month rise in prices. The prices of items a

weighted

according to their usual weights in the consumer price

index

and the Harmonised Index of Consumer Prices. The data extend through

April 2022.

OURCE

:Haver Analytics; Federal Reserve Board sta calculations.

Percent

2017–19 avg. April 2022

Advanced foreign economies ex Japan

B. Foreign consumer price ination components

Energy

Food

Core

Percent

2017–19 avg. 2022:Q2

Emerging market economies ex China

Energy

Food

Core

NOTE: The advanced foreign economy (AFE) aggregate is the average of Canada, the euro area, and the United Kingdom, weighted by U.S. goods

imports. The emerging market economy (EME) aggregate is the average of Argentina, Brazil, Chile, Colombia, Hong Kong, India, Israel,

Mexico,

Russia, Saudi Arabia, Singapore, South Korea, and the 5 original member countries of the Association of Southeast Asian Nations, weighted by

U.S.

goods imports. The ination measure is the Harmonised Index of Consumer Prices for the euro area and the consumer price index f

or other economies.

The key identies bars in order from top to bottom. The data are 12-month percent changes for AFEs and 4-quarter percent changes for EMEs.

OURCE

: Haver Analytics.

Global In ation (continued)

MONETARY POLICY REPORT: JUNE 2022 39

With in ation rising sharply across the globe, central

banks have broadly shifted toward tighter monetary

policy. Policy tightening started last year, as some

emerging market central banks—particularly those in

Latin America—increased policy rates out of concern that

sharp increases in in ation could become entrenched

in in ation expectations. Among the advanced foreign

economies (AFEs), central banks of some smaller

economies (New Zealand and Norway) with particularly

strong recoveries were the  rst to hike their policy rates

last autumn, while policy expectations for some major

AFE central banks began to rise sharply ( gure A).

Last December, the Bank of England (BOE) raised

its policy rate from 0.1percent to 0.25percent, citing

a strong labor market and rising in ation. This year,

with U.K. in ation picking up more sharply, the BOE

followed with additional rate hikes in subsequent

meetings, taking its policy rate to 1percent in May. The

Bank of Canada (BOC) began raising its policy rate in

March with a 25 basis point hike. In response to sharply

higher in ation and the view that economic slack in

the Canadian economy had been absorbed, the BOC

followed with hikes of 50 basis points each in April

and June, bringing the policy rate to 1.5percent. As

in ation concerns grew more widespread, the Reserve

Bank of Australia (RBA) and the Swedish Riksbank

pivoted sharply to hike rates in May, and the European

Central Bank (ECB) recently stated that it intends to start

raising its policy rate in July.

Supporting the overall thrust toward tighter global

monetary policy, several AFE central banks that had

expanded their balance sheets over the past two years

are now allowing them to shrink. In recent months, the

BOE, the BOC, the RBA, and the Swedish Riksbank have

begun to shrink their balance sheets by stopping full

reinvestments of maturing government bond holdings.

The BOE has indicated that it will consider accelerating

the pace of balance sheet reduction by selling U.K.

government bonds; it will provide an update in

August on a strategy for possible future bond sales.

After tapering its purchases in recent months, the ECB

announced it will end net asset purchases as of July1.

Not all major foreign central banks have been

tightening monetary policy. The Bank of Japan (BOJ)

has maintained its overnight policy rate at negative

0.1percent, given its outlook that Japanese in ation

will remain subdued in the medium term. The BOJ also

vowed to continue purchasing Japanese government

bonds to defend its current yield curve control target

band around 0percent for the 10-year nominal yield. In

addition, the People’s Bank of China recently increased

its monetary stimulus through reductions in reserve

requirement ratios and some key benchmark interest

rates amid a weakening of economic activity in China.

Monetary Policy in Foreign Economies

Canada

Japan

Euro area

100

150

200

250

300

350

400

Basis points

2016 2017 2018 2019 2020 2021 2022

A. 12-month policy expectations for selected advanced

foreign economies

Weekly

United Kingdom

OTE: The data are weekly averages of daily 12-month

market-implied

central

bank policy rates. The 12-month policy rates are implied

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

through June 10, 2022.

OURCE

: Bloomberg; Federal Reserve Board sta estimations.

40 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

spreads over German bund yields for euro-

area peripheral countries recently widened

signicantly. These moves partially retraced

following an unscheduled meeting of the

European Central Bank (ECB) on June15,

where the ECB indicated that it would take

action to address potential fragmentation in

euro-area sovereign bond markets.

Concerns about persistently high ination

and associated monetary policy tightening

across countries, as well as Russia’s invasion

of Ukraine and COVID lockdowns in

China, weighed on foreign risky asset prices

(gure42). Equities in many AFEs have

declined since the beginning of the year.

Equity declines were particularly strong in the

euro area, given the region’s trade and nancial

linkages to Russia and concerns over the

possibility of the conict spreading to other

parts of Europe. Euro-area corporate bond

spreads have widened since the beginning of

the year and are well above their pre-pandemic

levels.

Financial conditions in EMEs have tightened

since the beginning of the year but are not

particularly tight relative to historical norms.

EME-dedicated funds have experienced

net outows so far this quarter, reversing

the inows in the rst quarter of this year

(gure43). Outows have been concentrated

in Asia, especially China. Since Russia’s

invasion of Ukraine, investment funds that

focus on emerging Europe have experienced

particularly rapid outows. EME sovereign

bond spreads widened considerably. European

emerging market equities and Chinese equities

declined signicantly, the latter amid COVID-

related lockdowns and related supply chain

constraints as well as continued regulatory

uncertainty. Latin American equities,

supported in part by rising commodity prices,

declined by less than other emerging markets.

100

Billions of dollars

202220202018201620142012

43. Emerging market mutual fund ows

NOTE: The bond and equity fund ows data are quarterly sums of weekly

data from December 29, 2011, to June 8, 2022. Weekly data span Thursday

through Wednesday, and the quarterly values are sums over weekly data for

weeks ending in that quarter. The fund ows data exclude funds located in

China.

SOURCE: EPFR Global.

Equity fund ows

Bond fund ows

Japan

Euro area

100

110

120

130

140

150

Week ending January 8, 2016 = 100

2016 2017 2018 2019202020212022

42. Equity indexes for selected foreign economies

Weekly

China

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

June 10, 2022.

OURCE: For the euro area, Dow Jones Euro Stoxx Index; for Japan,

Tokyo Stock Price Index; for China, Shanghai Composite Index; all via

Bloomberg. (For Dow Jones Indices licensing information, see the note

on the Contents page.)

MONETARY POLICY REPORT: JUNE 2022 41

. . . and the dollar appreciated notably

Since the beginning of the year, the broad

dollar index—a measure of the trade-weighted

value of the dollar against foreign currencies—

has risen notably amid safe-haven ows and

increases in U.S. yields (gure44). The dollar

appreciated more against AFE currencies

than EME currencies, as rising commodity

prices supported Latin American currencies.

The Chinese renminbi depreciated against the

dollar amid growth concerns related to the

lockdowns in China and weaker-than-expected

Chinese data releases. Among AFE currencies,

the dollar appreciated particularly strongly

against the Japanese yen, largely reecting the

widening U.S.–Japanese yield dierential.

EME dollar index

Broad dollar index

100

105

110

115

Week ending December 27, 2019 = 100

2014 2016 201820202022

44. U.S. dollar exchange rate indexes

Weekly

AFE 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 extend through June 10, 2022. As

indicated by the leftmost arrow, increases in the data reect U.S. dollar

appreciation and decreases reect U.S. dollar depreciation.

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

Exchange Rates.”

The Federal Open Market Committee

has swiftly raised the target range for the

federal funds rate and anticipates that

ongoing increases in the target range will

be appropriate

With ination far too high, well above the

Federal Open Market Committee’s (FOMC)

2percent objective, and with tight labor

market conditions, the Committee raised

the target range for the federal funds rate

o the eective lower bound in March. The

Committee continued to raise the target

range in May and June, bringing it to 1½to

1¾percent following the June meeting

(gure45). The Committee has also indicated

that it anticipates that ongoing increases in the

target range will be appropriate.

The Committee ceased net purchases of

Treasury securities and agency mortgage-

backed securities in early March and

began the process of signicantly

reducing its securities holdings on June1

Reecting the need to rm the stance of

monetary policy amid elevated ination and

tight labor market conditions, the Committee

ended net asset purchases in early March and

announced its plans for signicantly reducing

the size of the Federal Reserve’s balance sheet

in May.

Consistent with the Principles for

Reducing the Size of the Federal Reserve’s

Balance Sheet that were issued in January,

the May statement outlined the Committee’s

intention to reduce the Federal Reserve’s

securities holdings over time in a predictable

manner primarily by adjusting the amounts

reinvested of principal payments received from

securities held in the System Open Market

Account (SOMA).

Specically, beginning in

June, principal payments from securities held

in the SOMA will be reinvested to the extent

that they exceed monthly caps. For Treasury

securities, the cap is initially set at $30billion

per month and after three months will increase

13. See the May4, 2022, press release regarding the

Plans for Reducing the Size of the Federal Reserve’s

Balance Sheet, available at https://www.federalreserve.

gov/newsevents/pressreleases/monetary20220504b.htm.

14. See the January26, 2022, press release

regarding the Principles for Reducing the Size of the

Federal Reserve’s Balance Sheet, available at https://

www.federalreserve.gov/newsevents/pressreleases/

monetary20220126c.htm.

Part 2

monetary PoLiCy

Target federal funds rate

2-year Treasury rate

Percent

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

45. 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.

44 PART 2: MONETARY POLICY

to $60billion per month. For agency debt and

agency mortgage-backed securities, the cap

is initially set at $17.5billion per month and

after three months will increase to $35billion

per month.

Reductions in securities holdings will slow and

then stop when reserve balances are somewhat

above the level the Committee judges to be

consistent with ecient implementation of

policy in an ample-reserves regime. Once

balance sheet runo has ceased, reserve

balances will likely continue to decline

at a slower pace—reecting growth in

other Federal Reserve liabilities—until the

Committee judges that reserve balances are

at the level required for implementing policy

eciently in an ample regime, at which point

reserve management purchases of securities

would likely begin to maintain ample reserves.

The Committee also noted that it is prepared

to adjust any of the details of its approach to

reducing the size of the balance sheet in light

of economic and nancial developments.

The FOMC will continue to monitor the

implications of incoming information for

the economic outlook

The Committee is strongly committed to

returning ination to its 2percent objective. 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’s

assessments will take into account a wide

range of information, including readings on

ination and ination expectations, wages,

other measures of labor market conditions,

nancial and international developments, and

public health.

In addition to considering a wide range of

economic and nancial data and information

gathered from business contacts and other

informed parties around the country, such

as participants in conversations held as part

of the Fed Listens initiative, policymakers

routinely consult prescriptions for the policy

interest rate provided by various monetary

policy rules. These rule 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 in the Current

Environment”).

Changes to the policy rate were

implemented smoothly, and the size of

the Federal Reserve’s balance sheet was

roughly stable

As in the previous tightening cycle and

consistent with the implementation of

monetary policy in an ample-reserves regime,

the Federal Reserve used its administered

rates—the interest rate on reserve balances

(IORB) and the oering rate at the overnight

reverse repurchase agreement (ON RRP)

facility—to implement increases to the target

range for the policy rate. The administered

rates were eective in raising the eective

federal funds rate and other short-term interest

rates with the Committee’s target range.

The Federal Reserve’s balance sheet was

roughly stable at $9trillion, or 36percent

of U.S. nominal GDP, from February

through May, and the process to signicantly

reduce securities holdings began on June1

(gure46).

Reserve balances have fallen

from their all-time highs of a little over

$4trillion to around $3.3trillion because of

increasing take-up at the ON RRP. (See the

box “Developments in the Federal Reserve’s

Balance Sheet and Money Markets.”)

15. Although balance sheet reduction started on

June1, the actual reduction in securities holdings has

been negligible thus far given the timing of principal

payments.

All of the Federal Reserve’s emergency credit and

liquidity facilities are closed and balances have continued

to decline as facilities’ assets mature or prepay. A list of

credit and liquidity 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: JUNE 2022 45

Trillions of dollars

202220212020201920182017201620152014201320122011201020092008

46. Federal Reserve assets and liabilities

Weekly

Other assets

Credit and liquidity facilities

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

: “Other assets” includes repurchase agreements, FIMA (Foreign and International Monetary Authorities) repurchase agreements, and

unamortized

premiums

and discounts on securities held outright. “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. “Agency debt and mortgage-backed securities holdings”

includes

agency

residential mortgage-backed securities and agency commercial mortgage-backed securities. “Capital and other liabilities” includes reverse r

epurchase

agreements, the U.S. Treasury General Account, and the U.S. Treasury Supplementary Financing Account. The key identies shaded

areas in order from top

to bottom. The data extend through June 8, 2022.

OURCE

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

46 PART 2: MONETARY POLICY

 gureA shows a “balanced-approach (shortfalls)”

rule, which represents one simple way to illustrate

the Committee’s focus on shortfalls from maximum

employment.

These rules embody key design

principles of good monetary policy, including that the

policy rate should be adjusted forcefully enough over

time to ensure a return of in ation to the central bank’s

longer-run objective and to anchor longer-term in ation

expectations at levels consistent with that objective.

All  ve rules feature the difference between in ation

and the FOMC’s longer-run objective of 2percent. The

 ve rules use 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 but the  rst-difference rule include an

rule is based on a rule suggested by 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.

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

and Monetary Policy Strategy, released in August2020,

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. The “balanced-

approach (shortfalls)” rule re ects this change by prescribing

policy rates identical 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.

3. Implementations of simple rules often use the output

gap as a measure of resource slack in the economy. The rules

described in  gure A instead use the unemployment rate

gap because that gap better captures the FOMC’s statutory

goal to promote maximum employment. Movements in

these alternative measures of resource utilization are highly

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

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

current 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.

Recently, in ation has run well above the

Committee’s 2percent longer-run objective, the

U.S. economy has been very strong, and labor

market conditions have been very tight. Against

this background, the simple monetary policy rules

considered in this discussion have called for raising the

federal funds rate signi cantly. Starting in March, the

Federal Open Market Committee (FOMC) began raising

the target range for the federal funds rate and indicated

that it anticipates that ongoing increases in the target

range will be appropriate. The FOMC also began the

process of signi cantly reducing the size of the Federal

Reserve’s balance sheet.

Selected Policy Rules: Descriptions

In many economic models, desirable economic

outcomes can be achieved if monetary policy

responds in a predictable way to changes in economic

conditions. In recognition of this idea, 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,

1. The Taylor(1993) rule was introduced 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

Monetary Policy Rules in the Current Environment

(continued)

n (u

) a

MONETARY POLICY REPORT: JUNE 2022 47

 gureA shows a “balanced-approach (shortfalls)”

rule, which represents one simple way to illustrate

the Committee’s focus on shortfalls from maximum

employment.

These rules embody key design

principles of good monetary policy, including that the

policy rate should be adjusted forcefully enough over

time to ensure a return of in ation to the central bank’s

longer-run objective and to anchor longer-term in ation

expectations at levels consistent with that objective.

All  ve rules feature the difference between in ation

and the FOMC’s longer-run objective of 2percent. The

 ve rules use 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 but the  rst-difference rule include an

rule is based on a rule suggested by 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.

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

and Monetary Policy Strategy, released in August2020,

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. The “balanced-

approach (shortfalls)” rule re ects this change by prescribing

policy rates identical 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.

3. Implementations of simple rules often use the output

gap as a measure of resource slack in the economy. The rules

described in  gure A instead use the unemployment rate

gap because that gap better captures the FOMC’s statutory

goal to promote maximum employment. Movements in

these alternative measures of resource utilization are highly

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

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

current 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.

Recently, in ation has run well above the

Committee’s 2percent longer-run objective, the

U.S. economy has been very strong, and labor

market conditions have been very tight. Against

this background, the simple monetary policy rules

considered in this discussion have called for raising the

federal funds rate signi cantly. Starting in March, the

Federal Open Market Committee (FOMC) began raising

the target range for the federal funds rate and indicated

that it anticipates that ongoing increases in the target

range will be appropriate. The FOMC also began the

process of signi cantly reducing the size of the Federal

Reserve’s balance sheet.

Selected Policy Rules: Descriptions

In many economic models, desirable economic

outcomes can be achieved if monetary policy

responds in a predictable way to changes in economic

conditions. In recognition of this idea, 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,

1. The Taylor(1993) rule was introduced 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

Monetary Policy Rules in the Current Environment

(continued)

n (u

) a

Taylor(1993) rule prescribes delaying the return of the

policy rate to the (positive) levels prescribed by the

standard Taylor(1993) rule until after the economy

begins to recover.

Selected Policy Rules: Prescriptions

FigureB shows historical prescriptions for

the federal funds rate under the  ve simple rules

considered. For each quarterly period, the  gure reports

the policy rates prescribed by the rules, taking as given

the prevailing economic conditions and survey-based

estimates of u

and r

at the time. All of the rules

considered called for a highly accommodative stance

for monetary policy in response to the pandemic-

driven recession. The recent elevated in ation readings

imply that the prescriptions for the federal funds rate of

simple policy rules in the  rst quarter of 2022 are well

estimate of the neutral real interest rate in the longer

run (r

Unlike the other simple rules featured here, the

adjusted Taylor(1993) rule recognizes that the federal

funds rate cannot be reduced materially below the

effective lower bound. To make up for the cumulative

shortfall in policy accommodation following a

recession during which the federal funds rate is

constrained by its effective lower bound, the adjusted

4. The neutral real interest rate in the longer run (

) 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  rst-difference rule shown in

 gureA does not require 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)

A. Monetary policy rules

Balanced-approach rule

Balanced-approach (shortfalls) rule

First-dierence rule

Taylor (1993) rule

Adjusted Taylor (1993) rule

N: R

T93

, R

BAS

, R

T93adj

, and R

represent the values of the nominal federal funds rate prescribed by the Taylor (1993),

balanc

ed-approach, balanced-approach (shortfalls), adjusted Taylor (1993), and rst-dierence rules, respectively.

t−1

denotes the midpoint of the target range for the federal funds rate for quarter t−1, π

is the 4-quarter price ination for quarter t, u

is the

employment 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

sust

aining maximum employment and ination at the Federal Open Market Committee’s 2percent longer-run objective, represented by π

addition, u

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

is the cumulative sum of past deviations of the federal funds rate

om the prescriptions of the Taylor (1993) rule when that rule prescribes setting the federal funds rate below an eective lower bound (ELB) of

.5 basis points.

The Taylor (1993) rule and other policy rules generally respond to the deviation of real output from its full capacity level. In these equations,

e 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

Okun’s law) to represent the rules in terms of the unemployment rate. The rules are implemented as responding to core personal consumption

penditures (PCE) ination rather than to headline PCE ination because current and near-term core ination rates tend to outperform headline

ation rates as predictors of the medium-term behavior of headline ination.

T93

= r

+ π

+ 0.5(π

− π

) + (u

− u

)

= R

t−1

+ 0.5(π

− π

) + (u

− u

) − (u

−

− u

t−4

)

T93adj

= max{R

T93

− Z

ELB}

BAS

= r

+ π

+ 0.5(π

− π

) + 2min{(u

− u

), 0}

= r

+ π

+ 0.5(π

− π

) + 2(u

− u

)

48 PART 2: MONETARY POLICY

effective lower bound on interest rates, which limits

the extent to which the policy rate can be lowered to

support the economy. This constraint was particularly

evident in the aftermath of the pandemic-driven

recession, when the lower bound on the policy rate

motivated the FOMC’s other policy actions to support

the economy. Finally, simple policy rules generally

abstract from the risk-management considerations

associated with uncertainty about economic

relationships and the evolution of the economy. As

a result, the usefulness of simple policy rules can be

limited in unusual economic circumstances.

5. For example, Taylor(1993) on page 197 noted that

“there will be episodes where monetary policy will need to

be adjusted to deal with special factors. The Fed would need

more than a simple policy rule as a guide in such cases.”

above their pre-pandemic levels, at between 4percent

and 7percent. Overall, the prescriptions of all simple

rules have risen notably over the past few quarters as

in ation readings climbed further above 2percent.

Policy Rules: Limitations

Simple policy rules are also subject to important

limitations. One important limitation is that simple

policy rules do not take into account the other tools of

monetary policy, such as large-scale asset purchases.

A second important limitation is that simple rules

respond to only a small set of economic variables and

thus necessarily abstract from many of the factors that

the FOMC considers when it assesses the appropriate

setting of the policy rate. Another limitation is that

most simple policy rules do not take into account the

Monetary Policy Rules in the Current Environment (continued)

First-dierence rule

Taylor (1993) rule

Balanced-approach rule

Federal funds rate

Balanced-approach (shortfalls) rule

Percent

20222021202020192018

B. Historical federal funds rate prescriptions from simple policy rules

Adjusted Taylor (1993) rule

OTE: The rules use historical values of core personal consumption expenditures ination, the unemployment rate, and, where applicable,

historical

values

of the midpoint of the target range for the federal funds rate. Quarterly projections of longer-run values for the federal funds rate and

the

unemployment

rate used in the computation of the rules’ prescriptions are derived through interpolations of biannual projections from Blue

Chip

Economic

Indicators. The longer-run value for ination is set to 2 percent. The rules data are quarterly, and the federal funds rate data are the

monthly

average of the daily midpoint of the target range for the federal funds rate.

OURCE

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

MONETARY POLICY REPORT: JUNE 2022 49

effective lower bound on interest rates, which limits

the extent to which the policy rate can be lowered to

support the economy. This constraint was particularly

evident in the aftermath of the pandemic-driven

recession, when the lower bound on the policy rate

motivated the FOMC’s other policy actions to support

the economy. Finally, simple policy rules generally

abstract from the risk-management considerations

associated with uncertainty about economic

relationships and the evolution of the economy. As

a result, the usefulness of simple policy rules can be

limited in unusual economic circumstances.

5. For example, Taylor(1993) on page 197 noted that

“there will be episodes where monetary policy will need to

be adjusted to deal with special factors. The Fed would need

more than a simple policy rule as a guide in such cases.”

above their pre-pandemic levels, at between 4percent

and 7percent. Overall, the prescriptions of all simple

rules have risen notably over the past few quarters as

in ation readings climbed further above 2percent.

Policy Rules: Limitations

Simple policy rules are also subject to important

limitations. One important limitation is that simple

policy rules do not take into account the other tools of

monetary policy, such as large-scale asset purchases.

A second important limitation is that simple rules

respond to only a small set of economic variables and

thus necessarily abstract from many of the factors that

the FOMC considers when it assesses the appropriate

setting of the policy rate. Another limitation is that

most simple policy rules do not take into account the

Monetary Policy Rules in the Current Environment (continued)

First-dierence rule

Taylor (1993) rule

Balanced-approach rule

Federal funds rate

Balanced-approach (shortfalls) rule

Percent

20222021202020192018

B. Historical federal funds rate prescriptions from simple policy rules

Adjusted Taylor (1993) rule

OTE: The rules use historical values of core personal consumption expenditures ination, the unemployment rate, and, where applicable, historical

values of the midpoint of the target range for the federal funds rate. Quarterly projections of longer-run values for the federal funds rate and the

unemployment rate used in the computation of the rules’ prescriptions are derived through interpolations of biannual projections from Blue Chip

Economic Indicators. The longer-run value for ination is set to 2 percent. The rules data are quarterly, and the federal funds rate data are the monthly

average of the daily midpoint of the target range for the federal funds rate.

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

With the Federal Reserve’s net asset purchases

concluding in March, the size of the balance sheet has

been roughly stable at $9 trillion since February2022

( gures A and B). At its May2022 meeting, the FOMC

announced plans for signi cantly reducing the size

of the Federal Reserve’s balance sheet starting June1.

Balance sheet reduction, along with increases in the

target range for the federal funds rate,  rms the stance

of monetary policy.

Despite the roughly constant total size of the

balance sheet, reserves—the largest liability on the

Federal Reserve’s balance sheet—have continued to fall

signi cantly since February2022, re ecting growth in

take-up at the overnight reverse repurchase agreement

(ON RRP) facility ( gure C).

In addition, the Treasury

General Account (TGA)—another volatile liability—

rose considerably upon larger than expected tax

receipts and peaked just short of $1trillion on June2

before retracing the movement.

Usage at the ON RRP facility has risen $496 billion

since February2022 to stand at a record $2.2 trillion

at the time of this report. Low rates on repurchase

agreements—re ecting abundant liquidity in the

banking system and limited Treasury bill supply—have

contributed to this increasingly elevated participation.

1. Reserves consist of deposits held at Federal Reserve

Banks by depository institutions, such as commercial banks,

savings banks, credit unions, thrift institutions, and U.S.

branches and agencies of foreign banks. Reserve balances

allow depository institutions to facilitate daily payment

 ows, both in ordinary times and in stress scenarios, without

borrowing funds or selling assets.

Developments in the Federal Reserve’s Balance Sheet and

Money Markets

A. Balance sheet comparison

Billions of dollars

June8,

2022

February16,

2022

Change

Assets

Total securities

Treasury securities 5,772 5,739 33

Agency debt and MBS 2,710 2,707 3

Net unamortized premiums 336 350 −14

Repurchase agreements 0 0 0

Loans and lending facilities

PPPLF 19 28 −8

Other loans and lending

facilities 37 40 −3

Central bank liquidity swaps 0 0 0

Other assets 47 48 −1

Total assets 8,921 8,911 10

Liabilities and capital

Federal Reserve notes 2,227 2,185 42

Reserves held by depository

institutions 3,317 3,797 −480

Reverse repurchase

agreements

Foreign o cial and

international accounts 272 257 14

Others 2,163 1,644 519

U.S. Treasury General

Account 627 709 −82

Other deposits 247 251 −5

Other liabilities and capital 69 67 1

Total liabilities and capital 8,921 8,911 10

Note: MBS is mortgage-backed securities. PPPLF is Paycheck Protection

Program Liquidity Facility. Components may not sum to totals because of

rounding.

Source: Federal Reserve Board, Statistical Release H.4.1, “Factors A ecting

Reserve Balances.”

(continued on next page)

50 PART 2: MONETARY POLICY

Trillions of dollars

2019 2020 2021 2022

C. Federal Reserve liabilities

Weekly

NOTE: “Capital and other liabilities” includes Treasury contributions. The key

OURCE: Federal Reserve Board, Statistical Release H.4.1, “Factors Aecting

Reserve Balances.”

Reverse repurchase agreements

Deposits of depository institutions (reserves)

U.S. Treasury General Account

Other deposits

Capital and other liabilities

Federal Reserve notes

identies shaded areas in order from top to bottom. The data extend

through

June 8, 2022

Trillions of dollars

2019 2020 2021 2022

B. Federal Reserve assets

Weekly

OTE

: MBS is mortgage-backed securities. The key identies shaded areas in

order from top to bottom. The data extend through June 8, 2022.

OURCE

: Federal Reserve Board, Statistical Release H.4.1, “Factors Aecting

Reserve Balances.”

Other assets

Loans

Central bank liquidity swaps

Repurchase agreements

Agency debt and MBS

Treasury securities

held outright

In addition, uncertainty about the magnitude and pace

of policy rate increases contributed to a preference

for short-duration assets, like those provided by the

ONRRP facility. The ON RRP facility is intended to

help keep the effective federal funds rate from falling

below the target range set by the FOMC, as institutions

with access to the ON RRP should be unwilling to lend

funds below the ON RRP’s pre-announced offering rate.

The facility continued to serve this intended purpose,

and the set of administered rates—interest on reserve

balances (IORB) and the ON RRP offering rate—was

effective at raising and maintaining the effective federal

funds rate within the target range during the policy rate

adjustments that have taken place since March.

Going forward, the planned balance sheet decline

will drain reserves from the banking system and add

longer-duration assets, which will likely put upward

pressure on short-term rates and reduce demand at

the ON RRP facility. The Committee will monitor the

evolution of reserves and other liabilities to ensure

a smooth entry into ef cient operation of monetary

policy in an ample-reserves regime.

Developments in the Federal Reserve’s Balance Sheet and Money Markets (continued)

In conjunction with the Federal Open Market

Committee (FOMC) meeting held on

June14–15, 2022, 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 2022 to 2024

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.

Part 3

summary of eConomiC ProjeCtions

The following material was released after the conclusion of the June14–15, 2022, meeting of the

Federal Open Market Committee.

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

individual assumptions of projected appropriate monetary policy, June 2022

Percent

Variable

Median

Central tendency

Range

2022 2023 2024

Longer

run

2022 2023 2024

Longer

run

2022 2023 2024

Longer

run

Change in real GDP

.....

1.7 1.7 1.9 1.8 1.5–1.9 1.3–2.0 1.5–2.0 1.8–2.0 1.0–2.0 0.8–2.5

1.0–2.2

1.6–2.2

March projection ..... 2.8 2.2 2.0 1.8 2.5–3.0 2.1–2.5 1.8–2.0 1.8–2.0 2.1–3.3 2.0–2.9 1.5–2.5 1.6–2.2

Unemployment rate

.....

3.7 3.9 4.1 4.0 3.6–3.8 3.8–4.1 3.9–4.1 3.5–4.2 3.2–4.0 3.2–4.5

3.2–4.3

3.5–4.3

March projection ..... 3.5 3.5 3.6 4.0 3.4–3.6 3.3–3.6 3.2–3.7 3.5–4.2 3.1–4.0 3.1–4.0 3.1–4.0 3.5–4.3

PCE ination

..........

5.2 2.6 2.2 2.0 5.0–5.3 2.4–3.0 2.0–2.5 2.0 4.8–6.2 2.3–4.0

2.0–3.0

2.0

March projection ..... 4.3 2.7 2.3 2.0 4.1–4.7 2.3–3.0 2.1–2.4 2.0 3.7–5.5 2.2–3.5 2.0–3.0 2.0

Core PCE ination

.....

4.3 2.7 2.3 4.2–4.5 2.5–3.2 2.1–2.5 4.1–5.0 2.5–3.5

2.0–2.8

March projection .....

4.1 2.6 2.3 3.9–4.4 2.4–3.0 2.1–2.4

3.6–4.5 2.1–3.5

2.0–3.0

Memo: Projected

appropriate policy path

Federal funds rate

......

March projection .....

3.4

1.9

3.8

2.8

3.4

2.8

2.5

2.4

3.1–3.6

1.6–2.4

3.6–4.1

2.4–3.1

2.9–3.6

2.4–3.4

2.3–2.5

3.1–3.9

1.4–3.1

2.9–4.4

2.1–3.6

2.1–4.1

2.1–3.6

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 consumption 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 economy. 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 March projections were made in conjunction with the meeting of the Federal Open Market Committee on March15–16, 2022. One

participant did not submit longer-run projections for the change in real GDP, the unemployment rate, or the federal funds rate in conjunction with the March15–16, 2022, meeting, and

one participant did not submit such projections in conjunction with the June14–15, 2022, 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.

52 PART 3: SUMMARY OF ECONOMIC PROJECTIONS

−3

−2

−1

2017 2018 2019 2020 2021 2022 2023 2024

Median of projections

Central tendency of projections

Range of projections

Actual

Percent

Change in real GDP

Longer

run

2017 2018 2019 2020 2021 2022 2023 2024

Percent

Unemployment rate

Longer

run

2017 2018 2019 2020 2021 2022 2023 2024

Percent

PCE inflation

Longer

run

2017 2018 2019 2020 2021 2022 2023 2024

Percent

Core PCE inflation

Longer

run

Figure 1. Medians, central tendencies, and ranges of economic projections, 2022–24 and over the longer run

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.

MONETARY POLICY REPORT: JUNE 2022 53

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2022 2023 2024

Longer run

Percent

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

level for the federal funds rate

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 projections for the federal funds rate.

54 PART 3: SUMMARY OF ECONOMIC PROJECTIONS

0.6−

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−

2.5

2.6−

2.7

2.8−

2.9

3.0−

3.1

3.2−

3.3

Percent range

June projections

March projections

Number of participants

2022

0.6−

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−

2.5

2.6−

2.7

2.8−

2.9

3.0−

3.1

3.2−

3.3

Percent range

Number of participants

2023

0.6−

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−

2.5

2.6−

2.7

2.8−

2.9

3.0−

3.1

3.2−

3.3

Percent range

Number of participants

2024

0.6−

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−

2.5

2.6−

2.7

2.8−

2.9

3.0−

3.1

3.2−

3.3

Percent range

Number of participants

Longer run

Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2022–24 and over the longer run

N: Denitions of variables and other explanations are in the notes to table 1.

MONETARY POLICY REPORT: JUNE 2022 55

2.8−

2.9

3.0−

3.1

3.2−

3.3

3.4−

3.5

3.6−

3.7

3.8−

3.9

4.0−

4.1

4.2−

4.3

4.4−

4.5

Percent range

June projections

March projections

Number of participants

2022

2.8−

2.9

3.0−

3.1

3.2−

3.3

3.4−

3.5

3.6−

3.7

3.8−

3.9

4.0−

4.1

4.2−

4.3

4.4−

4.5

Percent range

Number of participants

2023

2.8−

2.9

3.0−

3.1

3.2−

3.3

3.4−

3.5

3.6−

3.7

3.8−

3.9

4.0−

4.1

4.2−

4.3

4.4−

4.5

Percent range

Number of participants

2024

2.8−

2.9

3.0−

3.1

3.2−

3.3

3.4−

3.5

3.6−

3.7

3.8−

3.9

4.0−

4.1

4.2−

4.3

4.4−

4.5

Percent range

Number of participants

Longer run

Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2022–24 and over the longer run

N: Denitions of variables and other explanations are in the notes to table 1.

56 PART 3: SUMMARY OF ECONOMIC PROJECTIONS

1.7−

1.8

1.9−

2.0

2.1−

2.2

2.3−

2.4

2.5−

2.6

2.7−

2.8

2.9−

3.0

3.1−

3.2

3.3−

3.4

3.5−

3.6

3.7−

3.8

3.9−

4.0

4.1−

4.2

4.3−

4.4

4.5−

4.6

4.7−

4.8

4.9−

5.0

5.1−

5.2

5.3−

5.4

5.5−

5.6

5.7−

5.8

5.9−

6.0

6.1−

6.2

Percent range

June projections

March projections

Number of participants

2022

1.7−

1.8

1.9−

2.0

2.1−

2.2

2.3−

2.4

2.5−

2.6

2.7−

2.8

2.9−

3.0

3.1−

3.2

3.3−

3.4

3.5−

3.6

3.7−

3.8

3.9−

4.0

4.1−

4.2

4.3−

4.4

4.5−

4.6

4.7−

4.8

4.9−

5.0

5.1−

5.2

5.3−

5.4

5.5−

5.6

5.7−

5.8

5.9−

6.0

6.1−

6.2

Percent range

Number of participants

2023

1.7−

1.8

1.9−

2.0

2.1−

2.2

2.3−

2.4

2.5−

2.6

2.7−

2.8

2.9−

3.0

3.1−

3.2

3.3−

3.4

3.5−

3.6

3.7−

3.8

3.9−

4.0

4.1−

4.2

4.3−

4.4

4.5−

4.6

4.7−

4.8

4.9−

5.0

5.1−

5.2

5.3−

5.4

5.5−

5.6

5.7−

5.8

5.9−

6.0

6.1−

6.2

Percent range

Number of participants

2024

1.7−

1.8

1.9−

2.0

2.1−

2.2

2.3−

2.4

2.5−

2.6

2.7−

2.8

2.9−

3.0

3.1−

3.2

3.3−

3.4

3.5−

3.6

3.7−

3.8

3.9−

4.0

4.1−

4.2

4.3−

4.4

4.5−

4.6

4.7−

4.8

4.9−

5.0

5.1−

5.2

5.3−

5.4

5.5−

5.6

5.7−

5.8

5.9−

6.0

6.1−

6.2

Percent range

Number of participants

Longer run

Figure 3.C. Distribution of participants’ projections for PCE ination, 2022–24 and over the longer run

N: Denitions of variables and other explanations are in the notes to table 1.

MONETARY POLICY REPORT: JUNE 2022 57

1.7−

1.8

1.9−

2.0

2.1−

2.2

2.3−

2.4

2.5−

2.6

2.7−

2.8

2.9−

3.0

3.1−

3.2

3.3−

3.4

3.5−

3.6

3.7−

3.8

3.9−

4.0

4.1−

4.2

4.3−

4.4

4.5−

4.6

4.7−

4.8

4.9−

5.0

Percent range

June projections

March projections

Number of participants

2022

1.7−

1.8

1.9−

2.0

2.1−

2.2

2.3−

2.4

2.5−

2.6

2.7−

2.8

2.9−

3.0

3.1−

3.2

3.3−

3.4

3.5−

3.6

3.7−

3.8

3.9−

4.0

4.1−

4.2

4.3−

4.4

4.5−

4.6

4.7−

4.8

4.9−

5.0

Percent range

Number of participants

2023

1.7−

1.8

1.9−

2.0

2.1−

2.2

2.3−

2.4

2.5−

2.6

2.7−

2.8

2.9−

3.0

3.1−

3.2

3.3−

3.4

3.5−

3.6

3.7−

3.8

3.9−

4.0

4.1−

4.2

4.3−

4.4

4.5−

4.6

4.7−

4.8

4.9−

5.0

Percent range

Number of participants

2024

Figure 3.D. Distribution of participants’ projections for core PCE ination, 2022–24

N: Denitions of variables and other explanations are in the notes to table 1.

58 PART 3: SUMMARY OF ECONOMIC PROJECTIONS

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

3.13−

3.37

3.38−

3.62

3.63−

3.87

3.88−

4.12

4.13−

4.37

4.38−

4.62

Percent range

June projections

March projections

Number of participants

2022

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

3.13−

3.37

3.38−

3.62

3.63−

3.87

3.88−

4.12

4.13−

4.37

4.38−

4.62

Percent range

Number of participants

2023

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

3.13−

3.37

3.38−

3.62

3.63−

3.87

3.88−

4.12

4.13−

4.37

4.38−

4.62

Percent range

Number of participants

2024

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

3.13−

3.37

3.38−

3.62

3.63−

3.87

3.88−

4.12

4.13−

4.37

4.38−

4.62

Percent range

Number of participants

Longer run

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

federal funds rate or the appropriate target level for the federal funds rate, 2022–24 and over the longer run

N: Denitions of variables and other explanations are in the notes to table 1.

MONETARY POLICY REPORT: JUNE 2022 59

−3

−2

−1

2017 2018 2019 2020 2021 2022 2023 2024

Median of projections

70% confidence interval

Actual

Percent

Change in real GDP

Lower Broadly

similar

Higher

June projections

March projections

Number of participants

Uncertainty about GDP growth

Weighted to

downside

Broadly

balanced

Weighted to

upside

June projections

March projections

Number of participants

Risks to GDP growth

Median projection and condenceinterval basedon historical forecast errors

FOMC participants’ assessments of uncertainty and risks around their economicprojections

Figure 4.A. Uncertainty and risks in projections of GDP growth

N: The blue and red lines in the top panel show actual values and median projected values, respectively, of the

percent change in real gross domestic product (GDP) from the fourth quarter of the previous year to the fourth quarter of

the year indicated. The 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 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

2017 2018 2019 2020 2021 2022 2023 2024

Median of projections

70% confidence interval

Actual

Percent

Unemployment rate

Lower Broadly

similar

Higher

June projections

March projections

Number of participants

Uncertainty about the unemployment rate

Weighted to

downside

Broadly

balanced

Weighted to

upside

June projections

March projections

Number of participants

Risks to the unemployment rate

Median projection and condenceinterval based on historical forecast errors

FOMC participants’ assessments of uncertainty and risks around their economicprojections

Figure 4.B. Uncertainty and risks in projections of the unemployment rate

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 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 around their projections as approxi-

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

MONETARY POLICY REPORT: JUNE 2022 61

2017 2018 2019 20202021202220232024

Median of projections

70% confidence interval

Actual

Percent

PCE inflation

Lower Broadly

similar

Higher

June projections

March projections

Number of participants

Uncertainty about PCE inflation

Weighted to

downside

Broadly

balanced

Weighted to

upside

June projections

March projections

Number of participants

Risks to PCE inflation

Lower Broadly

similar

Higher

June projections

March projections

Number of participants

Uncertainty about core PCE inflation

Weighted to

downside

Broadly

balanced

Weighted to

upside

June projections

March projections

Number of participants

Risks to core PCE inflation

Median projection and condenceinterval basedon historical forecast errors

FOMC participants’ assessments of uncertaintyand risks around their economicprojections

Figure 4.C. Uncertainty and risks in projections of PCE ination

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 around their projections as approximately symmetric. For

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

62 PART 3: SUMMARY OF ECONOMIC PROJECTIONS

−1.00

−0.75

−0.50

−0.25

0.00

0.25

0.50

0.75

1.00

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 20182019202020212022

Diffusion index

Change in real GDP

−1.00

−0.75

−0.50

−0.25

0.00

0.25

0.50

0.75

1.00

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 20182019202020212022

Diffusion index

Unemployment rate

−1.00

−0.75

−0.50

−0.25

0.00

0.25

0.50

0.75

1.00

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 20182019202020212022

Diffusion index

PCE inflation

−1.00

−0.75

−0.50

−0.25

0.00

0.25

0.50

0.75

1.00

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 20182019202020212022

Diffusion index

Core PCE inflation

Figure 4.D. Diusion indexes of participants’ uncertainty assessments

N: For each SEP, participants provided responses to the question “Please indicate your judgment of the uncertainty

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

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

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

MONETARY POLICY REPORT: JUNE 2022 63

Figure 4.E. Diusion indexes of participants’ risk weightings

−1.00

−0.75

−0.50

−0.25

0.00

0.25

0.50

0.75

1.00

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Diffusion index

Change in real GDP

−1.00

−0.75

−0.50

−0.25

0.00

0.25

0.50

0.75

1.00

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Diffusion index

Unemployment rate

−1.00

−0.75

−0.50

−0.25

0.00

0.25

0.50

0.75

1.00

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Diffusion index

PCE inflation

−1.00

−0.75

−0.50

−0.25

0.00

0.25

0.50

0.75

1.00

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Diffusion index

Core PCE inflation

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.

64 PART 3: SUMMARY OF ECONOMIC PROJECTIONS

2017 2018 2019 2020 2021 2022 2023 2024

Midpoint of target range

Median of projections

70% confidence interval*

Actual

Percent

Federal funds rate

Figure 5. Uncertainty and risks in projections of the federal funds rate

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 variables as well as additional adjustments to monetary policy that may be appropriate to oset 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 target

range for the federal funds rate that has been adopted in the past by the Committee. This truncation would not be intended

to indicate the likelihood of the use of negative interest rates to provide additional monetary policy accommodation if

doing so was judged appropriate. In such situations, the Committee could also employ other tools, including forward

guidance and large-scale asset purchases, to provide additional accommodation. Because current conditions may 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.

MONETARY POLICY REPORT: JUNE 2022 65

Table 2. Average historical projection error ranges

Percentage points

Variable 2022 2023 2024

Change in real GDP

......... ± 1.5 ± 1.9 ± 2.3

Unemployment rate

......... ± 0.8 ± 1.4 ± 1.9

Total consumer prices

....... ± 1.0 ± 1.3 ± 1.4

Short-term interest rates

..... ± 0.6 ± 1.8 ± 2.3

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

error of projections for 2002 through 2021 that were released in the summer by

various private and government forecasters. As described in the box “Forecast

Uncertainty,” under certain assumptions, there is about a 70percent probability that

actual outcomes for real GDP, unemployment, consumer prices, and the federal funds

rate will be in ranges implied by the average size of projection errors made in the past.

For more information, see David Reifschneider and Peter Tulip (2017), “Gauging

the Uncertainty of the Economic Outlook Using Historical Forecasting Errors: The

Federal Reserve’s Approach,” Finance and Economics Discussion Series 2017-020

(Washington: Board of Governors of the Federal Reserve System, February), https://

dx.doi.org/10.17016/FEDS.2017.020.

1. 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.

66 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 1.5 to 4.5percent in the current year, 1.1 to

4.9percent in the second year, and 0.7 to 5.3percent

in the third year. The corresponding 70percent

con dence intervals for overall in ation would be 1.0

to 3.0percent in the current year, 0.7 to 3.3percent

in the second year, and 0.6 to 3.4percent in the third

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’ current

assessments of the uncertainty surrounding their

projections are summarized in the bottom-left panels

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: JUNE 2022 67

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.

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

rather are projections of participants’ individual

assessments of appropriate monetary policy and are

AFE advanced foreign economy

BOC Bank of Canada

BOE Bank of England

BOJ Bank of Japan

CCP central counterparty

COVID-19 coronavirus disease 2019

CPI consumer price index

ECB European Central Bank

ECI employment cost index

EME emerging market economy

EPOP ratio employment-to-population ratio

FOMC Federal Open Market Committee; also, the Committee

GDP gross domestic product

IORB interest rate on reserve balances

LFPR labor force participation rate

MBS mortgage-backed securities

MMF money market fund

ON RRP overnight reverse repurchase agreement

PCE personal consumption expenditures

repo repurchase agreement

SOMA System Open Market Account

S&P Standard & Poor’s

TGA Treasury General Account

USD U.S. dollar

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. EDT

June 17, 2022

Monetary Policy rePort

June 17, 2022