The report now describes stronger growth and inflation, with core inflation at 2 percent and GDP projections raised, while the FOMC's expected rate path has shifted up. It adds new sections on international conditions and financial stability, and notes wider corporate spreads and trade policy risks.
Inflation
The report now states core inflation reached 2 percent, up half a percentage point from a year earlier, whereas the previous report had core inflation at 1.5 percent. Read the sectionQuotes
Previous report: “Core inflation ... was 1.5 percent over the 12 months ending in December 2017--0.4 percentage point lower than it had been one year earlier.”
This report: “Core PCE inflation, which excludes consumer food and energy prices that are often quite volatile and typically provides a better indication than the total measure of where overall inflation will be in the future, was 2 percent over the 12 months ending in May--0.5 percentage point higher than it had been one year earlier.”
The report now says inflation had moved close to 2 percent, whereas the previous report said it continued to run below the 2 percent objective. Read the sectionQuotes
Previous report: “inflation had continued to run below the FOMC's 2 percent longer-run objective”
This report: “The Committee's decisions reflected the continued strengthening of the labor market and the accumulating evidence that, after many years of running below the Committee's 2 percent longer-run objective, inflation had moved close to 2 percent.”
Labor market
The median unemployment rate projection for 2018 is now 3.6 percent, down from 3.9 percent in the previous report. Read the sectionQuotes
Previous report: “The medians of projections for the unemployment rate in the fourth quarter of both 2018 and 2019 were 3.9 percent, 0.2 percentage point below the medians from September and about 3/4 percentage point below the median assessment of its longer-run normal level.”
This report: “The median of participants' projections for the unemployment rate was 3.6 percent for the final quarter of this year and 3.5 percent for the final quarters of 2019 and 2020.”
Economic activity
The median projection for real GDP growth in 2018 is now 2.8 percent, up from 2.5 percent in the previous report. Read the sectionQuotes
Previous report: “The median of participants' projections for the growth rate of real GDP for 2018, conditional on their individual assessments of appropriate monetary policy, was 2.5 percent, the same as for 2017.”
This report: “The median of participants' projections for the growth rate of real GDP, conditional on their individual assessments of appropriate monetary policy, was 2.8 percent for this year and 2.4 percent for next year.”
Financial conditions
The report now notes that corporate bond spreads widened notably, whereas the previous report indicated high-yield spreads near the bottom of their historical distribution. Read the sectionQuotes
Previous report: “the high-yield spread is now near the bottom of its historical distribution.”
This report: “Yields on corporate debt securities--both investment grade and high yield--rose more than Treasury yields, leaving the spreads on corporate bond yields over comparable-maturity Treasury yields notably wider than at the beginning of the year.”
Financial stability
The report now adds that residential real estate valuation pressures increased modestly, with price-to-rent ratios approaching cycle peaks but below pre-crisis levels. Read the sectionQuotes
This report: “Aggregate price-to-rent ratios, adjusted for an estimate of their long-run trend and the carrying cost of housing, are approaching the cycle peaks of the early 1980s and early 1990s but remain well below the levels observed on the eve of the financial crisis.”
International
The report now includes a discussion of foreign economic growth and financial conditions, a topic not covered in the previous report. Read the sectionQuotes
This report: “Foreign economic growth has remained solid, and net exports had a roughly neutral effect on real U.S. GDP growth in the first quarter. ... Foreign financial conditions remain generally supportive of growth despite recent increases in financial stress in several emerging market economies.”
Monetary policy
The median federal funds rate projection for end-2018 is now 2.4 percent, up from 2.13 percent in the previous report. Read the sectionQuotes
Previous report: “The median projection for the end of 2018 was 2.13 percent;”
This report: “The medians of participants' projections of the federal funds rate rose gradually to 2.4 percent at the end of this year, 3.1 percent at the end of 2019, and 3.4 percent at the end of 2020.”
The report now says total assets have decreased to about $4.3 trillion, whereas the previous report said they had declined to about $4.4 trillion. Read the sectionQuotes
Previous report: “Consequently, the Federal Reserve's total assets have declined somewhat to about $4.4 trillion, with holdings of Treasury securities at approximately $2.4 trillion and holdings of agency debt and agency MBS at approximately $1.8 trillion (figure 45).”
This report: “the Federal Reserve's total assets have started to decrease, from about $4.4 trillion last October to about $4.3 trillion at present”
Projections
The report now cites trade policy as a downside risk to growth, whereas previously the balance of risks had shifted slightly toward strength. Read the sectionQuotes
Previous report: “The balance of risks to the economic outlook shifted slightly in the direction of strength, with two more participants seeing upside risks to growth in real GDP than in September and one more seeing risks to the unemployment rate as weighted to the downside.”
This report: “several participants continued to point to fiscal developments as a source of upside risk, many participants cited developments related to trade policy as posing downside risks to their growth forecasts”
These points are generated automatically by comparing the two reports' text, and each quote is checked against the report it's cited from.
Prime-age labor force participation. Labor force participation rates (LFPRs) for men and women between 25 and 54 years old--that is, the share of these individuals either working or actively seeking work--trended lower between 2000 and 2013. Those trends likely reflect numerous factors, including a long-run decline in the demand for workers with lower levels of education and an increase in the share of the population with some form of disability. By contrast, the prime-age LFPR has increased notably since 2013, and the share of nonparticipants who report wanting a job remains above pre-recession levels. Thus, some continuation of the recent increase in the prime-age LFPR may be possible if labor demand remains strong. (See the box "The Labor Force Participation Rate for Prime-Age Individuals" in Part 1.)
Oil prices. Oil prices have climbed rapidly over the past year, reflecting both supply and demand factors. Although higher oil prices are likely to restrain household consumption in the United States, much of the negative effect on GDP from lower consumer spending is likely to be offset by increased production and investment in the growing U.S. oil sector. Consequently, higher oil prices now imply much less of a net overall drag on the economy than they did in the past, although they will continue to have important distributional effects. The negative effect of upward moves in oil prices should get smaller still as U.S. oil production grows and net oil imports decline further. (See the box "The Recent Rise in Oil Prices" in Part 1.)
Monetary policy rules. Monetary policymakers consider a wide range of information on current economic conditions and the outlook when deciding on a policy stance they deem most likely to foster the FOMC's statutory mandate of maximum employment and stable prices. They also routinely consult monetary policy rules that connect prescriptions for the policy interest rate with variables associated with the dual mandate. The use of such rules requires, among other considerations, careful judgments about the choice and measurement of the inputs into the rules such as estimates of the neutral interest rate, which are highly uncertain. (See the box "Complexities of Monetary Policy Rules" in Part 2.)
Interest on reserves. The payment of interest on reserves--balances held by banks in their accounts at the Federal Reserve--is an essential tool for implementing monetary policy because it helps anchor the federal funds rate within the FOMC's target range. This tool has permitted the FOMC to achieve a gradual increase in the federal funds rate in combination with a gradual reduction in the Fed's securities holdings and in the supply of reserve balances. The FOMC judged that removing monetary policy accommodation through first raising the federal funds rate and then beginning to shrink the balance sheet would best contribute to achieving and maintaining maximum employment and price stability without causing dislocations in financial markets or institutions that could put the economic expansion at risk. (See the box "Interest on Reserves and Its Importance for Monetary Policy" in Part 2.)
Jerome H. Powell