The report now describes inflation as running below the 2 percent objective and notes a shift in FOMC communications toward acting as appropriate to sustain the expansion, with market expectations implying a likely rate cut. It also highlights increased financial stability risks from business borrowing and a planned end to balance sheet reduction in September.
Inflation
The report now describes inflation as running below the 2 percent objective, with headline and core rates at 1.5 and 1.6 percent in May, whereas previously it was near target with core at 1.9 percent. Read the sectionQuotes
Previous report: “Inflation has been near the Federal Open Market Committee's (FOMC) longer-run objective of 2 percent, aside from the transitory effects of recent energy price movements.” · “Consumer price inflation, as measured by the 12-month change in the price index for personal consumption expenditures, moved down from a little above the FOMC's objective of 2 percent in the middle of last year to an estimated 1.7 percent in December, restrained by recent declines in consumer energy prices.” · “The 12-month measure of inflation that excludes food and energy items (so-called core inflation), which historically has been a better indicator of where overall inflation will be in the future than the headline measure that includes those items, is estimated to have been 1.9 percent in December--up 1/4 percentage point from a year ago.”
This report: “inflation has been running below the Federal Open Market Committee's (FOMC) longer-run objective of 2 percent” · “the 12-month change in the price index for personal consumption expenditures, moved down from a little above the FOMC's objective of 2 percent in the middle of last year to a rate of 1.5 percent in May.” · “The 12-month measure of inflation that excludes food and energy items (so-called core inflation) ... was 1.6 percent in May—down from a rate of 2 percent from a year ago.”
The report now says the inflation-swaps measure of 5-to-10-year-forward inflation compensation is about 2 percent, down from about 2-1/4 percent previously. Read the sectionQuotes
Previous report: “The TIPS-based measure of 5-to-10-year-forward inflation compensation and the analogous measure from inflation swaps are now about 1-3/4 percent and 2-1/4 percent”
This report: “The TIPS-based measure of 5-to-10-year-forward inflation compensation and the analogous measure from inflation swaps are now about 1-3/4 percent and 2 percent, respectively”
Labor market
The report now says the labor market strengthened at a slower pace in the first half of 2019, whereas previously it described strengthening without noting a slowdown. Read the sectionQuotes
Previous report: “The labor market strengthened further during the second half of 2018 and early this year...”
This report: “The labor market strengthened further during the first half of 2019 but at a slower pace than last year.”
Financial stability
The report now highlights business borrowing outpacing GDP and concentrated among riskiest firms, whereas previously it noted household borrowing in line with incomes and prime borrowers. Read the sectionQuotes
Previous report: “Borrowing by households has risen roughly in line with household incomes and is concentrated among prime borrowers.”
This report: “Borrowing by businesses continues to outpace GDP, with the most rapid increases in debt concentrated among the riskiest firms.”
International
The report now says foreign growth stabilized at a restrained pace, whereas previously it had slowed significantly in 2018. Read the sectionQuotes
Previous report: “Foreign economic growth stepped down significantly last year from the brisk pace in 2017.”
This report: “After slowing in 2018, foreign economic growth appears to have stabilized in the first half of the year, but at a restrained pace.”
Monetary policy
The report now says the FOMC will act as appropriate to sustain the expansion, replacing the earlier emphasis on patience in determining rate adjustments. Read the sectionQuotes
Previous report: “the FOMC indicated at its January meeting that it will be patient as it determines what future adjustments to the federal funds rate may be appropriate” · “the Committee noted that it will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate”
This report: “the Committee indicated that it will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion” · “the Committee indicated that it will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.”
The report now states the FOMC will conclude balance sheet reduction by end-September 2019, whereas previously it only noted a decline in assets and intent to continue ample reserves. Read the sectionQuotes
Previous report: “the Federal Reserve's total assets declined by about $260 billion since the middle of last year, ending the period close to $4 trillion.” · “the FOMC stated that it intends to continue to implement monetary policy in a regime with an ample supply of reserves”
This report: “in March, the Committee announced plans to conclude the reduction of its aggregate securities holdings at the end of September 2019.” · “The Committee decided to continue to implement monetary policy in a regime with an ample supply of reserves and announced that it intends to conclude the reduction of its aggregate securities holdings in the System Open Market Account at the end of September 2019.”
Survey-based modal projections now imply a declining trajectory for the target range in 2019, whereas the previous report implied two additional rate increases. Read the sectionQuotes
Previous report: “the median of respondents' modal projections for the path of the federal funds rate implies two additional 25 basis point rate increases in 2019”
This report: “the median of respondents' modal projections implies a declining trajectory for the target range of the federal funds rate for 2019, which flattens out in 2020.”
The report now indicates that FOMC communications are interpreted as signaling a likely lowering of the target range, a shift from the previous emphasis on patience. Read the sectionQuotes
Previous report: “including increased investor concerns about downside risks to the global economic outlook and rising trade tensions, as well as FOMC communications that were viewed as signaling patience and greater flexibility”
This report: “investors reportedly interpreted FOMC communications over the first half of 2019 as signaling the Federal Reserve is likely to lower the target range for the federal funds rate in light of muted inflation pressures and uncertainties about the global economic outlook.”
Projections
The report now says risks to growth are weighted to the downside and inflation risks split, whereas previously most saw risks as balanced. Read the sectionQuotes
Previous report: “On balance, participants continued to view the uncertainty around their projections as broadly similar to the average of the past 20 years. While most participants viewed the risks to the outlook as balanced, a couple more participants than in September saw risks to real GDP growth as weighted to the downside, and one less participant viewed the risks to inflation as weighted to the upside.”
This report: “About half of participants viewed the risks to inflation as being broadly balanced, with a similar number viewing inflation risks as being weighted to the downside.” · “most participants viewed the risks for GDP growth as weighted to the downside and the risks for the unemployment rate as weighted to the upside.”
These points are generated automatically by comparing the two reports' text, and each quote is checked against the report it's cited from.
Global manufacturing and trade. Growth in global trade and manufacturing has weakened significantly since 2017 even as growth in services has held up. Trade policy developments appear to have lowered trade flows to some extent, while uncertainty surrounding trade policy may be weighing on investment. The global tech cycle and a general slowdown in global demand, reflecting idiosyncratic factors specific to different economies, have also likely weighed on demand for traded goods. (See the box "The Persistent Slowdown in Global Trade and Manufacturing" in Part 1.)
Monetary policy rules. Monetary policy rules are mathematical formulas that relate a policy interest rate, such as the federal funds rate, to a small number of other economic variables, typically including the deviation of inflation from its target value and a measure of resource slack in the economy. The prescriptions for the policy interest rate from these rules can provide helpful guidance for the FOMC. This discussion presents five policy rules—illustrative of the many rules that have received attention in the research literature—and provides examples of two ways to compute historical prescriptions of policy rules. (See the box "Monetary Policy Rules and Their Interactions with the Economy" in Part 2.)
Monetary policy implementation and balance sheet normalization. Since the beginning of this year, the FOMC has made important decisions regarding its framework for monetary policy implementation and the process of normalizing the size of its balance sheet. The Committee decided to continue to implement monetary policy in a regime with an ample supply of reserves and announced that it intends to conclude the reduction of its aggregate securities holdings in the System Open Market Account at the end of September 2019. (See the box "Framework for Monetary Policy Implementation and Normalization of the Federal Reserve's Balance Sheet" in Part 2.)
No longer included
Employment Disparities between Rural and Urban Areas RemovedView previous
Monetary Policy Rules and Systematic Monetary Policy RemovedView previous
The Role of Liabilities in Determining the Size of the Federal Reserve's Balance Sheet RemovedView previous
Federal Reserve Transparency: Rationale and New Initiatives RemovedView previous
Jerome H. Powell