The report now describes a stronger labor market, with unemployment at 3.5 percent, and inflation near 1.6 percent, with no mention of transitory factors. It highlights financial stability concerns, including September repo market pressures and elevated business debt. The FOMC's policy path is seen as unchanged for 2020, with downside risks to the outlook having receded.
Inflation
The report now notes inflation at 1.6 percent in December, similar to May's 1.5 percent, but no longer mentions transitory influences or declines from above 2 percent. Read the sectionQuotes
Previous report: “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.”
This report: “The 12-month change was 1.6 percent in December 2019, as was the 12-month measure that excludes consumer food and energy prices (so-called core inflation), which historically has been a better indicator of where inflation will be in the future than the overall figure.”
Labor market
The report now states the unemployment rate fell to 3.5 percent in December, its lowest since 1969, whereas previously it was 3.6 percent in April and May. Read the sectionQuotes
Previous report: “In April and May of this year, the unemployment rate stood at 3.6 percent, 1/4 percentage point lower than its level in December 2018 and its lowest level since 1969.”
This report: “the unemployment rate declined further in 2019 and stood at 3.5 percent in December, 0.4 percentage point below its year-earlier level and at its lowest level since 1969”
Economic activity
The report now notes downside risks to the outlook have receded somewhat, whereas previously the expansion was described as supported by steady job gains and other factors. Read the sectionQuotes
Previous report: “the economic expansion continues to be abetted by steady job gains, increases in household wealth, expansionary fiscal policy, and still-supportive domestic financial conditions”
This report: “Downside risks to the economic outlook seem to have receded somewhat in the latter part of 2019.”
Financial stability
The report now details the September 2019 repo market pressures, the federal funds rate briefly moving above its target range, and the subsequent repo operations and bill purchases that restored calm. Read the sectionQuotes
This report: “Against a backdrop of declining reserves and high levels of Treasury securities outstanding, in mid-September 2019, imbalances in the supply of and demand for short-term funding led to pressures in the repurchase agreement (repo) market—a money market segment in which banks, securities dealers, money market funds (MMFs), and other financial market participants lend to and borrow from each other for short periods against high-quality collateral.” · “The federal funds rate firmed, moving out of its target range for one day (as shown in figure A).” · “The Federal Reserve's open market operations—repo operations and bill purchases—lifted reserves to levels averaging about $1.6 trillion in early 2020.” · “Notably, with the provision of about $250 billion in liquidity via the Federal Reserve's repo operations, money market conditions were quite calm on year-end.”
The report now highlights elevated business debt levels with riskier firms driving increases, whereas previously it focused on low leverage at financial institutions. Read the sectionQuotes
Previous report: “Vulnerabilities stemming from leverage at financial institutions remain low. Capital relative to risk-weighted assets at the largest banks has remained largely stable over the past few years.”
This report: “In contrast, business debt levels continue to be elevated compared with either business assets or gross domestic product, with the riskiest firms accounting for most of the increase in debt in recent years (figure C).”
The report now highlights mid-September volatility and tightening in short-term funding markets, a topic not mentioned in the previous report. Read the sectionQuotes
This report: “Domestic short-term funding markets were volatile in mid-September—amid large flows related to corporate tax payments and settlement of Treasury securities—and experienced a significant tightening of conditions.”
The report now says equity prices increased nearly 30 percent over 2019 and forward price-to-earnings reached the 2018 peak, whereas previously equity prices were only somewhat elevated. Read the sectionQuotes
Previous report: “Asset valuations remain somewhat elevated in a number of markets. Treasury term premiums are near record lows. ... Equity prices appear to be somewhat elevated relative to earnings, with the forward equity price-to-earnings ratio for the S&P 500 remaining above the median value of its historical distribution since the mid-1980s (figure A).”
This report: “Equity prices increased nearly 30 percent over 2019, and the forward price-to-earnings ratio has reached the recent peak seen in 2018 (figure A).”
International
The report now says foreign growth slowed further in 2019, whereas the previous report said it stabilized at a restrained pace. Read the sectionQuotes
Previous report: “After slowing in 2018, foreign economic growth appears to have stabilized in the first half of the year, but at a restrained pace.”
This report: “After weakening in 2018, foreign economic growth slowed further in 2019, held down by a slump in global manufacturing, elevated trade tensions, and political and social unrest in several countries.”
Monetary policy
Survey-based expected policy rate path is now said to indicate no change to the target range in 2020, whereas previously it shifted down relative to end-2018 levels. Read the sectionQuotes
Previous report: “Survey-based measures of the expected path of the policy rate also shifted down relative to the levels observed at the end of 2018.”
This report: “Survey-based measures of the expected path of the policy rate also shifted down from the levels observed in the middle of 2019 but indicate no change to the target range for the federal funds rate over 2020 from its level at the end of 2019.”
The report now highlights that the neutral policy rate has fallen, increasing the risk of the effective lower bound constraining policy, and presents evidence of declining longer-run real rate and unemployment estimates. Read the sectionQuotes
This report: “the neutral level of the policy interest rate appears to have fallen in the United States and abroad, increasing the risk that the effective lower bound on interest rates will constrain central banks from reducing their policy interest rates enough to effectively support economic activity during downturns” · “Since 2000, forecasters in the Blue Chip survey have markedly reduced their estimates of the longer-run level of the real short-term interest rate” · “FOMC participants have also lowered their estimates of the real federal funds rate in the longer run since the Summary of Economic Projections, or SEP, began reporting this information in 2012.” · “in recent years, FOMC participants as well as outside forecasters and analysts generally have lowered their estimates of the longer-run unemployment rate considerably.”
These points are generated automatically by comparing the two reports' text, and each quote is checked against the report it's cited from.
Manufacturing and U.S. business cycles. After increasing solidly in 2017 and 2018, manufacturing output turned down last year. This decline raised fears among some observers that the weakness could spread and potentially lead to an economy-wide recession. In general, a decline in manufacturing similar to that in 2019 would not be large enough to initiate a major downturn for the economy. Furthermore, after accounting for changing trends in growth of manufacturing output, mild slowdowns have often occurred during expansionary phases of business cycles. In contrast, a more pronounced contraction in manufacturing has historically been associated with an economy-wide recession. (See the box "Manufacturing and U.S. Business Cycles" in Part 1.)
Monetary policy rules. Prescriptions for the policy interest rate from monetary policy rules often depend on judgments and assumptions about economic variables that are inherently uncertain and may change over time. Notably, many policy rules depend on estimates of resource slack and of the longer-run neutral real interest rate, both of which are not directly observable and are estimated with a high degree of uncertainty. As a result, the amount of policy accommodation that these rules prescribe—and whether that amount is appropriate in light of underlying economic conditions—is also uncertain. Such a situation cautions against mechanically following the prescriptions of any specific rule. (See the box "Monetary Policy Rules and Uncertainty in Monetary Policy Settings" in Part 2.)
Jerome H. Powell