June 2020 Monetary Policy Report

The June 2020 report describes a sharp pandemic-driven contraction, with record unemployment and a historic GDP decline, replacing earlier growth assessments. It also notes a policy rate cut to near zero, a flat expected path, and severe financial disruptions, in contrast with prior stable conditions. Inflation is now seen as falling well below target.

Inflation

• The report now attributes below-2-percent inflation to weaker demand and lower oil prices, and notes record-low inflation compensation, a shift from the prior focus on modest shortfalls. Read the section
  Quotes

  Previous report: “inflation was below the Federal Open Market Committee's (FOMC) longer-run objective of 2 percent”  ·  “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.”

  This report: “Weaker demand and significantly lower oil prices are holding down consumer price inflation.”  ·  “However, market-based measures of inflation compensation have moved down to some of the lowest readings ever seen.”

• Inflation is now reported as falling sharply, with total PCE inflation at 0.5 percent and core at 1.0 percent in April, versus 1.6 percent and a pickup to 1.9 percent earlier. Read the section
  Quotes

  Previous report: “The 12-month change in the price index for personal consumption expenditures (PCE) was 1.6 percent in December 2019, as was 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 inflation will be in the future than the overall index (figure 8).”  ·  “Indeed, core inflation picked up after the first quarter and was at an average annual rate of 1.9 percent over the remainder of the year.”

  This report: “As measured by the 12-month change in the price index for personal consumption expenditures (PCE), inflation was just 0.5 percent in April, compared with 1.6 percent over the same period a year ago.”  ·  “These price declines led the 12-month measure of core PCE inflation—that is, inflation excluding volatile consumer food and energy prices—to move significantly lower, falling from 1.8 percent in February to just 1.0 percent in April, as the monthly readings for March and April were exceptionally low.”

Labor market

• The report now describes a severe labor market downturn, with payroll employment plummeting 22 million in March and April and unemployment at 13.3 percent in May, replacing the earlier solid gains and 3.5 percent rate. Read the section
  Quotes

  Previous report: “Payroll employment gains were solid in the second half of 2019 and averaged 176,000 per month during the year as a whole.”  ·  “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”

  This report: “After posting strong gains in both January and February, payroll employment plummeted by an unprecedented 22 million in March and April before adding back 2.5 million jobs in May (figure 1).”  ·  “The unemployment rate jumped to 14.7 percent in April, the highest level since the Great Depression. In May, the unemployment rate fell to 13.3 percent, which was almost 10 percentage points above the February level (figure 2).”

Economic activity

• The report now characterizes the downturn as the worst since World War II, with GDP contracting at a 5 percent annual rate in Q1, replacing the earlier moderate growth and business investment decline. Read the section
  Quotes

  Previous report: “Real gross domestic product (GDP) is reported to have increased at a moderate average annual rate of 2.1 percent in the second half of 2019”  ·  “business fixed investment declined in the second half of last year, reflecting a number of factors that likely include uncertainty regarding trade tensions and the weak global growth outlook”

  This report: “The severity, scope, and speed of the ensuing downturn in economic activity have been significantly worse than any recession since World War II.”  ·  “An appreciation of the dollar has also contributed to the slowing in core inflation.”

Financial conditions

• The report now emphasizes severe financial market disruptions and impaired credit flow, a stark reversal from the earlier assessment of supportive financial conditions. Read the section
  Quotes

  Previous report: “Domestic financial conditions for businesses and households remained supportive of spending and economic activity.”

  This report: “The disruptions to economic activity here and abroad significantly affected financial conditions and impaired the flow of credit to U.S. households and businesses.”  ·  “In late February and over much of March as COVID-19 spread, equity prices plunged and nominal Treasury yields dropped substantially, with yields on longer-term securities reaching all-time record lows.”  ·  “Market functioning deteriorated in many markets in late February and much of March, including the critical Treasury and agency MBS markets.”

Financial stability

• The report now emphasizes strains in nonbank finance and liquidity transformation as key vulnerabilities, whereas previously it focused on elevated valuation pressures and business debt levels. Read the section
  Quotes

  Previous 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).”  ·  “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).”

  This report: “financial system vulnerabilities—most notably those associated with liquidity and maturity transformation in the nonbank financial sector—have amplified some of the economic effects of the pandemic.”  ·  “At the onset of the pandemic, asset valuation pressures in the United States were elevated.”

• The report now highlights nonbank liquidity and maturity transformation vulnerabilities amplifying pandemic effects, shifting from the earlier emphasis on overall resilience and elevated business debt. Read the section
  Quotes

  Previous report: “The U.S. financial system is substantially more resilient than it was before the financial crisis.”  ·  “In contrast, the levels of business debt continue to be elevated compared with the levels of either business assets or GDP, with the riskiest firms accounting for most of the increase in debt in recent years.”

  This report: “Despite increased resilience from the financial and regulatory reforms adopted since 2008, financial system vulnerabilities—most notably those associated with liquidity and maturity transformation in the nonbank financial sector—have amplified some of the economic effects of the pandemic.”

Monetary policy

• The report now describes a 1-1/2 percentage point cut in March to 0 to 1/4 percent, replacing the earlier 75 basis point cuts to 1-1/2 to 1-3/4 percent. Read the section
  Quotes

  Previous report: “the FOMC lowered the target range for the federal funds rate at its July, September, and October meetings”  ·  “bringing it to the current range of 1-1/2 to 1-3/4 percent”  ·  “the FOMC lowered the target range a cumulative 75 basis points, bringing it to the current range of 1-1/2 to 1-3/4 percent.”

  This report: “the Federal Reserve quickly lowered its policy rate to close to zero to support economic activity”  ·  “at two meetings in March, the FOMC lowered the target range for the federal funds rate by a total of 1-1/2 percentage points, bringing it to the current range of 0 to 1/4 percent.”

• The report now describes the expected federal funds rate path as flat at the effective lower bound through mid-2023, whereas previously it showed a modest decline over 2020. Read the section
  Quotes

  Previous report: “Market-based measures of the expected path of the federal funds rate over the next several years have moved down, on net, since the middle of last year and show about a 30 basis point decrease in the federal funds rate over 2020 and a relatively flat path thereafter (figure 30).”

  This report: “The expected path of the federal funds rate over the next several years has declined since early January and is now flat at the effective lower bound for the next few years (figure 27).”  ·  “Market-based measures suggest that the expected federal funds rate remains below 0.25 percent through mid-2023.”

Other

• The report now highlights the largest and fastest fiscal response to any postwar downturn, with substantial support and rising deficits, replacing the earlier description of continued fiscal boosts and a widening deficit. Read the section
  Quotes

  Previous report: “The effects of fiscal policy actions enacted at the federal level in earlier years continued to boost GDP growth in 2019”  ·  “The federal unified budget deficit widened further in fiscal year 2019 to 4-1/2 percent of nominal GDP from 3-3/4 percent of GDP in 2018”

  This report: “Federal fiscal stimulus will provide substantial support to economic activity in 2020 while also significantly boosting the budget deficit and debt.”  ·  “the amount of fiscal support that has been enacted constitutes the fastest and largest fiscal response to any postwar economic downturn.”

These points are generated automatically by comparing the two reports' text, and each quote is checked against the report it's cited from.