June 2025 Monetary Policy Report: Full Text
Summary
Inflation has continued to moderate this year, though it remains somewhat elevated. The labor market is in solid shape, with a moderate pace of job gains so far this year and the unemployment rate at a low level. Although growth in real gross domestic product (GDP) is reported to have paused in the first quarter, growth in private domestic final demand was moderate, reflecting a modest increase in consumer spending and a jump in capital spending. However, measures of household and business sentiment have declined this year amid concerns about the effects of higher tariffs on inflation and employment as well as heightened uncertainty about the economic outlook.
With the labor market at or near maximum employment and inflation continuing to moderate, the Federal Open Market Committee (FOMC) has maintained the target range for the federal funds rate at 4-1/4 to 4-1/2 percent. The FOMC's current stance of monetary policy leaves it well positioned to wait for more clarity on the outlook for inflation and economic activity and to respond in a timely way to potential economic developments. The Federal Reserve has also continued to reduce its holdings of Treasury and agency mortgage-backed securities and, beginning in April, further slowed the pace of decline to facilitate a smooth transition to ample reserve balances. The FOMC is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.
Recent Economic and Financial Developments
Inflation. Inflation. After declining modestly last year, consumer price inflation has continued to ease this year, although progress has been bumpy. The price index for personal consumption expenditures (PCE) rose 2.1 percent over the 12 months ending in April, down from 2.6 percent at the end of last year. The core PCE price index—which excludes often-volatile food and energy prices and is generally considered a better guide to the future of inflation—rose 2.5 percent over the 12 months ending in April, below the 2.9 percent increase observed at the end of last year. Although measures of shorter-term inflation expectations have moved sharply higher this year, reflecting concerns around tariffs, most measures of longer-term inflation expectations have remained within the range of values seen in the decade before the pandemic and continue to be broadly consistent with the FOMC's longer-run objective of 2 percent inflation.
The labor market. The labor market. The labor market is in solid shape, with supply and demand about in balance. The unemployment rate, at 4.2 percent in May, has been relatively flat since the middle of last year at a level that is low by historical experience; job vacancies have continued to edge down, while layoff activity has been subdued. As labor demand has cooled somewhat further so far this year, monthly job gains have slowed to a moderate pace on average. Labor supply has increased less robustly than in previous years, with immigration appearing to have slowed sharply since the middle of last year and the labor force participation rate having declined a bit. With the labor market about in balance, nominal wage gains have continued to moderate this year and are now close to the pace consistent with 2 percent inflation over the longer term.
Economic activity. Economic activity. After having increased at a solid pace last year, real GDP is reported to have edged down in the first quarter. The slowdown was mostly due to a historic surge in imports ahead of expected increases in tariffs that was only partially offset by a pickup in measured inventories. Growth in private domestic final purchases, in contrast, was moderate in the first quarter, reflecting a modest increase in consumer spending and a jump in capital spending. Other measures of domestic production, such as those from the labor market as well as manufacturing output, rose solidly in the first quarter, although manufacturing has shown signs of weakness more recently. In the housing market, new home construction has softened slightly this year, while existing home sales remained depressed, with mortgage rates still elevated.
Financial conditions. Financial conditions. Since the beginning of the year, yields on short- and medium-term nominal Treasury securities moved moderately lower, on net, reflecting a significant decline in real yields that offset an increase in near-term inflation compensation. The expected path for the federal funds rate for this year fluctuated in response to investors' changing concerns about higher near-term inflation and downside risks to economic growth. The expected path for next year was notably lower, with financial market prices implying that the federal funds rate will decline more than 100 basis points from current levels to 3.3 percent by the end of 2026. Broad equity prices were little changed but experienced sizable declines in early April following the announced changes to U.S. trade policy before retracing. Spreads on investment-grade corporate bonds increased modestly, consistent with somewhat increased concerns about the corporate outlook, but remained low by historical standards. Credit continued to be broadly available to most nonfinancial firms, households, and municipalities, but it stayed relatively tight for small businesses and households with lower credit scores. Bank lending to households and businesses grew only slightly, likely reflecting still-elevated interest rates and tight lending standards.
Financial stability. Financial stability. Overall, the financial system remained resilient amid heightened uncertainty and withstood considerable volatility in April. Smoothing through this volatility, valuations remained high relative to fundamentals in a range of markets, including those for equities, corporate debt, and residential real estate. Total debt of households and nonfinancial businesses as a fraction of GDP continued to trend down and is now at its lowest level seen in the past two decades. The banking system remained sound and resilient, with continued increases in regulatory capital, while outside the banking sector, leverage at hedge funds remained near historically high levels. Vulnerabilities from funding risks improved somewhat since earlier this year, in part due to a reduction in banks' reliance on uninsured deposits, particularly at the largest banks. That said, structural vulnerabilities remain in other cash-investment vehicles, where assets under management continued to grow. (See the box "Developments Related to Financial Stability.")
International developments. International developments. Foreign growth picked up a bit in the first quarter of 2025, supported in part by increased demand from U.S. importers that likely reflected a pull-forward ahead of expected tariff hikes. That said, indicators of business conditions and confidence in many foreign economies have declined notably this year and suggest weakening growth prospects abroad. Headline inflation moderated further across most foreign economies. Several foreign central banks have continued to lower policy rates, citing a deteriorating outlook for growth and continued easing of inflationary pressures in their economies. However, foreign central bank communications have generally emphasized the need to maintain policy flexibility amid considerable uncertainty. Since early 2025, the broad dollar index—a measure of the exchange value of the dollar against a trade-weighted basket of foreign currencies—decreased on net. The decline in the dollar index was broad based, with depreciations against the currencies of both advanced and emerging market economies.
Monetary Policy
Interest rate policy. Interest rate policy. Since the beginning of the year, the FOMC maintained the target range for the federal funds rate at 4-1/4 to 4-1/2 percent. The FOMC's current stance of monetary policy leaves it well positioned to wait for more clarity on the outlook for inflation and economic activity and respond in a timely way to potential economic developments. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.
Balance sheet policy. Balance sheet policy. The Federal Reserve has continued the process of significantly reducing its holdings of Treasury and agency securities in a predictable manner and decided to further slow the pace of this decline beginning in April. The Federal Reserve has reduced its holdings of Treasury and agency securities by about $180 billion since the beginning of the year, bringing the total reduction in securities holdings since mid-2022 to more than $2 trillion. The FOMC has stated that it intends to maintain securities holdings at amounts consistent with implementing monetary policy efficiently and effectively in its ample-reserves regime, and it intends to stop reductions in its securities holdings when reserve balances are somewhat above the level that it judges to be consistent with ample reserves.
Special Topics
Employment and earnings across groups. Employment and earnings across groups. Employment disparities across sex, race, and education groups remain near historically narrow levels amid a solid, but not especially tight, labor market. Similarly, nominal wage growth also remains robust for most groups despite slowing from post-pandemic highs. While the benefits of a strong labor market in recent years have been broadly shared, significant disparities in absolute levels across groups remain. (See the box "Employment and Earnings across Demographic Groups.")
Federal Reserve's balance sheet and money markets. Federal Reserve's balance sheet and money markets. The size of the Federal Reserve's balance sheet has declined since January, as the FOMC has continued to reduce its securities holdings. Usage of the overnight reverse repurchase agreement facility was little changed, while reserve balances increased on net. Conditions in money markets remained stable. (See the box "Developments in the Federal Reserve's Balance Sheet and Money Markets.")
Monetary policy rules. Monetary policy rules. Simple monetary policy rules, which prescribe a setting for the policy interest rate in response to the behavior of a small number of economic variables, can provide useful guidance to policymakers. With inflation easing and the unemployment rate staying low, the policy rate prescriptions of most simple monetary policy rules have generally declined since 2023. Currently, most rules call for levels of the federal funds rate that are within the current target range. (See the box "Monetary Policy Rules in the Current Environment.")
Domestic Developments
Inflation has continued to ease
After declining modestly last year, consumer price inflation continued to ease during the first four months of this year, although at a bumpy pace and with some early signs that higher tariffs on U.S. goods imports are pushing up prices for some consumer goods. The 12-month change in the price index for personal consumption expenditures (PCE) was 2.1 percent in April, down from 2.6 percent at the end of last year (figure 1). Meanwhile, inflation for core PCE prices—which exclude often-volatile food and energy prices and are generally considered a better guide for future inflation—has also eased further this year but remains somewhat elevated, with the 12-month change receding from 2.9 percent in December to 2.5 percent in April. Similarly, alternative measures that attempt to reduce the influence of idiosyncratic price movements on inflation in other ways have declined but remain elevated and suggest inflation rates will run somewhat above 2 percent in the coming months. For example, the 12-month change in the trimmed mean measure of PCE prices constructed by the Federal Reserve Bank of Dallas eased from 2.8 percent in December to 2.5 percent in April.
Personal consumption expenditures price indexes
The data extend through April 2025. The horizontal line indicates the Federal Open Market Committee's objective of 2 percent inflation.
Source: For trimmed mean, Federal Reserve Bank of Dallas; for all else, Bureau of Economic Analysis; all via Haver Analytics.
Consumer energy prices declined early this year, while food prices increased moderately
PCE energy prices declined, on net, during the early part of this year, with the 12-month change through April indicating a drop of almost 6 percent following an increase of around 2 percent over the preceding 12 months (figure 2, left panel). The pattern is largely due to the notable drop in oil prices over this period, which reflected actual and prospective increases in oil supply from members of OPEC (Organization of the Petroleum Exporting Countries) and its partners as well as concerns about global gross domestic product (GDP) growth (figure 3). More recently, oil spot prices jumped following Israel's attack on Iran, while oil price futures beyond the near team rose by less, suggesting markets perceive more-limited risk of lasting disruptions to global oil supplies.
Price indexes for subcomponents of personal consumption expenditures
The data extend through April 2025. Percent change is from year earlier,
Source: Bureau of Economic Analysis via Haver Analytics.
Spot and futures prices for crude oil
The data are weekly averages of daily data and extend through June 13, 2025.
Source: ICE Brent Futures via Bloomberg.
Series: Brent spot price and 24-month-ahead futures contracts Horizon: January 4, 2019, to June 13, 2025 Description: A line chart with two curves over January 4, 2019, to June 13, 2025. Units are dollars per barrel. The data are weekly averages of daily data. The Brent spot price series starts a bit below 60 and fluctuates between about 60 and 75 through 2019 until it falls sharply to nearly 20 by mid-2020. The series climbs steadily to and peaks at about 120 in mid-2022 and then slides to slightly above 80 by the start of 2023, ending at about 70 in June 2025, with two smaller peaks a bit above and below 90 in September 2023 and April 2024, respectively, and another peak at about 80 in January 2025. The 24-month-ahead futures contracts series, while a bit less volatile in its movements, largely follows the Brent spot price series. The series starts at around 60 and hovers between about 55 and 65 in 2019. It drops to about 40 by mid-2020 before rising steadily to about 90 in mid-2022 and declining to and hovering between about 70 and 80 through the start of 2025. It falls slightly to about 65 by June 2025.
Meanwhile, PCE food prices have risen moderately this year, with the 12-month change through April indicating an increase of 1.9 percent, a somewhat stronger gain than the modest increase observed at the same time last year (but still well below the large increases observed following the COVID-19 pandemic and Russia's invasion of Ukraine). The step-up in food price inflation likely reflects the moderate net increase in prices of agricultural commodities and livestock over the past year (figure 4). In addition, consumer prices for eggs are still notably higher than a year ago despite some recent declines, reflecting the bird flu–related supply disruptions that have affected this industry.
Spot prices for commodities
The data are weekly averages of daily data and extend through June 13, 2025.
Source: For industrial metals, S&P GSCI Industrial Metals Spot Index; for agriculture and livestock, S&P GSCI Agriculture & Livestock Spot Index; both via Haver Analytics.
Prices of both energy and food products are of particular importance for lower-income households, for whom such necessities account for a large share of expenditures. Reflecting the sharp increases seen in 2021 and 2022, prices for these necessities are more than 25 percent higher than before the pandemic, well above the 15 percent increase that would have been observed if prices had continued rising at their average rate during the 30 years prior to the pandemic.
Core goods inflation has picked up again...
In assessing the outlook for inflation, it is helpful to consider three separate components of core prices: core goods, housing services, and core nonhousing services (figure 2, right panel). Core goods inflation has moved back up this year after having receded last year to a pace about in line with the average annual decline that prevailed in the years before the pandemic: The 12-month change in PCE core goods prices was 0.2 percent in April, somewhat above the 0.5 percent decline recorded a year ago, and available data from the consumer price index suggest this reading is likely to increase further in May.
The effects on U.S. consumer prices of the increase in import tariffs this year are highly uncertain, as trade policy continues to evolve, and it is still early to assess how consumers and firms will respond. Although the effects of tariffs cannot be observed directly in the official consumer price statistics, the pattern of net price changes among goods categories this year suggests that tariffs may have contributed to the recent upturn in goods inflation. In particular, average monthly price changes for some durable goods with exposure to tariff increases, such as household appliances and a variety of consumer electronics, have been somewhat strong since the beginning of this year. That said, price changes so far this year have not been particularly strong for new motor vehicles, which have also been exposed to tariff increases.2
Among the other factors that tend to influence core consumer goods inflation, global benchmark prices for industrial metals have risen modestly, on net, this year (figure 4). However, prices received by domestic producers of steel and aluminum have risen substantially relative to the global prices, on net, over this period, likely reflecting the effects of tariffs.
More broadly, nonfuel import prices—which measure the prices paid to foreign producers and exclude tariffs—have increased modestly so far this year suggesting foreign producers have not responded materially to the higher tariffs by reducing the prices they charge U.S. importers (figure 5). Accordingly, domestic firms widely report on business surveys that they have faced increases in input cost pressures this year, which many firms have linked to higher tariffs. For example, purchasing managers report in both the Institute for Supply Management manufacturing survey and regional Federal Reserve surveys that the prices of inputs used in production have moved sharply higher this year (figure 6).
Prices paid indexes from manufacturing surveys
The regional survey average comprises data from the Dallas Fed's Texas Manufacturing Outlook Survey, the Kansas City Fed's Survey of Tenth District Manufacturers, the New York Fed's Empire State Manufacturing Survey, and the Philadelphia Fed's Manufacturing Business Outlook Survey. ISM is Institute for Supply Management.
Source: Institute for Supply Management, Manufacturing Report on Business; Federal Reserve Bank of Dallas, Texas Manufacturing Outlook Survey; Federal Reserve Bank of Kansas City, Survey of Tenth District Manufacturers; Federal Reserve Bank of New York, Empire State Manufacturing Survey; Federal Reserve Bank of Philadelphia, Manufacturing Business Outlook Survey; all via Haver Analytics.
...while housing services price inflation has continued to move lower but remains elevated...
Housing services price inflation has continued to moderate gradually this year, with prices rising 4.2 percent over the 12 months ending in April, down from 5.7 percent at the same time last year but still above its pre-pandemic pace. Inflation in this category reflects changes in rents paid by new and existing tenants, which tend to follow movements in rents for new leases to new tenants ("market rents") with a lag. With the increases in market rents having now been near their moderate pre-pandemic average rates for most of the past two years, housing services inflation will likely continue to move lower as the effects of the large increases in 2021 and 2022 fade further (figure 7).3
Measures of rental price inflation
Zillow data start in January 2016, and Apartment List data start in January 2018. Cotality and personal consumption expenditures (PCE) data extend through April 2025. Apartment List, Zillow, RealPage, and Cotality measure market-rate rents—that is, rents for a new lease by a new tenant.
Source: Bureau of Economic Analysis, PCE, via Haver Analytics; Apartment List, Inc., via Haver Analytics; Zillow, Inc.; RealPage, Inc.; Cotality; Federal Reserve Board staff calculations.
...and core nonhousing services price inflation has eased further to a pace roughly in line with its pre-pandemic average
Finally, price inflation for core nonhousing services—a broad group that includes services such as medical, travel and dining, and financial services—has eased further this year, after progress appeared to have stalled in the second half of last year. Prices for these services rose 3.0 percent over the 12 months ending in April, below the 3.6 percent increase observed at the same time last year and just a bit above its average pace during the 30 years prior to the pandemic. Because labor is an important input to many of these service sectors, the declines in price inflation likely reflect, in part, the ongoing deceleration in labor costs—supported by softening labor demand.
Most measures of longer-term inflation expectations have been stable, while shorter-term inflation expectations have risen sharply
A generally held view among economists is that inflation expectations influence actual inflation by affecting wage- and price-setting decisions. Most measures suggest longer-term inflation expectations remain well anchored. Survey-based measures of longer-term inflation expectations from Blue Chip, the Federal Reserve Banks of New York and Atlanta, and the Survey of Professional Forecasters from the Federal Reserve Bank of Philadelphia have moved roughly sideways in recent months and remain within the range seen in the decade before the pandemic. For example, the median forecaster in the Survey of Professional Forecasters expects inflation to average 2.0 percent over the five years beginning five years from now (figure 8). Similarly, market-based measures of longer-term inflation compensation based on financial instruments linked to inflation such as Treasury Inflation-Protected Securities have been little changed so far this year (figure 9). An exception among the longer-term measures is the University of Michigan Surveys of Consumers measure, in which the median expectation of inflation over the next 5 to 10 years climbed from 3 percent in December to 4.1 percent in June.
Measures of inflation expectations
The data for the Michigan survey are monthly and extend through June 2025; the June data for the Michigan survey are preliminary. The data for the Survey of Professional Forecasters (SPF) are quarterly and extend through 2025:Q2.
Source: University of Michigan Surveys of Consumers; Federal Reserve Bank of Philadelphia, SPF.
Inflation compensation implied by Treasury Inflation-Protected Securities
The data are at a business-day frequency and are estimated from smoothed nominal and inflation-indexed Treasury yield curves.
Source: Federal Reserve Bank of New York; Federal Reserve Board staff calculations.
Series: 5-to-10-year and 5-year Horizon: January 4, 2016, to June 16, 2025 Description: A line chart with two curves over January 4, 2016, to June 16, 2025. Units are percent, and the data are daily. The 5-to-10-year series begins around 1.7 in January 2016. It then steps down gradually to a bit below 1.5 in June 2016, rises to 2 in January 2017, and drops again to 1.8 in June 2017. The series then grows to about 2 in January 2018, moderates to about 1.5 by the end of February 2020, and then falls below 1 in March 2020 before returning to about 1.5 in April 2020. The series steadily climbs to about 2.5 by May 2021 and fluctuates between approximately 2 and 2.5 through mid-April 2022 before briefly hitting close to 2.8 in late April. The series then drops to just above 2 in late May 2022 and fluctuates between just below 2 and about 2.5 through May 2023 before increasing to above 2.5 in September 2023 and remaining there through November 2023. It then dips to about 2.1 in December 2023, climbs to around 2.4 by February 2024, and fluctuates between 2.2 and 2.5 until August, when it dips to between 2.1 and 2.2 until October 2024. The series swings up to nearly 2.5 in early November and then ticks down, fluctuating around 2.3 through December 2024. At the beginning of 2025, the series edges up and fluctuates between around 2.4 and 2.5 through February 2025 before falling to about 2.3 and hovering between 2.2 and 2.3 through the beginning of May. It then increases to and fluctuates around 2.4, ending just above 2.4 in mid-June 2025. From early 2016 through February 2020, both series are nearly identical. The 5-year series subsequently falls to just above 0 by mid-March 2020 before jumping to over 2.7 in May 2021, surpassing the 5-to-10-year series. From there, the series fluctuates slightly, ramping up to more than 3 in November 2021, retreating slightly to about 2.8 by December 2021, and remaining around there through most of February 2022. In late February 2022, the series begins to rise, peaking around 3.5 in late March 2022. It drops briefly to below 3.3 in early April before increasing again to nearly 3.5 in late April 2022. From there, the series decreases to just below 3 in mid-May and remains roughly between 2.8 and just above 3 through mid-June 2022. The series then falls to slightly above 2 by the end of September 2022 before rebounding to over 2.5 in late October 2022. The series then follows the 5-to-10-year series closely until early March 2023, when it rises to nearly 2.8. Over the next three months, the series declines slowly past the 5-to-10-year series to just above 2 by mid-June 2023. The series increases and peaks around 2.4 by mid-October 2023. It fluctuates between just above 2 and nearly 2.5 until late July 2024, when it falls to around 2. The series rises to around 2.3 in October 2024 and crests around 2.4 in early November. It then fluctuates around 2.3 for the rest of 2024 before hovering just below 2.5 in January 2025. The series then inches up to and fluctuates around 2.5 in February 2025. The series decreases to and hovers between around 2.4 and 2.5 through March, declines to about 2.2 in mid-April 2025, and steadily increases to and fluctuates around 2.4 percent through early June, ending at approximately 2.3.
Shorter-term inflation expectations, meanwhile, have risen considerably this year. Survey-based measures of professional forecasters and of households and businesses as well as market-based measures have all moved higher in recent months, though the extent of increase has varied. At one extreme, again, is the University of Michigan survey, in which the median expectation of inflation over the next 12 months rose from 2.8 percent in December to 5.1 percent in June, with almost two-thirds of respondents citing tariff-related concerns. Other shorter-term measures—such as those from the Federal Reserve Bank of New York's Survey of Consumer Expectations and the Blue Chip survey as well as many measures of businesses' expectations of inflation and cost increases—have increased less dramatically, as have market-based inflation compensation measures for the year ahead.
The labor market remained solid through the first five months of the year
The labor market remains in solid shape, with supply and demand about in balance. The unemployment rate, at 4.2 percent in May, has been little changed since the middle of last year and is low relative to historical experience (figure 10). Similarly, unemployment rates among most age, educational attainment, sex, and racial and ethnic groups have been stable over the past year at relatively low levels (figure 11). (The box "Employment and Earnings across Demographic Groups" provides further details.) The low and fairly stable unemployment rate has coincided with a pace of monthly payroll job gains that averaged 124,000 over the first five months of this year—a moderate pace that is a bit slower than the average monthly gain of 168,000 recorded last year (figure 12). Job growth has been fairly broad based among industries this year, with gains in health care remaining particularly strong.
Civilian unemployment rate
Source: Bureau of Labor Statistics via Haver Analytics.
Unemployment rate, by race and ethnicity
All data shown are 3-month moving averages. Unemployment rate measures total unemployed as a percentage of the labor force. Persons whose ethnicity is identified 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.
Source: Bureau of Labor Statistics via Haver Analytics.
Nonfarm payroll employment
The data shown are a 3-month moving average of the change in nonfarm payroll employment.
Source: Bureau of Labor Statistics via Haver Analytics.
Employment and Earnings across Demographic Groups
The labor market, in aggregate, has held roughly steady in recent months at a level that is solid, even if no longer especially tight. As a result, employment disparities across sex, race, ethnicity, and education groups—some of which reached historical lows in 2023 and early 2024 on the heels of an exceptionally tight labor market—remain narrow compared to typical historical levels. Similarly, nominal wage growth continues to be robust for most groups despite slowing from post-pandemic highs. Although the benefits of a strong labor market have been broadly shared in recent years, significant disparities in absolute levels across groups remain.
Among prime-age people (aged 25 to 54), employment rates for Black or African American workers have edged down from their peak last year but remain relatively high compared to historical levels (figure A, left panel). This movement reflects both a decline in the labor force participation rate for this group and a net increase in their unemployment rate.1 Because the employment-to-population (EPOP) ratio for white workers was little changed over the same period, the EPOP ratio gap between Black and white individuals has widened somewhat from the 50-year low it attained in early 2024, though the current gap is still historically narrow.2 The EPOP ratios for both Hispanic or Latino workers and Asian workers, by contrast, have remained quite strong this year. As a result, the EPOP ratio gaps for these groups relative to white workers also remain within historically narrow ranges.3
Prime-age employment-to-population ratios compared with the 2019 average ratio, by group
The data are 3-month moving averages. Prime age is 25 to 54. All series are seasonally adjusted by Federal Reserve Board staff.
Source: Bureau of Labor Statistics; U.S. Census Bureau, Current Population Survey; Federal Reserve Board staff calculations.
The EPOP ratio for prime-age women of all levels of education grew strongly during the post-pandemic recovery and peaked last year. This has led to a historically narrow EPOP ratio gap between prime-age men and women. The increase in the EPOP ratio for women most likely reflects the continuation of the pre-pandemic trend of rising female labor force participation—some of which is likely attributable to increased educational attainment—among other factors. More recently, EPOP ratios for women have diverged across education levels (figure A, right panel). Although the EPOP ratio for women with some college education or more has remained near its historical peak in the first five months of this year, the EPOP ratio for women with a high school education or less has moved down and now stands near its average level in 2019 (mostly reflecting a decline in labor force participation among this group). The EPOP ratio for prime-age men both with and without some college education has changed little, on net, over the past two years.
Across all prime-age people, the aggregate EPOP ratio has edged down from its peak late last year, likely owing in part to the lagged effects of an easing labor market on individuals' labor force participation decisions (figure B).4 The EPOP ratio for people aged 55 or older has been moving gradually lower, on net, in recent years and now stands almost 3 percentage points below its 2019 average. Most of this shortfall reflects retirements related to the aging of the baby-boom generation. As this cohort has grown older, the median age of people in the aged 55 or older population has risen, and because older workers are more likely to have retired, this has lowered the group's average EPOP ratio. Further, workers in this group, particularly those aged 65 or older, began retiring somewhat earlier than usual during the pandemic, which has put some additional downward pressure on their EPOP ratio.5
Employment-to-population ratios compared with the 2019 average ratio, by age
The data are 3-month moving averages. All series are seasonally adjusted by Federal Reserve Board staff. Data before January 2024 are estimated by Federal Reserve Board staff to eliminate discontinuities in the published history.
Source: Bureau of Labor Statistics; U.S. Census Bureau, Current Population Survey; Federal Reserve Board staff calculations.
Although employment disparities across many demographic groups are still near the historical lows reached during the post-pandemic recovery period, substantial gender, racial, ethnic, and geographic gaps in levels remain. For example, prime-age women are currently employed at a rate about 11 percentage points less than men, while prime-age Black and Hispanic workers are employed at a rate 3 to 5 percentage points less than white workers, largely reflecting long-standing structural factors.
Like employment, nominal wage growth has cooled a bit further over the past year as the labor market has come into better balance. Even so, with headline inflation declining, these nominal wage gains have translated into solid real wage increases for most groups. Earlier in the current expansion, the exceptionally tight labor market led to comparatively robust wage growth for lower-wage workers and historically disadvantaged groups. As shown in the top-left panel of figure C, real wage growth—as measured by the Federal Reserve Bank of Atlanta's Wage Growth Tracker and deflated by the personal consumption expenditures price index—was generally stronger for workers in the bottom half of the income distribution during the post-pandemic recovery through early 2024. This pattern was largely the result of labor demand outpacing labor supply in lower-wage service industries during the economic reopening, together with strong wage growth for job switchers, who tended to be relatively low-wage workers.6 Since late last year, however, real wage growth for workers in the bottom quartile of earners has fallen below that of workers in other earnings quartiles but remains relatively robust.7
Median real wage growth, by group
The data extend through April 2025. Series show 12-month moving averages of the median percent change in the hourly wage of individuals observed 12 months apart, deflated by the 12-month moving average of the 12-month percent change in the personal consumption expenditures price index. In the top-left panel, workers are assigned to wage quartiles based on the average of their wage reports in both Current Population Survey outgoing rotation group interviews; workers in the lowest 25 percent of the average wage distribution are assigned to the 1st quartile, and those in the top 25 percent are assigned to the 4th quartile.
Source: Federal Reserve Bank of Atlanta, Wage Growth Tracker; Bureau of Labor Statistics; U.S. Census Bureau, Current Population Survey; Federal Reserve Board staff calculations.
This pattern in wage growth across the income distribution is reflected in the experiences of different demographic and education groups. Wage growth for nonwhite workers was generally stronger than that for white workers from 2022 through mid-2024 but has been similar for these groups in recent months (figure C, top-right panel). Similarly, wage growth for workers with a high school diploma or less was strong relative to other groups in the tight post-pandemic labor market; however, as labor market conditions softened, wage growth for this group fell below that for college-educated workers in early 2024 and has edged down a bit further since the middle of last year (figure C, bottom-left panel). Finally, wages for men and women largely grew in tandem until the middle of last year, but real wage growth for women has been a bit stronger than that for men since mid-2024 (figure C, bottom-right panel).
Labor demand appears resilient...
Demand for labor has remained solid this year despite some further cooling. Job openings as measured in the Job Openings and Labor Turnover Survey (JOLTS) have edged down, on net, so far this year and are a touch lower than their average level last year. An alternative measure using job postings from the large online job board Indeed has also moved down somewhat this year and stands below its average level last year.
The gradual cooling in labor demand so far continues to be manifested as a slowdown in hiring rather than an increase in layoffs. The rate at which unemployed individuals find jobs each month from the Current Population Survey has moved lower, on net, over the past year, while the hiring rate from JOLTS has been little changed after having declined slowly from its peak in late 2021. Layoffs indicators, such as initial claims for unemployment insurance and the layoffs rate from JOLTS, were mostly little changed at low levels (figure 13).
Indicators of layoffs
The data for initial unemployment claims cover regular state programs, are reported as a 4-week moving average, and extend through June 7, 2025. The data for the Job Openings and Labor Turnover Survey (JOLTS) layoff rate are monthly and extend through April 2025. Series are truncated at the top of the figure in 2020 and 2021.
Source: Bureau of Labor Statistics via Haver Analytics; Department of Labor, Employment and Training Administration.
...while labor supply growth has slowed
At the same time, growth in the supply of labor—determined by both changes in the labor force participation rate (LFPR), which is the share of the population either working or seeking work, and growth of the working-age population—appears to have slowed since the middle of last year. The LFPR, at 62.4 percent in May, has continued to edge down slowly, on net, from its peak in mid-2023 (figure 14). However, participation rates for most age groups remain at or above 2019 levels other than for those aged 65 or older.
Labor force participation rate
Values before January 2024 are estimated by Federal Reserve Board staff to eliminate discontinuities in the published history.
Source: Bureau of Labor Statistics via Haver Analytics.
According to Census Bureau estimates, immigration increased strongly from 2022 through June 2024 and contributed to robust annual population growth over this period.4 While official Census Bureau immigration estimates are not yet available for the period after last June, other more timely indicators point to a sharp slowdown in immigration and population growth since then.5
The labor market appears to be about in balance
As labor demand has gradually eased over the past few years, a variety of measures suggest the labor market has moved into balance and is now less tight than just before the pandemic. For example, the gap between the total number of available jobs (measured by employed workers plus job openings) and the number of available workers (measured by the size of the labor force) was around 150,000 in May, far below its 2022 peak of 6.1 million and somewhat below its 2019 average of 1.2 million (figure 15). Similarly, the ratio of job openings to unemployed job seekers was 1.0 in May, well below its peak of 2.0 reached in 2022 and a little below its average of 1.2 in 2019. Additionally, the share of respondents to the Conference Board Consumer Confidence Survey who say that jobs are plentiful and the monthly percentage of the workforce that has quit their job as measured in JOLTS (an indicator of the availability of attractive job prospects) are somewhat below 2019 levels. Finally, the unemployment rate in May was about 1/2 percentage point higher than its 2019 average (but still below its average range over the past 50 years).
Available jobs versus available workers
Available jobs are employment plus job openings as of the end of the previous month. Available workers are the labor force. Data for employment and labor force before January 2024 are estimated by Federal Reserve Board staff to eliminate discontinuities in the published history.
Source: Bureau of Labor Statistics via Haver Analytics; Federal Reserve Board staff calculations.
Labor productivity has increased at a robust pace, with significant volatility
Labor productivity in the business sector increased 1.2 percent over the year ending in the first quarter of 2025 (figure 16).6 Productivity growth has swung widely since the onset of the pandemic, but looking through this volatility, average labor productivity since the fourth quarter of 2019 is estimated to have increased 1.8 percent per year, 0.3 percentage point faster than the average pace that prevailed over the previous business cycle between the fourth quarters of 2007 and 2019.7
U.S. labor productivity
The data are output per hour in the business sector.
Source: Bureau of Labor Statistics via Haver Analytics.
Wage growth has slowed but remains solid
As labor market tightness has eased further this year, nominal wage growth has continued to slow but remains solid (figure 17). Total hourly compensation for private-sector workers, as measured by the employment cost index, increased 3.4 percent over the 12 months ending in March and has gradually slowed from its peak increase of 5.5 percent in mid-2022. Other measures of labor compensation growth, such as average hourly earnings (a less comprehensive measure of compensation) and the Federal Reserve Bank of Atlanta's Wage Growth Tracker (which reports the median 12-month wage growth of individuals responding to the Current Population Survey), have flattened out in recent months but continued to slow over the past year from their peaks in 2022.
Measures of change in hourly compensation
For the Atlanta Fed's Wage Growth Tracker, the data are shown as a 3-month moving average of the 12-month percent change; for private-sector average hourly earnings, the data are 12-month percent changes; for the private-sector employment cost index, change is over the 12 months ending in the last month of each quarter.
Source: Bureau of Labor Statistics; Federal Reserve Bank of Atlanta, Wage Growth Tracker; all via Haver Analytics.
Despite this slowing, wage growth this year remains somewhat above its 2019 pace, in contrast with the indicators of labor market tightness that suggest the labor market is less tight this year than it was in 2019. One factor that could explain this extra strength might be the higher average productivity growth noted earlier.
With PCE prices having risen 2.1 percent during the 12 months through April, these wage measures suggest that most workers saw increases in the purchasing power of their wages over the past year. That said, the extent of these increases depends in part on workers' individual circumstances—because nominal wage changes vary significantly across industry and occupation and because households consume different baskets of goods than the one represented in the aggregate PCE price index. (For details on how real wage gains have differed across demographic groups, see the box "Employment and Earnings across Demographic Groups.")
Gross domestic product edged down in the first quarter, but growth in private domestic demand remained solid
After having increased at a solid pace last year, real GDP is reported to have edged down at an annual rate of 0.2 percent in the first quarter. Similarly, real gross domestic income, which measures the value of U.S. production from the flow of income it generates, declined slightly in the first quarter following robust growth last year (figure 18).
Change in real gross domestic product, gross domestic income, and private domestic final purchases
The key identifies bars in order from left to right. GDP is gross domestic product; GDI is gross domestic income; PDFP is private domestic final purchases.
Source: Bureau of Economic Analysis via Haver Analytics.
Although some of the pause in GDP growth in the first quarter reflects a decline in federal government purchases, most of it is due to a historic surge in imports that likely reflects a pull-forward of purchases of goods from abroad by households and businesses ahead of expected increases in tariffs. Imports are subtracted from the other spending flows in the GDP calculation to isolate the value-added of domestic production, and although it is possible that U.S. output declined in the first quarter while imports surged, it appears likely that reported GDP growth was understated. Specifically, the full increase in inventories owing to the surge in imports may not have been captured in the inventory source data.8 Moreover, the decline in GDP is at odds with other indicators of economic activity, including measures from the labor market and industrial production, which grew at solid rates in the first quarter.
In the manufacturing sector, output grew strongly in the first quarter, with especially large gains in industries that produce materials and supplies. This pattern suggests that producers may have pulled forward the production of inputs that are combined with imported inputs. Production then declined in April and May, on average, consistent with the net deterioration observed this year in manufacturing new orders and measures of sentiment in the sector, reflecting concerns that tariff increases will raise input costs, reduce exports, and lead to supply chain disruptions (figure 19).
Manufacturing new orders
The regional survey average comprises data from the Dallas Fed's Texas Manufacturing Outlook Survey, the Kansas City Fed's Survey of Tenth District Manufacturers, the New York Fed's Empire State Manufacturing Survey, the Philadelphia Fed's Manufacturing Business Outlook Survey, and the Richmond Fed's Fifth District Survey of Manufacturing Activity. ISM is Institute for Supply Management.
Source: Institute for Supply Management, Manufacturing Report on Business; Federal Reserve Bank of Dallas, Texas Manufacturing Outlook Survey; Federal Reserve Bank of Kansas City, Survey of Tenth District Manufacturers; Federal Reserve Bank of New York, Empire State Manufacturing Survey; Federal Reserve Bank of Philadelphia, Manufacturing Business Outlook Survey; Federal Reserve Bank of Richmond, Fifth District Survey of Manufacturing Activity; all via Haver Analytics.
Among measures of economic activity that tend to be less volatile than GDP, growth in private domestic final purchases—that is, consumer spending, business fixed investment, and residential investment—rose at a solid annual rate of 2.5 percent in the first quarter, somewhat below the rate observed last year but not an abrupt pause in growth. That said, while this measure is usually considered a better indicator of the underlying momentum in the economy than is GDP, some of its growth in the first quarter appears to have reflected businesses pulling forward their investment spending ahead of the expected increases in tariffs.
Consumer spending growth has eased this year
After rising at the robust rate of about 3 percent in 2023 and 2024, growth in consumer spending adjusted for inflation slowed in the first quarter of this year to a modest pace of around 1 percent (figure 20). The step-down in growth this year may reflect payback from the exceptionally strong growth in the second half of last year that was partly due to special factors.9 However, household fundamentals have softened somewhat and are consistent with more moderate growth in spending this year than last year. For example, growth in real disposable personal income has moderated further this year as job gains slowed, following very strong average growth of 3.5 percent per year in 2023 and 2024. The ratio of household wealth relative to income remains high and has been little changed, on net, since early last year, as weak house price growth has begun to weigh on the ratio, while swings in equity prices have caused it to fluctuate. The saving rate—the difference between current income and spending, as a share of income—remains somewhat below its pre-pandemic level (figure 21).
Change in real personal consumption expenditures
Source: Bureau of Economic Analysis via Haver Analytics.
Personal saving rate
The data extend through April 2025.
Source: Bureau of Economic Analysis via Haver Analytics.
More broadly, household balance sheets and finances appear to have largely returned to more normal levels this year, after having been bolstered during and after the pandemic by large fiscal transfers, the very tight labor market, and sizable increases in home and equity prices. The normalization of household balance sheets may suggest households are now less able to weather adverse shocks than they were a few years ago.
According to surveys, concerns over adverse shocks are apparently on the minds of consumers, as the frequency of references to tariff-driven inflation and expectations of slower job growth have risen notably this year, depressing consumer sentiment further from already low levels (figure 22). However, the magnitudes of decline in the headline measures have differed across surveys. Moreover, continuing a pattern from the past few years, consumer spending has been more resilient early this year than measures of consumer sentiment would suggest.
Indexes of consumer sentiment
Source: University of Michigan Surveys of Consumers; Conference Board.
Consumer financing conditions remain somewhat restrictive
Consumer financing conditions have remained somewhat restrictive this year, although financing has generally remained available to support spending for most households, other than those with low credit scores. However, growth in credit card and auto loan balances slowed slightly, on balance, during the first four months of this year relative to last year, partly reflecting borrowing costs that are still high and lending standards at commercial banks that are still tight (figure 23).
Consumer credit flows
Source: Federal Reserve Board, Statistical Release G.19, "Consumer Credit."
According to the April 2025 Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), conducted by the Federal Reserve Board, the level of lending standards at banks is estimated to have been tight, on balance, despite some net easing reported during the first quarter of this year.10 For auto loans and credit cards, tight lending standards likely reflect, in part, delinquency rates that have remained somewhat elevated relative to the pre-pandemic period, although delinquency rates for credit cards edged down in the fourth quarter of last year and the first quarter of this year. Also weighing on the credit access of some borrowers are the sharp declines in credit scores associated with the resumption of the reporting of student loan delinquencies to credit bureaus after the expiration of the on-ramp period.11
Residential investment growth has slowed this year
After rising moderately in 2024, residential investment has leveled off this year, as mortgage interest rates have flattened out at levels much higher than before and during the pandemic, and measures of builder sentiment have declined markedly on rising inventories of unsold homes under construction as well as concerns about rising costs from tariffs and a weaker growth outlook (figure 24).
Mortgage interest rates
The data are contract rates on 30-year, fixed-rate conventional home mortgage commitments and extend through June 11, 2025.
Source: Freddie Mac Primary Mortgage Market Survey via Haver Analytics.
Sales of both new and existing homes were little changed, on net, over the first four months of this year, although the relative strength of these markets continued to differ (figure 25). Existing home sales remained depressed, as high interest rates continue to weigh on affordability, mortgage financing conditions remain somewhat restrictive for some borrowers, and many homeowners who purchased or refinanced homes when fixed mortgage rates were lower appear unwilling to move and take out a new mortgage with a much higher rate. Indeed, a majority of outstanding mortgages still have interest rates below 4 percent, well below the prevailing 30-year fixed interest rate of 6.8 percent as of the middle of June (figure 26).
New and existing home sales
The data extend through April 2025. New and existing home sales include only single-family sales.
Source: For new home sales, U.S. Census Bureau; for existing home sales, National Association of Realtors; both via Haver Analytics.
Distribution of interest rates on outstanding mortgages
The data extend through April 2025. The sample only includes outstanding mortgages current on their payments.
Source: ICE, McDash®.
Series: Below 6 percent, below 5 percent, and below 4 percent Horizon: January 2011 to April 2025 Description: A line chart with three curves over January 2011 to April 2025. Units are percent, and the data are monthly. The below 6 percent series begins around 70 and rises over the time horizon until 2022, increasing the fastest between January 2011 and December 2014. The series is just below 85 in January 2014 and continues to gradually increase before reaching its peak of around 95 in May 2022. It then decreases steadily and ends slightly below 84 in April 2025. The below 5 percent series stays under the below 6 percent series and above the below 4 percent series over the entire horizon. The series begins slightly below 35 in January 2011 and increases at a steady rate, reaching 70 in June 2015. It then increases at a less substantial rate until September 2018, when it hits just below 82 before dipping to around 80 in early 2019. From there, the series rises to a peak of about 90 in April 2022 and then begins to decrease, ending a bit below 75 in April 2025. The below 4 percent series begins just under 10 in January 2011 and increases to about 35 by January 2014. From there, it moves up at a slower rate until hitting about 48 in late 2016 and fluctuating there through early 2018. The series then dips to around 43 in June 2019 before increasing again to a peak of 71 in March 2022. It then begins to decrease again and ends just above 58 percent in April 2025.
In contrast, sales of new homes bounced back more quickly and have been near pre-pandemic levels for the past few years, as the damping effects of high interest rates and a cooling labor market seem to have been about offset by builder incentives and higher demand from buyers who are unable to find homes in the existing home market. Accordingly, builders have maintained a strong pace of single-family housing starts, although the pace has declined a bit this year (figure 27). Reflecting some additional rebalancing in the housing market, in part from supply improvements and cooling demand, house price increases have slowed considerably this year (figure 28).
Private housing starts
The data extend through April 2025.
Source: U.S. Census Bureau via Haver Analytics.
Growth rate in house prices
The data for S&P CoreLogic Case-Shiller extend through March 2025, and the data for Cotality extend through April 2025.
Source: Cotality, Home Price Index; Zillow, Inc., Real Estate Data; S&P CoreLogic Case-Shiller U.S. National Home Price Index. The S&P CoreLogic Case-Shiller index is a product of S&P Dow Jones Indices LLC and/or its affiliates. (For Dow Jones Indices licensing information, see the Data Notes page.)
Meanwhile, starts of multifamily units—which are predominantly rental units—have moved sideways this year at a somewhat subdued pace, as rent growth has been modest amid rising vacancies, partly reflecting the delivery of new units to the housing market from the wave of multifamily construction projects that were started between 2021 and mid-2023.
Capital spending jumped in the first quarter...
After declining in the fourth quarter, business investment spending jumped in the first quarter, mostly reflecting a surge in equipment spending likely in anticipation of higher tariffs on imported capital goods (figure 29). Investment in software also posted a sizable gain in the first quarter. In contrast, investment in structures has remained relatively flat this year, albeit still at a relatively high level following the boom in manufacturing construction (especially for factories that produce semiconductors or electric vehicle batteries) in 2022 and 2023.
Change in real business fixed investment
Business fixed investment is known as "private nonresidential fixed investment" in the national income and product accounts. The key identifies bars in order from left to right.
Source: Bureau of Economic Analysis via Haver Analytics.
...but business sentiment has fallen, on net, this year
Measures of business sentiment and capital spending plans have fallen, on net, this year over concerns about tariffs and the rise in uncertainty, as noted in the Beige Book and in business surveys. However, measures of business uncertainty from financial markets, such as the one-month option-implied volatility on the S&P 500 index—the VIX—and corporate bond spreads, have moved back down after spiking in April, when trade policy tensions peaked. Rapid changes in sentiment and uncertainty measures this year have made them challenging to interpret, but deteriorations in sentiment and increases in uncertainty have damped business investment in the past. Weak sentiment and elevated uncertainty may weigh against other factors currently supporting business investment in equipment and intellectual property (which includes software as well as research and development), such as the need to outfit new manufacturing structures and data centers with high-tech equipment and rising investment demands of artificial intelligence technologies.
Business financing conditions remain somewhat restrictive, but credit remains generally available for larger firms
Businesses still face somewhat restrictive financing conditions, as interest rates have stayed elevated; however, credit has remained generally available to most nonfinancial corporations. Banks, on net, reported tighter lending standards for commercial and industrial (C&I) loans to large and middle-market firms in the first quarter relative to the end of last year, with levels of standards remaining tight. Despite a temporary slowdown following the trade policy announcements in April, total gross issuance of corporate bonds across credit categories and private credit remained solid, although issuance of speculative-grade bonds and leveraged loans continued to be subdued relative to the levels that prevailed at the start of the year.
For small businesses, which are more reliant on bank financing than large businesses, banks, on net, reported lending standards for C&I loans as unchanged in the first quarter, with the level of standards remaining tight. Other surveys similarly indicate that credit supply for small businesses has remained relatively tight, with interest rates on loans to small businesses remaining near the top of the range observed since 2008 despite the modest decreases observed over the past six months. Consistent with tight credit supply, loan originations continued to trend down early this year and are a touch below the level observed before the pandemic. Loan default rates and delinquency rates have moved down somewhat since last fall but remain above their pre-pandemic rates.
Imports surged in the first quarter
Real imports of goods and services surged at a historically high annual rate of 43 percent in the first quarter, reflecting jumps in imports of consumer goods and capital goods as well as sizable increases in imports of materials and supplies (figure 30). This surge arguably reflects that U.S. businesses pulled forward their imports in anticipation of higher tariffs in the coming months. Consistent with this motive, goods imports fell sharply in April after many tariffs were raised. Meanwhile, real goods exports increased moderately in the first quarter. Goods exports then rose further in April, largely due to a jump in gold exports. Reflecting the outsized jump in imports, net exports subtracted almost 5 percentage points from the annual rate of U.S. GDP growth in the first quarter, and the trade deficit as a share of GDP widened to 5.2 percent, well above the 3.3 percent share recorded in the second half of last year.
Change in real imports and exports of goods and services
The key identifies bars in order from left to right. Real imports were little changed in 2020.
Source: Bureau of Economic Analysis via Haver Analytics.
Federal fiscal policy actions provided a modest boost to GDP growth last year but have been a slight drag so far this year
Federal purchases grew moderately last year but declined in the first quarter of this year, as defense spending fell and real nondefense purchases edged down. The small decline in real nondefense federal purchases in the first quarter largely reflected the reductions in the federal workforce, including workers placed on administrative leave.12 Folding in the effects of tax policy as well as government transfer programs, which were relatively neutral on growth, the contribution of discretionary changes in federal fiscal policy moved from a modest boost to real GDP growth in 2024 to a slight drag in the first quarter of this year.
The budget deficit and federal debt remain elevated
In fiscal year 2024, the federal budget deficit—the difference between federal expenditures and receipts—was 6.4 percent of GDP, little changed since fiscal 2023 and notably larger than in the years before the pandemic (figure 31). The elevated federal budget deficit reflects higher noninterest outlays that have outpaced receipts and the rise in the cost of debt service because of higher interest rates and a higher level of debt. Despite large primary deficits, the ratio of federal debt held by the public to GDP has been about flat since 2021, close to the elevated ratio seen at the end of World War II, as the rise in debt since 2021 has been offset by strong nominal GDP growth (figure 32).
Federal receipts and expenditures
Through 2024, the receipts and expenditures data are on a unified-budget basis and are for fiscal years (October to September); gross domestic product (GDP) is for the 4 quarters ending in Q3. For 2025, receipts and expenditures are annualized for the first 8 months of the fiscal year; GDP is the average of 2024:Q4 and 2025:Q1.
Source: Department of the Treasury, Bureau of the Fiscal Service; Office of Management and Budget and Bureau of Economic Analysis via Haver Analytics.
Federal government debt and net interest outlays
Federal debt held by the public equals federal debt excluding most intragovernmental debt, evaluated at the end of the quarter. Net interest outlays are the cost of servicing the debt held by the public, offset by certain types of interest income the government receives. Through 2024, federal debt data, which begin in 1900, are on a fiscal year basis; net interest outlays data, which begin in 1948, are on a unified-budget basis and are for fiscal years (October to September); and gross domestic product (GDP) is for the 4 quarters ending in Q3. For 2025, federal debt and net interest outlays are annualized for the first 8 months of the fiscal year; GDP is the average of 2024:Q4 and 2025:Q1.
Source: For GDP, Bureau of Economic Analysis via Haver Analytics; for federal debt, Congressional Budget Office and Federal Reserve Board, Statistical Release Z.1, "Financial Accounts of the United States."
The fiscal position of most state and local governments remains in good shape...
State tax revenues grew modestly in 2024 following a decline in 2023, and the share of taxes as a percentage of GDP remained somewhat above historical norms (figure 33). Meanwhile, growth in spending by state and local governments moderated to a still-solid rate in 2024 following the strong pace in 2023, supported by generally strong budget positions. According to the National Association of State Budget Officers, states' total balances—that is, including rainy day fund balances and previous-year surplus funds—declined in fiscal 2024 from their all-time high in fiscal 2023 but remained well above pre-pandemic levels. At the local level, overall property tax receipts rose at a solid pace in 2024 and the beginning of 2025, and the typically long lags between changes in the market value of real estate and changes in taxable assessments suggest that—given past house price appreciation—property tax revenues as a share of GDP will maintain a healthy level going forward. That said, weakness in commercial real estate markets poses risks to tax collections in some locations.
State and local tax receipts
Receipts shown are year-over-year percent changes of 4-quarter moving averages beginning in 2012:Q4. Property taxes are primarily collected by local governments.
Source: U.S. Census Bureau, Quarterly Summary of State and Local Government Tax Revenue.
...contributing to above-average growth in employment and construction spending last year
State and local government employment growth has continued to moderate, but the average pace so far this year has still been strong (figure 34). Against the backdrop of continued strong budget positions, state and local government employment rebounded sharply from its decline during the pandemic, with growth peaking in 2023 as hiring and retention difficulties faded, in part because wages became more competitive with those in other sectors. Growth in employment has slowed gradually since 2023 as the level of employment has approached its pre-pandemic trend. Similarly, growth in real state and local government construction outlays moderated last year from its historically high pace in 2023 but remained strong, supported, in part, by federal infrastructure grants.
State and local government payroll employment
Source: Bureau of Labor Statistics via Haver Analytics.
Financial Developments
The expected path of the federal funds rate is notably lower for next year...
While market-based measures of the expected path of the federal funds rate fluctuated in response to investors' changing concerns about higher near-term inflation and downside risks to economic growth, the expected federal funds rate path at the end of this year was little changed. Beyond 2025, the market-implied path for the federal funds rate shifted notably lower. Taken together, financial market prices imply that the federal funds rate will decline more than 100 basis points from current levels to 3.3 percent by the end of 2026 (figure 35).
Market-implied federal funds rate path
The federal funds rate path is implied by quotes on overnight index swaps—a derivative contract tied to the effective federal funds rate. The implied path as of December 31, 2024, is compared with that as of June 16, 2025. The path is estimated with a spline approach, assuming a term premium of 0 basis points. The December 31, 2024, path extends through 2028:Q4 and the June 16, 2025, path through 2029:Q2.
Source: Bloomberg; Federal Reserve Board staff estimates.
...and yields on short- and medium-term U.S. nominal Treasury securities were moderately lower on net
Since the beginning of the year, yields on 2-, 5-, and 10-year nominal Treasury securities, on net, moved moderately lower (figure 36). The decline in yields of short- and medium-term Treasury securities reflected a significant decline in real yields, as measured by yields on Treasury Inflation-Protected Securities, that offset an increase in near-term inflation compensation. In contrast, yields of Treasury securities beyond the 10-year maturity increased slightly, on net, as the risk compensation required by investors to hold longer-term Treasury securities rose against the backdrop of changing investor perceptions of the economic outlook. In early April, on announcements of higher-than-expected tariffs, the 10-year Treasury yield rose even as stock prices dropped sharply and volatility spiked—a departure from typical flight-to-safety dynamics in which increases in broad risks tend to be accompanied by lower Treasury yields.
Yields on nominal Treasury securities
Source: Department of the Treasury via Haver Analytics.
Spreads widened modestly on other long-term debt
Spreads on corporate bonds over comparable-maturity Treasury securities, on net, widened modestly across the credit spectrum, consistent with somewhat increased concerns about the corporate outlook, and are currently below the 10th percentile of their respective historical distributions. Municipal bond spreads over comparable-maturity Treasury securities also widened moderately and are currently around the 30th percentile of the historical distribution. Corporate bond yields were little changed, on net, across credit categories and remained elevated (figure 37). Yields of municipal bonds increased moderately since the beginning of the year and also remain at elevated levels. Yields and spreads on agency mortgage-backed securities (MBS)—an important factor for home mortgage interest rates—were little changed and currently stand at similar levels to those observed in January (figure 38). Spreads remained elevated by historical standards, partly due to high interest rate volatility, which increases prepayment risk and reduces the value of holding MBS.
Corporate bond yields, by securities rating, and municipal bond yield
High-yield corporate reflects the effective yield of the ICE Bank of America Merrill Lynch (BofAML) High Yield Index (H0A0). Investment-grade corporate reflects the effective yield of the ICE BofAML triple-B U.S. Corporate Index (C0A4). Municipal reflects the yield to worst of the ICE BofAML U.S. Municipal Securities Index (U0A0).
Source: ICE Data Indices, LLC, used with permission.
Series: High-yield corporate, investment-grade corporate, and municipal Horizon: January 3, 2017, to June 16, 2025 Description: A line chart with three curves over January 3, 2017, to June 16, 2025. Units are percent, and the data are daily. The high-yield corporate series starts at 6 and increases to 8 by the end of 2018. The series gradually decreases to around 5 by the beginning of 2020, jumps to about 11 in early 2020, drops to around 4 by mid-2021, climbs to 9 by late 2022, and fluctuates between about 7 and 9 through the first half of 2025, ending at just above 7. The investment-grade corporate series starts slightly below 4, increases to a bit below 5 by the end of 2018, and declines to around 3 by the beginning of 2020. The series sharply increases to a bit above 5 in early 2020, falls to around 2 by early 2021, rises to about 6 by late 2022, fluctuates between 5 and 7 through late 2024, and hovers halfway between 5 and 6 for the first half of 2025. The municipal series, following a similar pattern, starts a bit below 3 and fluctuates between 2 and 3 before dropping below 2 from late 2019 through early 2020. The series then increases sharply to a bit below 3 in early 2020, decreases to about 1 by late 2021, and then moves up to just below 4 by late 2023. It drops slightly in early 2025 before ending a bit below 4 in mid-2025.
Yield and spread on agency mortgage-backed securities
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.
Source: Department of the Treasury; J.P. Morgan. Courtesy of J.P. Morgan Chase & Co., Copyright 2025.
Broad equity price indexes experienced sizable fluctuations
Broad equity price indexes experienced notable swings, with the largest moves occurring after April 2 in response to news about trade policy and the economic outlook. On net, the S&P 500 index was little changed since the beginning of the year (figure 39). The VIX rose dramatically in early April and reached levels not seen since March 2020 before mostly retracing (figure 40). On net, the VIX increased modestly since the beginning of the year. (For a discussion of financial stability issues, see the box "Developments Related to Financial Stability.") Prices of smaller stocks in the Russell 2000 index and consumer discretionary stocks, which may be particularly sensitive to an economic downturn, declined moderately. Bank equity prices were slightly higher over the first half of the year. Stock prices of consumer staple firms, which are seen as better able to withstand economic downturns, notably increased.
Equity prices
Source: S&P Dow Jones Indices LLC via Bloomberg. (For Dow Jones Indices licensing information, see the Data Notes page.)
Series: Dow Jones bank index and S&P 500 index Horizon: January 3, 2017, to June 16, 2025 Description: A line chart with two curves over January 3, 2017, to June 16, 2025. Units for both series have been indexed to 100 based on their respective values on December 31, 2019, and the data are daily. The Dow Jones bank index series starts slightly above 75 and rises to almost 100 by early 2018. The series fluctuates between about 70 and 100 until early 2020, when it plummets to about 50. The series rebounds to slightly below 115 by mid-2021, fluctuates between about 100 and 120 through early 2022, and then falls to a bit above 80 in mid-2022. It fluctuates between around 75 and 100 through late 2023 before rising steadily to its ending value of around 130. The S&P 500 index series starts around 70 and follows a similar trajectory until early 2020, when the gap between the two series sharply increases to and persists at about 25 until early 2023, widening to and remaining at around 50 through early 2025. The series finishes slightly above 185.
S&P 500 volatility
The VIX is an option-implied volatility measure that represents the expected annualized variability of 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.
Source: Cboe Volatility Index® (VIX®) via Bloomberg; LSEG Data & Analytics, DataScope; Federal Reserve Board staff estimates.
Series: VIX and expected volatility Horizon: January 2, 2015, to June 16, 2025 Description: A line chart with two curves over January 2, 2015, to June 16, 2025. Units are percent, and the data are daily. The VIX series starts slightly below 20 in 2015, spikes to about 40 in late 2015, and fluctuates between about 10 and 30 in 2016 and 2017. The series generally increases during 2018 aside from spikes to nearly 40 in February 2018 and December 2018 and declines to about 15 by the end of 2019. The series sharply shoots up to just below 85 in early 2020 and quickly decreases to about 20 by mid-2021, where it then stays relatively constant throughout 2021 before gradually increasing to around 30 in mid-2022. It continues fluctuating between about 20 and 35 through early 2023 and slides to slightly below 15 in mid-2023. After rising to a bit above 20 in late 2023, the series decreases to and stays at around 15 through mid-2024. It spikes to just below 40 in late 2024 and then fluctuates between about 15 and 30, jumping to around 50 in early 2025 before ending around 20. The expected volatility series follows a similar trajectory but with a magnitude about 5 to 10 points lower.
Developments Related to Financial Stability
This discussion reviews vulnerabilities in the U.S. financial system. The framework used by the Federal Reserve Board for assessing the resilience of the U.S. financial system focuses on financial vulnerabilities in four broad areas: asset valuations, business and household debt, leverage in the financial sector, and funding risks. The financial system weathered considerable market volatility in April amid heightened uncertainty following the announced changes to U.S. trade policy. Smoothing through this volatility, asset valuations remained high relative to fundamentals in a range of markets, including those for equities, corporate debt, and residential real estate. Total debt of households and nonfinancial businesses as a fraction of gross domestic product (GDP) continued to trend down and is now at its lowest level seen in the past two decades. With regard to financial leverage, the banking system remained sound and resilient, while outside the banking system, leverage at hedge funds remained at historically high levels. Vulnerabilities from funding risks improved somewhat since the start of the year, in part due to a reduction in banks' reliance on uninsured deposits.
Asset valuations experienced heightened volatility amid considerable uncertainty before returning to their high levels seen at the start of the year. On net, equity prices were little changed since the beginning of the year and, when measured relative to analysts' earnings forecasts, remained in the upper range of their historical distributions. Similarly, corporate bond spreads are only modestly wider now than at the beginning of the year. In residential property markets, home prices remained elevated, and the ratio of house prices to rents continued to be near the highest levels on record. In commercial real estate (CRE) markets, aggregate CRE prices measured in inflation-adjusted terms have shown signs of stabilizing recently after a period of decline following the pandemic.
Vulnerabilities arising from nonfinancial business and household debt remained moderate. The combined debt of both sectors as a share of GDP continued to trend down and is currently at its lowest level in over 20 years (figure A). While business debt has grown only modestly over the past few years, indicators of leverage for most publicly traded firms remained elevated relative to historical levels. That said, these firms appear well positioned to meet their debt obligations, as publicly traded firms rely more heavily on long-term, fixed-rate liabilities, which mute the pass-through of higher interest rates into debt-servicing costs. In the household sector, balance sheets remained strong, supported by near historically high homeowners' equity shares in their homes. However, delinquency rates on credit cards and auto loans were at levels somewhat above their historical medians and little changed relative to the start of the year, due largely to nonprime borrower performance.
Nonfinancial business and household debt-to-GDP ratios
GDP is gross domestic product.
Source: Federal Reserve Board, Statistical Release Z.1, "Financial Accounts of the United States"; Bureau of Economic Analysis, national income and product accounts; Federal Reserve Board staff calculations.
With regard to financial leverage, the banking sector remained sound and resilient overall. Regulatory measures of bank capital have been increasing and remained well above regulatory requirements, but fair value losses on fixed-rate assets remained sizable and market-adjusted measures continue to be sensitive to changes in long-term interest rates. The overall credit quality of banks' assets was sound, despite slight rises in delinquencies for commercial and industrial as well as CRE loans in the second half of 2024. Delinquencies of loans backed by office and multifamily properties remained elevated at global systemically important banks (G-SIBs) and large non–G-SIBs, although these banks tend to have more substantial loan loss allowances and appear to be positioned to manage potential losses. Outside the banking sector, indicators suggest that hedge fund leverage has likely decreased somewhat from historically high levels due to delevering associated with substantial losses on equity and certain relative value trades during April 2025. Meanwhile, leverage at broker-dealers remained near historical lows.
Vulnerabilities from funding risks declined since the start of the year and currently stand at a level that is in line with historical norms. In the banking system, aggregate liquidity remained ample and banks' reliance on uninsured deposits as a share of total funding has declined significantly since 2023. Moreover, reforms for prime money market funds (MMFs), implemented by the Securities and Exchange Commission in 2024, helped ease vulnerabilities at these funds over the course of the past year. That said, assets under management at other cash-investment vehicles that have similar vulnerabilities as prime MMFs continued to grow. Finally, life insurers continued to rely on a higher-than-average share of nontraditional liabilities as well as an increasing share of investments in less-liquid assets, such as collateralized loan obligations, alternative investments and leveraged loans, and commercial mortgage-backed securities.
Major asset markets functioned in an orderly manner, but liquidity remained low
Market functioning across Treasury, corporate bond, municipal bond, and equity markets was orderly, but a number of indicators suggest that liquidity remained low by historical standards. In early April, Treasury market functioning remained orderly, but liquidity fell notably to levels last seen in early 2023. Liquidity conditions in early April in equity, corporate bond, and municipal bond markets also materially deteriorated. Since early April, liquidity conditions across these financial markets improved, but conditions remain responsive to news about trade policy.
Short-term funding market conditions remained stable
Conditions in overnight bank funding and repurchase agreement markets were stable. Since the beginning of the year, the effective federal funds rate has remained 7 basis points below the interest rate on reserve balances. The Secured Overnight Financing Rate was slightly above the offering rate on the overnight reverse repurchase agreement (ON RRP) facility, except during short-lived periods of upward pressure on month-ends. Take-up at the ON RRP facility was little changed as investors weighed investing at the facility over purchasing Treasury bills or lending in private repurchase agreement markets. (See the box "Developments in the Federal Reserve's Balance Sheet and Money Markets.")
Assets under management of money market mutual funds (MMFs) remained near historical highs in June, as MMFs offered favorable yields relative to bank deposits. Meanwhile, MMFs, on net, shifted away from Treasury bills, for which net issuance decreased in recent months, to lending in Treasury repurchase agreement markets.
Bank credit expanded at a slow pace
Banks' core loan holdings grew during the first five months of the year, increasing at a 2.2 percent annualized rate, slightly higher than the fourth quarter of last year (figure 41). The muted loan growth likely reflects still-elevated interest rates and tight lending standards. Delinquency rates remained relatively stable during the first half of 2025. Commercial real estate loans, credit cards, and automobile delinquencies remained elevated relative to the pre-pandemic period. In contrast, delinquency rates for C&I loans remained in line with their pre-pandemic levels. Measures of bank profitability were little changed, on net, over the first half of this year, remaining below the levels that prevailed before the pandemic (figure 42).
Ratio of total commercial bank credit to nominal gross domestic product
Source: Federal Reserve Board, Statistical Release H.8, "Assets and Liabilities of Commercial Banks in the United States"; Bureau of Economic Analysis via Haver Analytics.
Profitability of bank holding companies
Source: Federal Reserve Board, Form FR Y-9C, Consolidated Financial Statements for Holding Companies.
International Developments
Foreign economic activity expanded at a moderate pace in the first quarter of 2025, but there are recent signs of cooling
Foreign GDP growth picked up a bit in the first quarter of 2025, supported in part by a surge in exports to the U.S. in anticipation of tariff hikes. In Europe, growth picked up in the first quarter, supported by exports in high-value sectors such as pharmaceuticals. Growth in many Asian economies remained robust last quarter, bolstered by strong manufacturing and high-tech exports. In China, first-quarter growth moderated but remained solid, supported by recent export strength and incremental policy stimulus.
More recent indicators, however, point to slowing growth abroad. In Europe, industrial production fell in April, partially retracing its sharp rise earlier in the year. Data on Chinese industrial production for April and May also show signs of cooling, while exports to the U.S. plummeted. Business conditions and confidence in many foreign economies have declined notably this year, consistent with weakening growth prospects abroad.
Inflation abroad eased further
Headline inflation moderated further in most foreign economies, as core inflation mostly held steady and energy prices had declined until recently. In many advanced foreign economies (AFEs) and Asian economies, inflation is running near central banks' targets (figure 43). In Latin America, inflation remains somewhat elevated amid persistent core and food price pressures, notably in Brazil. In contrast, price pressures remain very weak in China, with inflation hovering near zero, reflecting in part continued weakness in the country's property sector.
Consumer price inflation in foreign economies
The advanced foreign economy (AFE) aggregate is the average of Canada, the euro area, Japan, and the U.K., weighted by shares of U.S. non-oil goods imports. The emerging market economy (EME) aggregate is the average of Argentina, Brazil, Chile, Colombia, Hong Kong, India, Indonesia, Israel, Malaysia, Mexico, the Philippines, Russia, Saudi Arabia, Singapore, South Korea, Taiwan, Thailand, and Vietnam, weighted by shares of U.S. non-oil goods imports. The foreign aggregate is the import-weighted average of all aforementioned economies. The inflation measure is the Harmonised Index of Consumer Prices for the euro area and the consumer price index for the other economies. The data for China extend through April 2025, and the data for the foreign, EME, and AFE aggregates extend through March 2025.
Source: Federal Reserve Board staff calculations; Haver Analytics.
Several foreign central banks eased monetary policy further
Several foreign central banks, including the Bank of Canada, Bank of England, European Central Bank, as well as some emerging market central banks, continued to lower their policy rates this year, citing a deteriorating growth outlook and continued easing of inflationary pressures in their economies. The Bank of Japan has kept its rates on hold in recent months, after raising its policy rates early in the year. Policymakers at foreign central banks generally emphasized the need to maintain policy flexibility amid considerable uncertainty surrounding trade policy and its global economic effects.
Financial conditions abroad have been volatile but remained little changed on balance...
Since early 2025, short-term sovereign yields declined further in most AFEs, as several central banks in these jurisdictions lowered policy rates. Meanwhile, longer-term sovereign yields remained little changed in most AFEs but rose in Japan amid expectations for further monetary policy tightening (figure 44). Most AFE equity indexes were volatile amid trade policy uncertainty but rose, on net, relative to early 2025, as gains driven by an improved corporate earnings outlook in certain sectors were only partly tempered by concerns about foreign growth (figure 45).
Nominal 10-year government bond yields in selected advanced foreign economies
The data are weekly averages of daily benchmark yields and extend through June 13, 2025.
Source: Bloomberg.
Series: Germany, U.K., Canada, and Japan Horizon: January 4, 2019, to June 13, 2025 Description: A line chart with four curves over January 4, 2019, to June 13, 2025. The units are percent, and the data are weekly averages of daily benchmark yields. The curves for Germany, the U.K., Canada, and Japan all vary significantly at short time scales. The Germany series begins just above 0, decreases to around negative 0.5 by mid-2019, stays between 0 and negative 1 through 2021, and slowly rises to just over 0 in early 2022. The series then climbs to more than 2.5 by early 2023, approaching 3 before declining to around 2 at the end of 2023, and rebounds to just under 3 by March 2025 before falling back to around 2.5 by June 2025. The U.K. series begins slightly above 1, slumps to just above 0 by mid-2020, climbs steadily to about 2.5 by mid-2022, and then sharply increases to over 4 in late 2022. The series declines to about 3 in early 2023, rises to around 4.5 in mid-2023 before decreasing to about 3.5 by the end of 2023, climbs to 4.5 by the end of 2024, and hovers between about 4.5 and 5 before finishing around 4.5. The Canada series begins around 2, slides to about 0.5 by mid-2020, increases to about 1.5 by early 2021, and stays between 1 and 2 until early 2022, when it rises quickly and fluctuates between about 2.5 and 3.5 until mid-2023, increasing to around 4 before falling to just above 3 by year-end. The series rises to around 3.5 by mid-2024 and fluctuates between about 3 and 3.5 before ending a bit below 3.5. The Japan series begins around 0 and stays slightly below 0 in 2019 and slightly above 0 from 2020 through 2021 before rising gradually to about 0.5 by the beginning of 2023. The series stays at around 0.5 for the first half of 2023 before following a slightly bumpy rise to about 1 in mid-2024 and finishing around 1.5 in June 2025.
Equity indexes for selected foreign economies
The data are weekly averages of daily data and extend through June 13, 2025.
Source: For the euro area, Dow Jones Euro Stoxx Index; for Japan, Tokyo Stock Price Index; for China, Shanghai Composite Index; for the U.K., FTSE 100 Index; all via Bloomberg. (For Dow Jones Indices licensing information, see the Data Notes page.)
Series: Euro area, Japan, U.K., and China Horizon: January 4, 2019, to June 13, 2025 Description: A line chart with four curves over January 4, 2019, to June 13, 2025. The units are indexed with the week ending January 4, 2019, equal to 100, and the data are weekly averages of daily data. The euro-area series begins at 100, increases to nearly 130 before plunging to almost 80 in early 2020, climbs to nearly 150 by late 2021, and then drops to around 110 by late 2022. The series then rises to around 140 by mid-2023 before dropping to around 130 by late 2023 and fluctuates between about 140 and 160 over 2024. The series then rises to nearly 175 over the first three months of 2025, falls sharply to about 150 in April, and retraces and finishes slightly below 175 in mid-June. The Japan series tracks closely with that of the euro area through 2020, though the Japan series runs about 5 to 10 points lower in 2019. It then increases to and fluctuates between around 120 and 135 through 2022 before rising rapidly to around 160 by the end of 2023. The series then rises to about 195 by mid-2024, falls to around 160 before climbing to and hovering between about 175 and 185 through March 2025, drops sharply to a bit above 160 in April, and increases to and ends slightly above 185. The U.K. series also tracks closely with that of the euro area before 2020. The series drops to around 75 in early 2020, gradually rises to around 110 by the end of 2021, fluctuates between about 105 and 115 in 2022, and increases to and fluctuates between approximately 110 and 125 from 2023 through the end of 2024. It then climbs to about 130 in early 2025, drops to a bit above 115 in April, and retraces and finishes slightly above 130. The China series moves broadly in line with the other series before 2020 and rises slightly above the others through 2021, when it reaches a peak of nearly 150. The series then slowly declines through mid-2024, reaching a nadir of around 110 before rising sharply to just above 125, and fluctuates between about 125 and 135 through mid-2025, finishing just above 135.
Emerging market economies (EMEs) saw portfolio capital outflows and a widening in sovereign spreads through early April, but these moves have largely retraced since then.
...and the exchange value of the dollar has decreased
Since early 2025, the broad dollar index—a measure of the exchange value of the dollar against a trade-weighted basket of foreign currencies—decreased, on net, as changes in U.S. trade policy reportedly led investors to reassess U.S. growth prospects relative to other major economies (figure 46). The decline in the dollar index was broad based, with depreciations against the currencies of both advanced and emerging market economies. Nonetheless, relative to its historical average, the broad dollar index remains elevated in real terms.
U.S. dollar exchange rate index
The data, which are in foreign currency units per dollar, are weekly averages of daily values of the broad dollar index and extend through June 13, 2025. As indicated by the arrow, increases in the data reflect U.S. dollar appreciation and decreases reflect U.S. dollar depreciation.
Source: Federal Reserve Board, Statistical Release H.10, "Foreign Exchange Rates."
Footnotes
Monetary Policy
The Federal Open Market Committee held the federal funds rate steady
With the labor market at or near maximum employment, and inflation continuing to moderate toward 2 percent, the Federal Open Market Committee (FOMC) has maintained the target range for the federal funds rate at 4-1/4 to 4-1/2 percent since the beginning of the year figure 47. The FOMC's current stance of monetary policy leaves it well positioned to wait for more clarity on the outlook for inflation and economic activity and respond in a timely way to potential economic developments. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.
Selected interest rates
The 2-year and 10-year Treasury rates are the constant-maturity yields based on the most actively traded securities.
Source: Department of the Treasury; Federal Reserve Board.
The Federal Open Market Committee slowed the pace of decline of its holdings of Treasury securities
The FOMC began reducing its securities holdings in June 2022 and, since then, has continued to implement its plan for significantly reducing the size of the Federal Reserve's balance sheet in a predictable manner. Following its March 2025 meeting, the FOMC announced that the Committee would further slow the pace of decline of its Treasury securities holdings, effective April 1, by reducing the redemption cap on Treasury securities from $25 billion to $5 billion per month and maintaining the redemption cap on agency debt and agency mortgage-backed securities (MBS) at $35 billion per month. Any principal payments in excess of the agency debt and agency MBS cap are to be reinvested into Treasury securities, consistent with the FOMC's intention to hold primarily Treasury securities in the longer run. A slower pace of balance sheet runoff helps facilitate a smooth transition to ample reserve balances and gives the Committee more time to assess market conditions as the balance sheet continues to shrink. It will also allow banks, and short-term funding markets more generally, additional time to adjust to the lower level of reserves, thus reducing the probability that money markets experience undue stress that could require an early end to runoff. The decision to slow the pace of balance sheet runoff does not have implications for the stance of monetary policy and does not mean that the balance sheet will ultimately shrink by less than it would otherwise.
The System Open Market Account holdings of Treasury and agency securities have declined $176 billion since the beginning of the year to $6.7 trillion, a level equivalent to 22 percent of U.S. nominal gross domestic product (figure 48). Reserve balances—the largest liability item on the Federal Reserve's balance sheet—have increased $97 billion since the beginning of the year to a level of about $3.4 trillion. (See the box "Developments in the Federal Reserve's Balance Sheet and Money Markets.")
Federal Reserve assets and liabilities
"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 the U.S. Treasury General Account and the U.S. Treasury Supplementary Financing Account. The key identifies shaded areas in order from top to bottom. The data extend through June 11, 2025.
Source: Federal Reserve Board, Statistical Release H.4.1, "Factors Affecting Reserve Balances."
The FOMC has stated that it intends to maintain securities holdings at amounts consistent with implementing monetary policy efficiently and effectively in its ample-reserves regime. To ensure a smooth transition to ample reserve balances, the FOMC slowed the pace of decline of its securities holdings in June 2024 and in April 2025, and it intends to stop reductions in its securities holdings when reserve balances are somewhat above the level that it judges to be consistent with ample reserves. Once balance sheet runoff has ceased, reserve balances will likely continue to decline at a slower pace—reflecting growth in other Federal Reserve liabilities—until the FOMC judges that reserve balances are at an ample level. Thereafter, the FOMC will manage securities holdings as needed to maintain ample reserves over time.
Developments in the Federal Reserve's Balance Sheet and Money Markets
The Federal Open Market Committee (FOMC) continued to reduce the size of the Federal Reserve's System Open Market Account (SOMA) portfolio. Since early January 2025, total Federal Reserve assets have decreased $176 billion, leaving the total size of the balance sheet at $6.7 trillion, $2.2 trillion smaller since the reduction in the size of the SOMA portfolio began in June 2022 (table A and figure A).1 On March 19, the FOMC announced that the Committee would further slow the pace of decline in its securities holdings beginning in April, consistent with the Committee's Plans for Reducing the Size of the Federal Reserve's Balance Sheet.2
Table A. Balance sheet comparison
Billions of dollars
Federal Reserve assets
The data are weekly and extend through June 11, 2025. MBS is mortgage-backed securities. The key identifies shaded areas in order from top to bottom.
Source: Federal Reserve Board, Statistical Release H.4.1, "Factors Affecting Reserve Balances."
Loans extended under the Bank Term Funding Program (BTFP)—which made term funding available to eligible depository institutions amid the banking-sector stress of spring 2023 to help ensure the stability of the banking system and the ongoing provision of credit to the economy—were all repaid as of early March.3
Reserves, the largest liability item on the Federal Reserve's balance sheet, have increased $97 billion since early January 2025 to a level of about $3.4 trillion.4 The increase in reserves was due to a $344 billion decline in the Treasury General Account (TGA). Since the beginning of balance sheet runoff, reserves have increased by $72 billion, on net, as the reserve-draining effect of balance sheet runoff was offset by the decline in the TGA and a $1.8 trillion decline in balances at the overnight reverse repurchase agreement (ON RRP) facility. Reduced usage of the ON RRP facility largely reflects money market mutual funds shifting their portfolios toward higher-yielding investments, including Treasury bills and private-market repurchase agreements, although the decline has slowed in recent months amid reduced Treasury bill supply. Since early January 2025, usage of the ON RRP facility was little changed, on net, and currently stands at around $200 billion (figure B).
Federal Reserve liabilities
The data are weekly and extend through June 11, 2025. "Capital and other liabilities" includes the liability for earnings remittances due to the U.S. Treasury and contributions from the U.S. Treasury; the sum is negative from June 2023 onward because of the deferred asset that the Federal Reserve reports. The key identifies shaded areas in order from top to bottom.
Source: Federal Reserve Board, Statistical Release H.4.1, "Factors Affecting Reserve Balances."
Conditions in overnight money markets remained stable. The ON RRP facility continued to serve its intended purpose of supporting the control of the effective federal funds rate (EFFR), and the Federal Reserve's administered rates—the interest rate on reserve balances and the ON RRP offering rate—remained highly effective at maintaining the EFFR within the target range.
The Federal Reserve's expenses have continued to exceed its income in recent months, causing its deferred asset to increase $15 billion since early January to a level of around $232 billion.5 Negative net income and the associated deferred asset do not affect the Federal Reserve's conduct of monetary policy or its ability to meet its financial obligations.6
The Federal Open Market Committee will continue to monitor the implications of incoming information for the economic outlook
The FOMC is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the FOMC will carefully assess incoming data, the evolving outlook, and the balance of risks. Its assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
In addition to considering a wide range of economic and financial data, the FOMC gathers information from business contacts and other informed parties around the country, as summarized, for instance, in the Beige Book. The Federal Reserve also regularly hears from a broad range of participants in the U.S. economy about how monetary policy affects people's daily lives and livelihoods. In particular, the Federal Reserve has continued to gather insights into these matters through the Fed Listens initiative and the Federal Reserve System's community development outreach.13
The FOMC continued its discussions related to the review of the Federal Reserve's monetary policy framework at each of its meetings this year. These discussions covered topics related to the labor market, inflation dynamics, and uncertainty. The review featured public events involving a wide range of parties around the country, including through the Fed Listens initiative and a research conference in Washington, D.C., that was held in May.14 The Committee intends to conclude its review by late summer and to report the outcomes of the review at that time.
Policymakers routinely consult prescriptions for the policy interest rate provided by various monetary policy rules. These rule prescriptions can provide useful benchmarks for the consideration of monetary policy. However, simple rules cannot capture all of the complex considerations that go into the formation of appropriate monetary policy, and many practical considerations make it undesirable for the FOMC to adhere strictly to the prescriptions of any specific rule. Nevertheless, some principles of good monetary policy can be brought out by examining these simple rules. (See the box "Monetary Policy Rules in the Current Environment.")
Monetary Policy Rules in the Current Environment
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 inflation from its target value and a measure of resource slack in the economy. As part of their monetary policy deliberations, policymakers regularly consult the prescriptions of a variety of simple interest rate rules without mechanically following the prescriptions of any particular rule.
Available data on employment and inflation have indicated that the labor market remained solid and that inflation continued to ease in the first part of the year. However, the four-quarter change in core personal consumption expenditures (PCE) prices in the first quarter of this year was little different from the fourth quarter of last year, and most simple policy rules considered here called for levels of the policy rate in the first quarter of this year that were little changed from the end of last year. In support of its goals of maximum employment and inflation at the rate of 2 percent over the longer run, the Federal Open Market Committee (FOMC) has maintained the target range for the federal funds rate at 4-1/4 to 4-1/2 percent while continuing to reduce its holdings of Treasury securities and agency debt and agency mortgage-backed securities.
Selected Policy Rules: Descriptions
In many economic models, desirable economic outcomes can be achieved over time if monetary policy responds to changes in economic conditions in a manner that is predictable and adheres to some key design principles. 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 "first difference" rule.1 Table A shows these rules, along with a "balanced approach (shortfalls)" rule, which responds to the unemployment rate only when it is higher than its estimated longer-run level. All of the simple rules shown embody key design principles of good monetary policy, including the requirement that the policy rate should be adjusted by enough over time to ensure a return of inflation to the central bank's longer-run objective and to anchor longer-term inflation expectations at levels consistent with that objective.
Table A. Monetary policy rules
All five rules feature the difference between inflation and the FOMC's longer-run objective of 2 percent.2 The five rules use the unemployment rate gap, measured as the difference between an estimate of the rate of unemployment in the longer run ($$ u_t^{LR}$$) and the current unemployment rate; the first-difference rule includes the change in the unemployment rate gap rather than its level.3 All but the first-difference rule include an estimate of the neutral real interest rate in the longer run ($$ r_t^{LR}$$).4
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 (ELB). By contrast, the standard Taylor (1993) rule prescribed policy rates that, during the pandemic-induced recession, were far below zero. To make up for the cumulative shortfall in policy accommodation following a recession during which the federal funds rate is constrained by its ELB, the adjusted Taylor (1993) rule prescribes delaying the return of the policy rate to the (positive) levels prescribed by the standard Taylor (1993) rule.
Policy Rules: Limitations
As benchmarks for monetary policy, simple policy rules have important limitations. One of these limitations is that the simple policy rules mechanically 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. In addition, the structure of the economy and current economic conditions differ in important respects from those prevailing when the simple policy rules were originally devised and proposed. Relatedly, the prescriptions of the rules incorporate values of the unemployment rate in the longer run and the neutral real interest rate in the longer run, which are economic concepts that are not only difficult to measure, but can also change over time as the economy evolves. Finally, simple policy rules are not forward-looking and do not allow for important risk-management considerations, associated with uncertainty about economic relationships and the evolution of the economy, that factor into FOMC decisions. In particular, the responses of the rules to the unemployment rate gap and the deviation of inflation from 2 percent do not take into account the potentially different time horizons over which these two gaps are anticipated to close.
Selected Policy Rules: Prescriptions
Figure A shows historical prescriptions for the federal funds rate under the five simple rules considered together with the target federal funds rate. For each quarterly period, the figure reports the policy rates prescribed by the rules, taking as given the prevailing economic conditions and survey-based estimates of $$ u_t^{LR}$$ and $$ r_t^{LR}$$ at the time. All of the rules considered called for highly accommodative monetary policy in response to the pandemic-driven recession, followed by tighter policy as inflation picked up and labor market conditions strengthened. Starting around 2023, the policy rates prescribed by the rules declined as inflation eased and the unemployment rate increased somewhat. The prescriptions of most of the rules were somewhat below the target range for the federal funds rate for some time. Now, however, the latest prescriptions from these rules are within the current target range for the federal funds rate of 4-1/4 to 4-1/2 percent except for the first-difference rule, which prescribes a somewhat higher policy rate.
Historical federal funds rate prescriptions from simple policy rules
The rules use historical values of core personal consumption expenditures (PCE) inflation, the unemployment rate, and, where applicable, the midpoint of the target range for the federal funds rate constructed as the average of the lower and upper limits of the target range. Quarterly projections of longer-run values for the federal funds rate, the unemployment rate, and inflation used in the computation of the rules' prescriptions are interpolations to quarterly values of projections from the Survey of Market Expectations. The rules' prescriptions 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.
Source: For core PCE inflation, PCEPILFE; for the unemployment rate, UNRATE; for the lower and upper limits of the federal funds target range, DFEDTARL and DFEDTARU, respectively; all from Federal Reserve Bank of St. Louis, Federal Reserve Economic Data; Federal Reserve Bank of New York, Survey of Market Expectations; Federal Reserve Board staff estimates.
Footnotes
Summary of Economic Projections
The following material was released after the conclusion of the June 17–18, 2025, meeting of the Federal Open Market Committee. The following material was released after the conclusion of the June 17–18, 2025, meeting of the Federal Open Market Committee.
In conjunction with the Federal Open Market Committee (FOMC) meeting held on June 17–18, 2025, meeting participants submitted their projections of the most likely outcomes for real gross domestic product (GDP) growth, the unemployment rate, and inflation for each year from 2025 to 2027 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 affect 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 defined as the future path of policy that each participant deems most likely to foster outcomes for economic activity and inflation that best satisfy his or her individual interpretation of the statutory mandate to promote maximum employment and price stability.
Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual assumptions of projected appropriate monetary policy, June 2025
Percent
Medians, central tendencies, and ranges of economic projections, 2025–27 and over the longer run
Definitions of variables and other explanations are in the notes to table 1. The data for the actual values of the variables are annual.
FOMC participants' assessments of appropriate monetary policy: Midpoint of target range or target level for the federal funds rate
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 specified calendar year or over the longer run.
Distribution of participants' projections for the change in real GDP, 2025–27 and over the longer run
Definitions of variables and other explanations are in the notes to table 1.
Distribution of participants' projections for the unemployment rate, 2025–27 and over the longer run
Definitions of variables and other explanations are in the notes to table 1.
Distribution of participants' projections for PCE inflation, 2025–27 and over the longer run
Definitions of variables and other explanations are in the notes to table 1.
Distribution of participants' projections for core PCE inflation, 2025–27
Definitions of variables and other explanations are in the notes to table 1.
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, 2025–27 and over the longer run
Definitions of variables and other explanations are in the notes to table 1.
Uncertainty and risks in projections of GDP growth
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 confidence 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 differ from those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect 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 confidence 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 confidence interval around their projections as approximately symmetric. For definitions of uncertainty and risks in economic projections, see the box "Forecast Uncertainty."
Uncertainty and risks in projections of the unemployment rate
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 confidence 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 differ from those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect 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 confidence 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 confidence interval around their projections as approximately symmetric. For definitions of uncertainty and risks in economic projections, see the box "Forecast Uncertainty."
Uncertainty and risks in projections of PCE inflation
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 confidence 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 differ from those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect 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 confidence 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 confidence interval around their projections as approximately symmetric. For definitions of uncertainty and risks in economic projections, see the box "Forecast Uncertainty."
Diffusion indexes of participants' uncertainty assessments
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 diffusion 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.
Diffusion indexes of participants' risk weightings
For each SEP, participants provided responses to the question "Please indicate your judgment of the risk weighting around your projections." Each point in the diffusion 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.
Uncertainty and risks in projections of the federal funds rate
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 confidence 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 confidence 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 offset the effects of shocks to the economy.
Table 2. Average Historical Projection Error Ranges
Percentage points
Forecast Uncertainty
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 reported in table 2 would imply a probability of about 70 percent that actual GDP would expand within a range of 1.3 to 4.7 percent in the current year, 1.2 to 4.8 percent in the second year, and 0.8 to 5.2 percent in the third year. The corresponding 70 percent confidence intervals for overall inflation would be 1.0 to 3.0 percent in the current year, 0.3 to 3.7 percent in the second year, and 0.6 to 3.4 percent in the third year. Figures 4.A through 4.C illustrate these confidence bounds in "fan charts" that are symmetric and centered on the medians of FOMC participants' projections for GDP growth, the unemployment rate, and inflation. 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 reflected in the widths of the confidence intervals shown in the top panels of figures 4.A through 4.C. Participants' current assessments of the uncertainty surrounding their projections are summarized in the bottom-left panels of those figures. 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 figures 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 figures 4.A through 4.C.
As with real activity and inflation, 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 inflation 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 final line in table 2 shows the error ranges for forecasts of short-term interest rates. They suggest that the historical confidence intervals associated with projections of the federal funds rate are quite wide. It should be noted, however, that these confidence 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 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 confidence 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 figure 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 figures 4.A through 4.C provide information on the uncertainty around the economic projections, figure 1 provides information on the range of views across FOMC participants. A comparison of figure 1 with figures 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.
Statement on Longer-Run Goals and Monetary Policy Strategy
The Federal Open Market Committee (FOMC) is firmly committed to fulfilling 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 financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.
Employment, inflation, and long-term interest rates fluctuate over time in response to economic and financial 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 effective lower bound more frequently than in the past. Owing in part to the proximity of interest rates to the effective lower bound, the Committee judges that downward risks to employment and inflation 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 affect the structure and dynamics of the labor market. Consequently, it would not be appropriate to specify a fixed 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 inflation 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 inflation. The Committee reaffirms its judgment that inflation 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 inflation 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 significant economic disturbances. In order to anchor longer-term inflation expectations at this level, the Committee seeks to achieve inflation that averages 2 percent over time, and therefore judges that, following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.
Monetary policy actions tend to influence 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 inflation from its longer-run goal. Moreover, sustainably achieving maximum employment and price stability depends on a stable financial system. Therefore, the Committee's policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee's goals.
The Committee's employment and inflation 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 inflation deviations and the potentially different time horizons over which employment and inflation 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.