For use at 11: 00 a. m. EST February 22, 2019 MONETARY POLICY REPORT February 22, 2019 Board of Governors of the Federal Reserve System
Board of Governors of the Federal Reserve System For use at 11:00 a.m., EST February 22, 2019 Monetary Policy rePort February 22, 2019
LETTER OF TRANSMITTAL BOAR FEDERAL RESERVE SYSTEM Washington, D. C, February 22, 2019 THE PRESIDENT OF THE SENATE THE SPEAKER OF THE HOUSE OF REPRESENTATIVES The Board of Governors is pleased to submit its Monetary Policy Report pursuant to section 2B of the Federal Reserve act Sincerely, Jerome h. Powell. Chairman
Letter of transmittaL Board of Governors of the Federal Reserve System Washington, D.C., February 22, 2019 The President of the Senate The Speaker of the House of Representatives The Board of Governors is pleased to submit its Monetary Policy Report pursuant to section 2B of the Federal Reserve Act. Sincerely, Jerome H. Powell, Chairman
STATEMENT ON LONGER-RUN GOALS AND MONETARY POLICY STRATEGY Adopted effective January 24, 2012, as amended effective January 29, 2019 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. Inflation, employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. 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 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 would be concerned if inflation were running persistently above or below this objective. Communicating this symmetric inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances. The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committees policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a vide range of indicators in making these assessments. Information about Committee participants estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMCs Summary of Economic Projections. For example, in the most recent projections, the median of FoMC participants' estimates of the longer-run normal rate of unemployment was 4.4 percent In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee's assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially differen time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate The Committee intends to reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January
Adopted effective January 24, 2012; as amended effective January 29, 2019 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. Inflation, employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee’s policy decisions reflect its longer-run goals, its mediumterm 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 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 would be concerned if inflation were running persistently above or below this objective. Communicating this symmetric inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee’s ability to promote maximum employment in the face of significant economic disturbances. The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. 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 maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants’ estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC’s Summary of Economic Projections. For example, in the most recent projections, the median of FOMC participants’ estimates of the longer-run normal rate of unemployment was 4.4 percent. In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee’s assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the 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 reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January. Statement on Longer-Run Goals and Monetary Policy Strategy
CONTENTS Summary∴ Economic and Financial Developments Monetary Polic Special Topics Part 1: Recent Economic and Financial Developments Domestic Developments Financial Developments International Developments Part2: Monetary Policy∴∴…∴∴…∴∴……∴∴…∴………33 Part 3: Summary of Economic Projections 47 The Outlook for Economic Activity The Outlook for Inflation Appropriate Monetary Policy Uncertainty and risks 51 Abbreviations List of boxes Employment Disparities between Rural and Urban Areas Developments Related to Financial Stability Monetary Policy Rules and Systematic Monetary Policy The Role of Liabilities in Determining the Size of the Federal Reserves Balance Sheet 41 Federal Reserve Transparency: Rationale and New Initiatives Forecast Uncertainty NOTE: This report reflects information that was publicly available as of noon EST on February 21, 2019 data, January 2019; and, for quarterly data, 2018: Q4 In bar charts, except as noted, the change for a given period is measured to its final quarter from the final quarter of the preceding period For figures 16 and 34, note that the S&P 500 Index and the Dow Jones Bank Index are products of S&P Dow Jones Indices LLC and/or its affiliates and ive been licensed for use by the Board. Copyright o 2019 S&P Dow Jones Indices LLC, a division of S&P Global, and/or its affiliates. All rights reserved Redistribution, reproduction, andor photocopying in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more informationonanyofS&pDowJonesIndicesLlCsindicespleasevisitwww.spdjicom.S&pbisaregisteredtrademarkofStandard&PoorsFinancial ervices LLC, and Dow Jones( is a registered trademark of Do Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any or warranty, express or implied, as to the ability of any index to curately represent the asset class or market sector that it purports to represent, and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein
Contents Note: This report reflects information that was publicly available as of noon EST on February 21, 2019. Unless otherwise stated, the time series in the figures extend through, for daily data, February 20, 2019; for monthly data, January 2019; and, for quarterly data, 2018:Q4. In bar charts, except as noted, the change for a given period is measured to its final quarter from the final quarter of the preceding period. For figures 16 and 34, note that the S&P 500 Index and the Dow Jones Bank Index are products of S&P Dow Jones Indices LLC and/or its affiliates and have been licensed for use by the Board. Copyright © 2019 S&P Dow Jones Indices LLC, a division of S&P Global, and/or its affiliates. All rights reserved. Redistribution, reproduction, and/or photocopying in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spdji.com. S&P® is a registered trademark of Standard & Poor’s Financial Services LLC, and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent, and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein. Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Economic and Financial Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Monetary Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Special Topics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Part 1: Recent Economic and Financial Developments. . . . . . . . . . . . . . . . . 5 Domestic Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Financial Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 International Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Part 2: Monetary Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Part 3: Summary of Economic Projections. . . . . . . . . . . . . . . . . . . . . . . . . 47 The Outlook for Economic Activity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 The Outlook for Inflation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Appropriate Monetary Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Uncertainty and Risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Abbreviations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 List of Boxes Employment Disparities between Rural and Urban Areas. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Developments Related to Financial Stability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Monetary Policy Rules and Systematic Monetary Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 The Role of Liabilities in Determining the Size of the Federal Reserve’s Balance Sheet. . . . . . 41 Federal Reserve Transparency: Rationale and New Initiatives. . . . . . . . . . . . . . . . . . . . . . . . . 45 Forecast Uncertainty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
SUMMARY Economic activity in the United States year to an estimated 1. 7 percent in December, appears to have increased at a solid pace, on restrained by recent declines in consumer balance over the second half of 2018. and the energy prices. The 12-month measure of labor market strengthened further. Inflation infiation that excludes food and energy items has been near the Federal Open Market (so-called core inflation), which historically Committee's(FOMC) longer-run objective has been a better indicator of where overall of 2 percent, aside from the transitory effects inflation will be in the future than the headline of recent energy price movements. In this measure that includes those items, is estimated environment, the FOMC judged that, on to have been 1.9 percent in December-up balance, current and prospective economic /4 percentage point from a year ago. Survey conditions called for a further gradual removal based measures of longer-run inflation of policy accommodation. In particular, the expectations have generally been stable, FOMC raised the target range for the federal though market-based measures of inflation funds rate twice in the second half of 2018 compensation have moved down some since utting its level at 274 to 27/2 percent following the first half of 2018 the December meeting. In light of softer global economic and financial conditions late Economic growth. Available indicators suggest in the year and muted inflation pressures, the that real gross domestic product(GDP) FOMC indicated at its January meeting that increased at a solid rate. on balance. in the it will be patient as it determines what future second half of last year and rose a little under adjustments to the federal funds rate may 3 percent for the year as a whole-a noticeable be appropriate to support the Committee's pickup from the pace in recent years. congressionally mandated objectives of onsumer spending expanded at a strong maximum employment and price stability. rate for most of the second half, supported by robust job gains, past increases in household Economic and financial wealth, and higher disposable income due in Developments part to the Tax Cuts and Jobs Act, though spending appears to have weakened toward The labor market. The labor market has year-end. Business investment grew as well continued to strengthen since the middle of though growth seems to have slowed somewhat last year. Payroll employment growth has housing market activity declined last yedr g from a sizable gain in the first half remained strong, averaging 224,000 per month since June 2018. The unemployment rate amid rising mortgage interest rates and higher has been about unchanged over this period material and labor costs. Indicators of both averaging a little under 4 percent-a low level consumer and business sentiment remain by historical standards-while the labor force at favorable levels. but some measures have participation rate has moved up despite the softened since the fall, likely a reflection of ongoing downward influence from an aging financial market volatility and increased population. was ge growth has also picked concerns about the global outlook. up recentl Financial conditions. Domestic financial Inflation. Consumer price inflation, as conditions for businesses and households have measured by the 12-month change in the price become less supportive of economic growth index for personal consumption expenditures since July. Financial market participants moved down from a little above the fomcs appetite for risk deteriorated markedly in the objective of 2 percent in the middle of last latter part of last year amid investor concerns
1 summary Economic activity in the United States appears to have increased at a solid pace, on balance, over the second half of 2018, and the labor market strengthened further. Inflation has been near the Federal Open Market Committee’s (FOMC) longer-run objective of 2 percent, aside from the transitory effects of recent energy price movements. In this environment, the FOMC judged that, on balance, current and prospective economic conditions called for a further gradual removal of policy accommodation. In particular, the FOMC raised the target range for the federal funds rate twice in the second half of 2018, putting its level at 2¼ to 2½ percent following the December meeting. In light of softer global economic and financial conditions late in the year and muted inflation pressures, the FOMC indicated at its January meeting that it will be patient as it determines what future adjustments to the federal funds rate may be appropriate to support the Committee’s congressionally mandated objectives of maximum employment and price stability. Economic and Financial Developments The labor market. The labor market has continued to strengthen since the middle of last year. Payroll employment growth has remained strong, averaging 224,000 per month since June 2018. The unemployment rate has been about unchanged over this period, averaging a little under 4 percent—a low level by historical standards—while the labor force participation rate has moved up despite the ongoing downward influence from an aging population. Wage growth has also picked up recently. Inflation. Consumer price inflation, as measured by the 12-month change in the price index for personal consumption expenditures, moved down from a little above the FOMC’s objective of 2 percent in the middle of last year to an estimated 1.7 percent in December, restrained by recent declines in consumer energy prices. The 12-month measure of inflation that excludes food and energy items (so-called core inflation), which historically has been a better indicator of where overall inflation will be in the future than the headline measure that includes those items, is estimated to have been 1.9 percent in December—up ¼ percentage point from a year ago. Surveybased measures of longer-run inflation expectations have generally been stable, though market-based measures of inflation compensation have moved down some since the first half of 2018. Economic growth. Available indicators suggest that real gross domestic product (GDP) increased at a solid rate, on balance, in the second half of last year and rose a little under 3 percent for the year as a whole—a noticeable pickup from the pace in recent years. Consumer spending expanded at a strong rate for most of the second half, supported by robust job gains, past increases in household wealth, and higher disposable income due in part to the Tax Cuts and Jobs Act, though spending appears to have weakened toward year-end. Business investment grew as well, though growth seems to have slowed somewhat from a sizable gain in the first half. However, housing market activity declined last year amid rising mortgage interest rates and higher material and labor costs. Indicators of both consumer and business sentiment remain at favorable levels, but some measures have softened since the fall, likely a reflection of financial market volatility and increased concerns about the global outlook. Financial conditions. Domestic financial conditions for businesses and households have become less supportive of economic growth since July. Financial market participants’ appetite for risk deteriorated markedly in the latter part of last year amid investor concerns
2 SUMMARY about downside risks to the growth outlook International Developments. Foreign economic and rising trade tensions between the United growth stepped down significantly last year States and China. As a result, Treasury yields from the brisk pace in 2017. Aggregate growth and risky asset prices declined substantially in the advanced foreign economies slowed between early October and late December markedly, especially in the euro area, and the midst of heightened volatility, although several latin American economies continued those moves partially retraced early this year. to underperform. The pace of economic On balance since July, the expected path of the activity in China slowed noticeably in the federal funds rate over the next several years second half of 2018. Inflation pressures in shifted down, long-term Treasury yields and major advanced foreign economies rema mortgage rates moved lower, broad measures subdued, prompting central banks to maintain of U.S. equity prices increased somewhat, accommodative monetary policies. and spreads of yields on corporate bonds over those on comparable-maturity Treasury Financial conditions abroad tightened in the securities widened modestly Credit to large second half of 2018, in part reflecting political nonfinancial firms remained solid in the second uncertainty in Europe and Latin America, half of 2018: corporate bond issuance slowed trade policy developments in the United States considerably toward the end of the year but and its trading partners, as well as concerns has rebounded since then. Despite increases about moderating global growth. Although in interest rates for consumer loans, consumer financial conditions abroad improved in recent credit expanded at a solid pace, and financing weeks, alongside those in the United States, on conditions for consumers largely remain balance since July 2018, global equity prices supportive of growth in household spending were lower, sovereign yields in many economies The foreign exchange value of the U.S. dollar declined, and sovereign credit spreads in the strengthened slightly against the currencies of European periphery and the most vulnerable the U.s. economy's trading partners emerging market economies increased somewhat Market-implied paths of policy rates in advanced foreign economies generally Financial stability. The U.S. financial system edged down remains substantially more resilient than in the decade preceding the financial crisis. Pressures associated with asset valuations Monetary Policy eased compared with July 2018, particularly Interest rate policy. As the labor market in the equity, corporate bond, and leverage continued to strengthen and economic loan markets. Regulatory capital and liquidity activity expanded at a strong rate, the FOMC ratios of key financial institutions, includin increased the target range for the federal large banks, are at historically high levels funds rate gradually over the second half of Funding risks in the financial system are 2018. Specifically, the FOMC decided to raise low relative to the period leading up to the the federal funds rate in September and in crisis. Borrowing by households has risen December, bringing it to the current range of roughly in line with household incomes and 2/4 to 2/ percent is concentrated among prime borrowers. While debt owed by businesses is high and In December, against the backdrop of credit standards--especially within segments increased concerns about global growth of the loan market focused on lower-rated or trade tensions, and volatility in financial unrated firms--deteriorated in the second half markets, the Committee indicated it would of 2018. issuance of these loans has slowed monitor global economic and financial
2 SUMMARy about downside risks to the growth outlook and rising trade tensions between the United States and China. As a result, Treasury yields and risky asset prices declined substantially between early October and late December in the midst of heightened volatility, although those moves partially retraced early this year. On balance since July, the expected path of the federal funds rate over the next several years shifted down, long-term Treasury yields and mortgage rates moved lower, broad measures of U.S. equity prices increased somewhat, and spreads of yields on corporate bonds over those on comparable-maturity Treasury securities widened modestly. Credit to large nonfinancial firms remained solid in the second half of 2018; corporate bond issuance slowed considerably toward the end of the year but has rebounded since then. Despite increases in interest rates for consumer loans, consumer credit expanded at a solid pace, and financing conditions for consumers largely remain supportive of growth in household spending. The foreign exchange value of the U.S. dollar strengthened slightly against the currencies of the U.S. economy’s trading partners. Financial stability. The U.S. financial system remains substantially more resilient than in the decade preceding the financial crisis. Pressures associated with asset valuations eased compared with July 2018, particularly in the equity, corporate bond, and leveraged loan markets. Regulatory capital and liquidity ratios of key financial institutions, including large banks, are at historically high levels. Funding risks in the financial system are low relative to the period leading up to the crisis. Borrowing by households has risen roughly in line with household incomes and is concentrated among prime borrowers. While debt owed by businesses is high and credit standards—especially within segments of the loan market focused on lower-rated or unrated firms—deteriorated in the second half of 2018, issuance of these loans has slowed more recently. International Developments. Foreign economic growth stepped down significantly last year from the brisk pace in 2017. Aggregate growth in the advanced foreign economies slowed markedly, especially in the euro area, and several Latin American economies continued to underperform. The pace of economic activity in China slowed noticeably in the second half of 2018. Inflation pressures in major advanced foreign economies remain subdued, prompting central banks to maintain accommodative monetary policies. Financial conditions abroad tightened in the second half of 2018, in part reflecting political uncertainty in Europe and Latin America, trade policy developments in the United States and its trading partners, as well as concerns about moderating global growth. Although financial conditions abroad improved in recent weeks, alongside those in the United States, on balance since July 2018, global equity prices were lower, sovereign yields in many economies declined, and sovereign credit spreads in the European periphery and the most vulnerable emerging market economies increased somewhat. Market-implied paths of policy rates in advanced foreign economies generally edged down. Monetary Policy Interest rate policy. As the labor market continued to strengthen and economic activity expanded at a strong rate, the FOMC increased the target range for the federal funds rate gradually over the second half of 2018. Specifically, the FOMC decided to raise the federal funds rate in September and in December, bringing it to the current range of 2¼ to 2½ percent. In December, against the backdrop of increased concerns about global growth, trade tensions, and volatility in financial markets, the Committee indicated it would monitor global economic and financial developments and assess their implications for
MONETARY POLICY REPORT: FEBRUARY 2019 3 the economic outlook. In January, the FOMC required. In addition, the Committee noted stated that it continued to view sustained that it is prepared to adjust any of the details expansion of economic activity, strong labor for completing balance sheet normalization in market conditions, and inflation near the light of economic and financial developments Committee's 2 percent objective as the most cely outcomes. Nonetheless, in light of global economic and financial developments Special Topics and muted inflation pressures, the Committee Labor markets in urban versus rural areas noted that it will be patient as it determines The recovery in the U.S. labor market since what future adjustments to the target range the end of the recession has been uneven for the federal funds rate may be appropriate across the country, with rural areas showing to support these outcomes. FOMC markedly less improvement than cities and communications continued to emphasize their surrounding metropolitan areas. In that the Committee's approach to setting the particular, the employment-to-population stance of policy should be importantly guided ratio and labor force participation rate in rural by the implications of incoming data for the areas remain well below their pre-recession economic outlook. In particular, the timing levels, while the recovery in urban areas has and size of future adjustments to the target been more complete. Differences in the mix of range for the federal funds rate will depend industries in rural and urban areas-a larger on the committee s assessment of realized share of manufacturing in rural areas and a and expected economic conditions relative to greater concentration of fast-growing services its maximum-employment objective and industries in urban areas-have contributed to symmetric 2 percent inflation objective the stronger rebound in urban areas. (See the box Employment Disparities between Rural Balance sheet policy. The FOMC continued and Urban Areas"in Part 1) to implement the balance sheet normalization program that has been under way since Monetary policy rules. In evaluating the October 2017. Specifically, the FOMC stance of monetary policy, policymakers reduced its holdings of Treasury and agency consider a wide range of information on the securities in a gradual and predictable manner current economic conditions and the outlook by reinvesting only principal payments it Policymakers also consult prescriptions for the received from these securities that exceeded policy interest rate derived from a variety of gradually rising caps. Consequently, the policy rules for guidance, without mechanically Federal Reserve's total assets declined by about following the prescriptions of any specific S260 billion since the middle of last year rule. The FOMCS approach for conducting ending the period close to $4 trillion systematic monetary policy provides sufficient flexibility to address the intrinsic complexities Together with the January postmeeting and uncertainties in the economy while statement the Committee released an keeping monetary policy predictable and updated Statement Regarding Monetary Policy Implementation and Balance Sheet transparent. (See the box"Monetary Policy Rules and Systematic Monetary Policy Normalization to provide additional Part 2.) information about its plans to implement monetary policy over the longer run. I Balance sheet normalization and monetary particular, the FOMC stated that it intend policy implementation. Since the financial to continue to implement monetary policy crisis. the size of the Federal reserves balance in a regime with an ample supply of reserves sheet has been determined in large part so that active management of reserves is not by its decisions about asset purchases for
MONETARy POLICy REPORT: FEBRUARy 2019 3 the economic outlook. In January, the FOMC stated that it continued to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s 2 percent objective as the most likely outcomes. Nonetheless, in light of global economic and financial developments and muted inflation pressures, the Committee noted that it will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes. FOMC communications continued to emphasize that the Committee’s approach to setting the stance of policy should be importantly guided by the implications of incoming data for the economic outlook. In particular, the timing and size of future adjustments to the target range for the federal funds rate will depend on the Committee’s assessment of realized and expected economic conditions relative to its maximum-employment objective and its symmetric 2 percent inflation objective. Balance sheet policy. The FOMC continued to implement the balance sheet normalization program that has been under way since October 2017. Specifically, the FOMC reduced its holdings of Treasury and agency securities in a gradual and predictable manner by reinvesting only principal payments it received from these securities that exceeded gradually rising caps. Consequently, the Federal Reserve’s total assets declined by about $260 billion since the middle of last year, ending the period close to $4 trillion. Together with the January postmeeting statement, the Committee released an updated Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization to provide additional information about its plans to implement monetary policy over the longer run. In particular, the FOMC stated that it intends to continue to implement monetary policy in a regime with an ample supply of reserves so that active management of reserves is not required. In addition, the Committee noted that it is prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments. Special Topics Labor markets in urban versus rural areas. The recovery in the U.S. labor market since the end of the recession has been uneven across the country, with rural areas showing markedly less improvement than cities and their surrounding metropolitan areas. In particular, the employment-to-population ratio and labor force participation rate in rural areas remain well below their pre-recession levels, while the recovery in urban areas has been more complete. Differences in the mix of industries in rural and urban areas—a larger share of manufacturing in rural areas and a greater concentration of fast-growing services industries in urban areas—have contributed to the stronger rebound in urban areas. (See the box “Employment Disparities between Rural and Urban Areas” in Part 1.) Monetary policy rules. In evaluating the stance of monetary policy, policymakers consider a wide range of information on the current economic conditions and the outlook. Policymakers also consult prescriptions for the policy interest rate derived from a variety of policy rules for guidance, without mechanically following the prescriptions of any specific rule. The FOMC’s approach for conducting systematic monetary policy provides sufficient flexibility to address the intrinsic complexities and uncertainties in the economy while keeping monetary policy predictable and transparent. (See the box “Monetary Policy Rules and Systematic Monetary Policy” in Part 2.) Balance sheet normalization and monetary policy implementation. Since the financial crisis, the size of the Federal Reserve’s balance sheet has been determined in large part by its decisions about asset purchases for
4 SUMMARY economic stimulus, with growth in total assets Transparency also enhances the effectiveness primarily matched by higher reserve balances of monetary policy and a central bank's of depository institutions. However, liabilities efforts to promote financial stability. For other than reserves have grown significantly these reasons. the Federal Reserve uses a over the past decade. In the longer run, the wide variety of communications to explain size of the balance sheet will be importantly its policymaking approach and decisions determined by the various factors affecting the as clearly as possible. Through several new demand for Federal Reserve liabilities. ( See th initiatives, including a review of its monetary box"The role of liabilities in determinin policy framework that will include outreach he Size of the Federal reserve's balance to a broad range of stakeholders, the Federal Sheet” in Part2.) Reserve seeks to enhance transparency and accountability regarding how it pursues Federal Reserve transparency and its statutory responsibilities. (See the box accountability. For central banks, transparency Federal Reserve Transparency: Rationale provides an essential basis for accountability and New Initiatives"in Part 2.)
4 SUMMARy economic stimulus, with growth in total assets primarily matched by higher reserve balances of depository institutions. However, liabilities other than reserves have grown significantly over the past decade. In the longer run, the size of the balance sheet will be importantly determined by the various factors affecting the demand for Federal Reserve liabilities. (See the box “The Role of Liabilities in Determining the Size of the Federal Reserve’s Balance Sheet” in Part 2.) Federal Reserve transparency and accountability. For central banks, transparency provides an essential basis for accountability. Transparency also enhances the effectiveness of monetary policy and a central bank’s efforts to promote financial stability. For these reasons, the Federal Reserve uses a wide variety of communications to explain its policymaking approach and decisions as clearly as possible. Through several new initiatives, including a review of its monetary policy framework that will include outreach to a broad range of stakeholders, the Federal Reserve seeks to enhance transparency and accountability regarding how it pursues its statutory responsibilities. (See the box “Federal Reserve Transparency: Rationale and New Initiatives” in Part 2.)
