Monetary Policy Report, February 25, 2022

Board of Governors of the Federal Reserve System

For use at 11:00 a.m. EST

February 25, 2022

Monetary Policy rePort

February 25, 2022

Letter of transmittaL

B  G  

F R S

Washington, D.C., February 25, 2022

T P   S

T S   H  R

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 reafrmed effective January25, 2022

The Federal Open Market Committee (FOMC) is rmly committed to fullling 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 nancial

uncertainty, increases the eectiveness of monetary policy, and enhances transparency and accountability,

which are essential in a democratic society.

Employment, ination, and long-term interest rates uctuate over time in response to economic and nancial

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 eective lower bound

more frequently than in the past. Owing in part to the proximity of interest rates to the eective lower bound,

the Committee judges that downward risks to employment and ination 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 aect the structure and dynamics of the

labor market. Consequently, it would not be appropriate to specify a xed 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 ination 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 ination. The Committee rearms its judgment that ination

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 ination 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 signicant economic disturbances. In order to anchor longer-term ination

expectations at this level, the Committee seeks to achieve ination that averages 2percent over time, and

therefore judges that, following periods when ination has been running persistently below 2percent,

appropriate monetary policy will likely aim to achieve ination moderately above 2percent for some time.

Monetary policy actions tend to inuence 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 ination from its longer-run goal. Moreover, sustainably

achieving maximum employment and price stability depends on a stable nancial system. Therefore, the

Committee’s policy decisions reect its longer-run goals, its medium-term outlook, and its assessments of

the balance of risks, including risks to the nancial system that could impede the attainment of the

Committee’s goals.

The Committee’s employment and ination 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 ination deviations and the potentially dierent time horizons over which

employment and ination 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.

iii

Contents

note: This report reects information that was publicly available as of noon EST on February23, 2022

(the one exception is the GDP data published on February 24, 2022). Unless otherwise stated, the time series

in the gures extend through, for daily data, February22, 2022; for monthly data, January2022; and, for

quarterly data, 2021:Q4. In bar charts, except as noted, the change for a given period is measured to its nal

quarter from the nal quarter of the preceding period.

For gures 23 and 35, note that the S&P/Case-Shiller U.S. National Home Price Index, the S&P 500 Index, and the Dow Jones Bank Index are products

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 afliates, 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 afliates, 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

Recent Economic and Financial Developments ................................... 1

Monetary Policy

........................................................... 2

Special Topics

............................................................. 3

Part 1: Recent Economic and Financial Developments .....................5

Domestic Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Financial Developments

.................................................... 31

International Developments

................................................. 36

Part 2: Monetary Policy ..................................................41

Part 3: Summary of Economic Projections ................................47

Abbreviations ............................................................65

List of Boxes

The Limited Recovery of Labor Supply .......................................... 8

Differences in Wage and Employment Growth across Jobs and Workers

................ 11

How Widespread Has the Rise in Ination Been?

................................. 15

Supply Chain Bottlenecks in U.S. Manufacturing and Trade

......................... 19

Developments Related to Financial Stability

..................................... 34

Developments in the Federal Reserve’s Balance Sheet and Money Markets

.............. 44

Forecast Uncertainty

....................................................... 62

summary

U.S. economic activity posted further

impressive gains in the second half of last

year, but ination rose to its highest level since

the early 1980s. The labor market tightened

substantially further amid high demand for

workers and constrained supply, with the

unemployment rate reaching the median of

Federal Open Market Committee (FOMC)

participants’ estimates of its longer-run

normal level and nominal wages rising at their

fastest pace in decades. With demand strong,

and amid ongoing supply chain bottlenecks

and constrained labor supply, ination

increased appreciably last year, running well

above the FOMC’s longer-run objective of

2percent and broadening out to a wider range

of items. As 2022 began, the rapid spread of

the Omicron variant appeared to be causing a

slowdown in some sectors of the economy, but

with Omicron cases having declined sharply

since mid-January, the slowdown is expected

tobe brief.

Over the second half of last year, the FOMC

held its policy rate near zero to support the

continued economic recovery. The Committee

began phasing out net asset purchases in

November and accelerated the pace of the

phaseout in December; net asset purchases will

end in early March. With ination well above

the FOMC’s longer-run objective and a strong

labor market, the Committee expects it will

soon be appropriate to raise the target range

for the federal funds rate.

Recent Economic and Financial

Developments

Economic activity and the labor market. In the

second half of 2021, gross domestic product

(GDP) growth slowed somewhat from its

brisk rst-half pace but nevertheless rose at a

solid annualized rate of 4.6percent. Average

monthly job gains remained robust at 575,000

in the second half. The unemployment rate

has plummeted almost 2percentage points

since June and, at 4percent in January, has

reached the median of FOMC participants’

estimates of its longer-run normal level.

Moreover, unemployment declines have been

widespread across demographic groups. That

said, labor force participation only crept up

last year and remains constrained. The tight

labor supply, in conjunction with a continued

surge in labor demand, has resulted in strong

nominal wage growth, especially for low-wage

workers. Supply bottlenecks also continued

to signicantly limit activity throughout the

second half, while the Delta and Omicron

waves led to notable, but apparently

temporary, slowdowns in activity.

Ination. The personal consumption

expenditures (PCE) price index rose

5.8percent over the 12 months ending in

December, and the index that excludes food

and energy items (so-called core ination)

was up 4.9percent—the highest readings for

both measures in roughly 40years. Upward

pressure on ination from prices of goods

experiencing both supply chain bottlenecks

and strong demand, such as motor vehicles

and furniture, has persisted, and elevated

ination has broadened out to a wider range

of items. Services ination has also stepped

up further, reecting strong wage growth in

some service sectors and a signicant increase

in housing rents. While measures of near-term

ination expectations moved substantially

higher over the course of last year, measures of

longer-term ination expectations have moved

up only modestly; they remain in the range

observed over the decade before the pandemic

and thus appear broadly consistent with the

FOMC’s longer-run ination objective of

2percent.

Financial conditions. Yields on nominal

Treasury securities across maturities increased

notably since mid-2021, with much of the

increase having occurred in the past couple

of months, as the expected timing for the

2 SUMMARY

beginning of the removal of monetary

policy accommodation has moved forward

signicantly. Equity prices decreased slightly,

on net, and corporate bond yields rose but

remain low, with stable corporate credit

quality. Financing conditions for consumer

credit continue to be largely accommodative

except for borrowers with low credit scores.

Mortgage rates for households remain

low despite recent increases. Bank lending

standards have eased across most loan

categories, and bank credit has expanded.

All told, nancing conditions have been

accommodative for businesses and households.

Financial stability. While some nancial

vulnerabilities remain elevated, the large banks

at the core of the nancial system continue to

be resilient. Measures of valuation pressures

on risky assets remain high compared with

historical values. Nonnancial-sector leverage

has broadly declined, and credit growth in

the household sector has been driven almost

exclusively by residential mortgages and auto

loans to prime-rated borrowers. Vulnerabilities

from nancial-sector leverage are within their

historical range, with relatively lower leverage

at banks partially oset by higher leverage at

life insurers and hedge funds. Funding markets

remain stable. Domestic banks continue to

maintain signicant levels of high-quality

liquid assets, while assets under management

at prime and tax-exempt money market funds

have declined further since mid-2021. The

Federal Reserve continues to evaluate the

potential systemic risks posed by hedge funds

and digital assets and is closely monitoring

the transition away from LIBOR. (See the box

“Developments Related to Financial Stability”

in Part 1.)

International developments. Foreign GDP

has continued to recover briskly, on balance,

despite successive waves of the pandemic,

which have been mirrored in slowdowns and

rebounds in economic activity. This recovery

has been supported by vaccination rates that

have steadily increased in both advanced

foreign economies and emerging market

economies (EMEs). Ination rose notably in

many economies in the second half of last

year, importantly boosted by higher energy

and other commodity prices as well as supply

chain constraints. Several emerging market

foreign central banks and a few advanced-

economy foreign central banks have raised

policy rates, though foreign monetary and

scal policies have generally continued to be

accommodative.

Foreign nancial conditions have tightened

modestly but are generally contained. In

advanced foreign economies, sovereign yields

have increased since the rst half of last year

on rming expectations for higher policy rates.

The change in nancial conditions in EMEs

has been relatively muted in the face of the

shift in monetary policy in some advanced

economies. The trade-weighted value of the

dollar appreciated modestly, on net, over the

past six months. Recent geopolitical tensions

related to the Russia–Ukraine situation are a

source of uncertainty in global nancial and

commodity markets.

Monetary Policy

Interest rate policy. The FOMC has continued

to keep the target range for the federal funds

rate at 0 to ¼percent since the previous

Monetary Policy Report. With ination well

above the Committee’s 2percent longer-run

goal and a strong labor market, the Committee

expects it will soon be appropriate to raise the

target range for the federal funds rate.

Balance sheet policy. From June2020

until November2021, the Federal Reserve

expanded its holdings of Treasury securities

by $80billion per month and its holdings

of agency mortgage-backed securities by

$40billion per month. In December2020,

the Committee indicated that it would

continue to increase its holdings of securities

at least at this pace until the economy had

made substantial further progress toward its

maximum-employment and price-stability

goals. Last November, the Committee

MONETARY POLICY REPORT: FEBRUARY 2022 3

judged that this criterion had been achieved

and began to reduce the monthly pace of

its net asset purchases. In December, in

light of ination developments and further

improvements in the labor market, the

Committee announced it would double the

pace of reductions in its monthly net asset

purchases. At its January meeting, the FOMC

decided to continue to reduce its net asset

purchases at this accelerated pace, which will

bring them to an end in early March, and

issued a statement of principles for its planned

approach for signicantly reducing the size of

the Federal Reserve’s balance sheet.

A number

of participants at the meeting commented that

conditions would likely warrant beginning to

reduce the size of the balance sheet sometime

later this year.

In assessing the appropriate stance of

monetary policy, the Committee will continue

to monitor the implications of incoming

information for the economic outlook. The

Committee is rmly committed to its price-

stability and maximum-employment goals and

is prepared to use its tools to prevent higher

ination from becoming entrenched while

promoting a sustainable expansion and strong

labor market.

Special Topics

Low labor supply. Labor supply has been

slow to rebound even as labor demand has

been remarkably strong. The labor force

participation rate remains well below estimates

of its longer-run trend, principally reecting a

wave of retirements among older individuals

and increases in the number of people out

of the labor force and engaged in caregiving

responsibilities. The ongoing pandemic has

1. See the January26, 2022, press release regarding the

Principles for Reducing the Size of the Federal Reserve’s

Balance Sheet, available at https://www.federalreserve.

gov/newsevents/pressreleases/monetary20220126c.htm.

2. The minutes for the January2022 FOMC meeting

note these comments and are available on the Federal

Reserve’s website at https://www.federalreserve.gov/

monetarypolicy/fomcminutes20220126.htm.

also aected labor supply through fear of the

virus or the need to quarantine. Moreover,

savings buers accumulated during the

pandemic may have enabled some people to

remain out of the labor force. (See the box

“The Limited Recovery of Labor Supply” in

Part 1.)

Wage and employment growth across jobs and

workers. Wage and employment gains were

widespread across jobs and industries last

year, with the lowest-wage jobs experiencing

the largest gains in both median wages and

employment. Wage growth in the leisure and

hospitality industry accelerated sharply, which,

together with a lagging employment rebound

and high job openings, suggests a lack of

available workers in the industry. Median

wages also increased across racial and ethnic

groups, leaving dierences in wage levels across

groups little changed relative to 2019. (See the

box “Dierences in Wage and Employment

Growth across Jobs and Workers” in Part 1.)

Broadening of ination. Higher PCE price

ination broadened out over the course of

2021, with the share of products experiencing

notable price increases moving appreciably

higher. The broadening was evident in both

goods and services, though most of last year’s

very high ination readings were concentrated

in goods, a reection of the strong demand

and supply bottlenecks that have particularly

aected these items. (See the box “How

Widespread Has the Rise in Ination Been?” in

Part 1.)

Supply bottlenecks. Supply chain bottlenecks

have plagued the economy for much of the

past year. Against a backdrop of robust

demand for goods, global distribution

networks have been strained, and domestic

manufacturers have had trouble nding the

materials and labor needed to ll orders for

their products. U.S. ports have been congested

amid record volumes of shipping, and delivery

times for materials have remained elevated.

Supply shortages of semiconductors have been

particularly acute and have weighed heavily

4 SUMMARY

on motor vehicle production and sales. While

there are some signs of improvement, general

supply chain bottlenecks are not expected to

resolve for some time. (See the box “Supply

Chain Bottlenecks in U.S. Manufacturing

andTrade” in Part 1.)

Developments in the Federal Reserve’s balance

sheet. The size of the Federal Reserve’s balance

sheet continued to grow, albeit at a slower

rate given the reduced monthly pace of net

asset purchases since November. However,

reserve balances—the largest liability on the

Federal Reserve’s balance sheet—were little

changed, on net, reecting growth in nonreserve

liabilities such as currency and overnight

reverse repurchase agreements (ON RRP). The

elevated level of reserves continued to put broad

downward pressure on short-term interest rates,

while the decline in Treasury bill supply over

2021 has contributed to a shortage of short-

term investments. Amid these developments, the

ON RRP facility continued to serve its intended

purpose of helping to provide a oor under

short-term interest rates and support eective

implementation of monetary policy. (See the

box “Developments in the Federal Reserve’s

Balance Sheet and Money Markets” in Part 2.)

Percent

202220202018201620142012201020082006

2. Civilian unemployment rate

Monthly

OURCE

: Bureau of Labor Statistics via Haver Analytics.

125

130

135

140

145

150

155

Millions of jobs

202220202018201620142012201020082006

1. Nonfarm payroll employment

Monthly

SOURCE: Bureau of Labor Statistics via Haver Analytics.

Domestic Developments

The labor market has continued to

recover rapidly

Payroll employment increased by 3.5million

jobs in the second half of 2021, bringing the

gains for the year to a robust 6.7million. And

despite the headwind caused by the Omicron

wave, employment growth in January remained

robust at 467,000 (gure1). Payroll gains over

the past year have been widespread across

industries, with a particularly large increase

in the leisure and hospitality sector as people

continued their return to many activities that

had been curtailed by the pandemic.

Meanwhile, the unemployment rate

continued to move down rapidly, declining

from 6.7percent at the end of 2020 to

4.0percent this January (gure2). Notably,

the nearly 2percentage point decline in the

unemployment rate since June of last year was

the fastest half-year decline since the 1950s,

apart from the unprecedented rebound when

the economy rst reopened in 2020. Moreover,

this decline was broad based across racial and

ethnic groups and was particularly large for

Hispanics and African Americans (gure3).

While these recent declines brought the gaps

between Hispanic and African American

unemployment rates and those of whites

and Asians to near historic lows, the gaps

nevertheless remain and largely reect long-

standing structural issues.

Labor demand is very strong, but labor

supply remains constrained . . .

Last year’s job gains were driven by an

appreciable and steady rise in labor demand as

the economy reopened and activity bounced

back. By the end of the year, the number of

unlled job openings was about 60percent

above pre-pandemic levels and at an all-time

high. However, labor supply struggled to

Part 1

reCent eConomiC and finanCiaL deveLoPments

6 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

Employment-to-

population ratio

Percent

202220202018201620142012201020082006

4. Labor force participation rate and

employment-to-population ratio

Monthly

Labor force participation rate

OTE: The labor force participation rate and the employment-

to-population ratio are percentages of the population aged 16 and over.

OURCE

: Bureau of Labor Statistics via Haver Analytics.

keep up. In particular, the labor force

participation rate—which measures the share

of people either working or actively seeking

work—moved up only a little over the past

year and remains below its February2020

level (gure4).

Several pandemic-related

factors appear to be holding back labor

3. The 0.3percentage point jump in the labor force

participation rate (LFPR) in January2022 is the result

of revisions to the Current Population Survey (CPS)

population controls, which introduced a discontinuity

in the LFPR between December and January. (The

Bureau of Labor Statistics (BLS) does not revise its

published estimates for December2021 and earlier

months.) Population controls—population estimates

for disaggregated demographic groups that are used

to weight the CPS sample to make it representative of

the U.S. population—are updated annually based on

information provided by the Census Bureau. The BLS

has indicated that the LFPR revision was mostly due to

an increase in the size of the population in age groups

that participate in the labor force at high rates (those

aged 35 to 64) and a large decrease in the size of the

population aged 65 and older, which participates at a

lowrate.

Black or African American

Asian

Hispanic or Latino

Percent

202220202018201620142012201020082006

3. Unemployment rate, by race and ethnicity

Monthly

White

OTE: Unemployment rate measures total unemployed as a percentage of the labor force. Persons whose ethnicity is identied as Hispanic or L

atino

may

be of any race. Small sample sizes preclude reliable estimates for Native Americans and other groups for which monthly data are not reported b

the Bureau of Labor Statistics.

OURCE

: Bureau of Labor Statistics via Haver Analytics.

MONETARY POLICY REPORT: FEBRUARY 2022 7

Compensation per hour,

business sector

Atlanta Fed’s

Wage Growth Tracker

Employment cost index,

private sector

Percent change from year earlier

20222020201820162014

6. Measures of change in hourly compensation

Average hourly earnings,

private sector

OTE: Business-sector compensation is on a 4-quarter percent chang

basis.

For the private-sector employment cost index, change is over

the

months ending in the last month of each quarter; for p

rivate-sector

average

hourly earnings, the data are 12-month percent changes; for

the

Atlanta

Fed’s Wage Growth Tracker, the data are shown as a

3-month

moving average of the 12-month percent change.

SOURCE: Bureau of Labor Statistics; Federal Reserve Bank of Atlanta

Wage Growth Tracker; all via Haver Analytics.

Vacancy-to-

unemployment ratio

1.2

1.5

1.8

2.1

Ratio

1.2

1.6

2.0

2.4

2.8

3.2

202120192017201520132011200920072005

5. Ratio of job openings to job seekers and quits rate

Percent of employment

NOTE: The data are monthly and extend through December 2021. The

vacancy-to-unemployment ratio data are the ratio of job openings to

unemployed excluding temporary layos.

OURCE: Bureau of Labor Statistics, Job Openings and Labor

Turnover Survey.

Nonfarm quits rate

supply, including a pandemic-induced

surge in retirements, increased caregiving

responsibilities, and fears of contracting

COVID-19. (See the box “The Limited

Recovery of Labor Supply.”) As a result, the

recovery in employment—though rapid—has

been incomplete, with payrolls nearly 3 million

below their pre-pandemic level as of January.

. . . resulting in an extremely tight

labormarket . . .

A wide range of indicators have been pointing

to a very tight labor market, reecting robust

demand for workers and constrained supply.

There were two job openings per unemployed

person at year-end, the highest level on

record (gure5). Both households’ and small

businesses’ perceptions of labor market

tightness were near or above the highest levels

observed in the history of these series. The

share of workers quitting jobs each month,

an indicator of the availability of attractive

job prospects, climbed from 2.4percent to

2.9percent last year, reaching an all-time high.

Moreover, employers continued to report

widespread hiring diculties.

. . . and a broad-based acceleration

inwages

Measures of hourly labor compensation

growth have risen sharply over the past year

in nominal terms, reecting the inuences

of strong labor demand and pandemic-

related reductions in labor supply. Total

hourly compensation as measured by the

employment cost index, which includes both

wages and benets, rose at an annual rate of

5.2percent in the second half of 2021, lifting

the 12-month change to 4.4percent, well above

pre-pandemic rates (gure6). Wage growth

as computed by the Federal Reserve Bank of

Atlanta, which tracks the median 12-month

wage growth of individuals responding to

the Current Population Survey, has also been

rising smartly, as have average hourly earnings

and compensation per hour in the business

8 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

this factor is likely to dwindle as the date when these

individuals had previously planned to retire is reached,

provided that younger cohorts continue to retire at

expected rates.

beginning of the pandemic, who had likely planned to retire in

the next few years.

Although labor demand has bounced back strongly

over the past year, labor supply has been much slower

to rebound, resulting in an extremely tight labor

market. In particular, the labor force participation

rate (LFPR)—the share of working-age adults either

employed or actively seeking work—fell early in the

pandemic and changed little last year despite plentiful

job openings and rapidly rising wages ( gure A).

The behavior of the LFPR re ects a combination of

factors that have limited the recovery of labor supply

following the pandemic. The most important of these

factors are listed in turn.

Retirements: The retired share of the population is

now substantially higher than before the pandemic,

accounting for more than two-thirds of the net decline

in the LFPR. About half (0.6percentage point) of this

increase was to be expected even in the absence of the

pandemic, as additional members of the large baby-

boom generation have reached retirement age in the

past two years.

The other half of the increase comes

from excess retirements, above and beyond what would

have been expected in the absence of the pandemic,

due to individuals “pulling forward” their planned

future retirements by a couple of years.

The effect of

1. The table shows changes only through December2021

to maintain comparability with pre-pandemic data. With the

release of January2022 data, the BLS revised the population

base for labor force statistics, which complicates comparisons

with pre-pandemic data.

2. For estimates of the effects of population aging on the

LFPR during the 2020–22 period that predate the pandemic,

see Joshua Montes (2018), “CBO’s Projection of Labor

Force Participation Rates,” Working Paper Series 2018-04

(Washington: Congressional Budget Of ce, March), https://

www.cbo.gov/publication/53616.

3. Federal Reserve Board staff calculations from the Current

Population Survey indicate that many of the excess retirements

are concentrated among individuals aged 71 to 73 at the

The Limited Recovery of Labor Supply

(continued)

A. Change in labor force participation

Monthly

Metric Dec. 2020 June2021 Dec. 2021

Change since Feb. 2020

. . . . . . −1.9 −1.7 −1.5

Contribution of

Retirement

. . . . . . . . . . . . . . . . −.8 −1.1 −1.1

Expected retirement

. . . . . . −.3 −.4 −.6

Excess retirements

. . . . . . . . −.5 −.7 −.6

Caregiving

. . . . . . . . . . . . . . . . −.8 −.5 −.4

Parents of school-age

children*

. . . . . . . . . . . . . . −.3 −.1 −.1

Parents of only young

children**

. . . . . . . . . . . . . −.1 .0 .0

Nonparents

. . . . . . . . . . . . . . −.4 −.4 −.4

Disability, illness, and

schooling

. . . . . . . . . . . . . . . .2 .1 .5

Other reasons, including

COVID-19 fears

. . . . . . . . . . −.6 −.2 −.4

N: The data are monthly and extend through December 2021. The data

comprise individuals aged 16 and over. Contributions are derived from Current

Population Survey (CPS) non-labor-force participants’ answers to the question

“What best describes your current situation at this time?” We break out catego-

ries for the answers “in retirement”; “taking care of home or family,” which we

categorize as caregiving; “ill or disabled” and “in school,” which we combine;

and “other.” Contribution lines are seasonally adjusted by Federal Reserve

Board sta . Details may not sum to totals due to rounding.

*Adults with at least one child between ages 6 and 17.

**Adults with at least one child only between ages 0 and 5.

S: Bureau of Labor Statistics; Federal Reserve Board sta calculations

using CPS microdata.

MONETARY POLICY REPORT: FEBRUARY 2022 9

3percent of out-of-work adults reported fear of

contracting or spreading the virus as their main

reason for being out of work; the rate is even higher

among individuals with no college education, who

are more likely to work in contact-intensive sectors

when employed.

This factor may exacerbate other

labor supply factors, as retirees or caregivers may be

especially fearful of contracting or spreading the virus.

Additionally, many households built up larger-than-

normal savings during the pandemic, which may have

enabled workers to retire, spend time on caregiving,

or remain out of the labor force until virus conditions

subside. Finally, reduced immigration likely has held

back total labor supply, even though the effect on the

LFPR is likely to be much smaller.

workers are counted as employed in the Current Population

Survey, these absences do not affect the LFPR. In addition,

some vaccine-hesitant workers who are subject to vaccine

mandates may have left the labor force and may be reluctant

to return.

6. See the data from week 41 of the Household Pulse

Survey, which can be found on the Census Bureau’s website

at https://www.census.gov/data/tables/2021/demo/hhp/hhp41.

html#tables.

7. Slower immigration during the pandemic period has

reduced population growth—and labor force growth—since

2019, lowering the foreign-born working-age population in

the United States by about 2million people, according to

one estimate. See Giovanni Peri and Reem Zaiour (2022),

“Labor Shortages and the Immigration Shortfall,” Econofact,

January11, https://econofact.org/labor-shortages-and-the-

immigration-shortfall. Although foreign-born individuals

tend to have higher LFPRs than the overall population, the

difference is not large enough for the reduced immigration to

have a substantial effect on the (overall) LFPR.

Caregiving: Many individuals who have left the

labor force have taken on caregiving responsibilities

during the pandemic, accounting for an additional

0.4percentage point of the LFPR shortfall as of

December2021.

Caregiving responsibilities among

parents of school-aged children exerted a large drag

on labor supply in 2020, when schools were largely

closed. This drag on labor supply eased over the course

of 2021 as schools reopened, although the ongoing

pandemic may leave parents unsure whether in-person

schooling could be disrupted again. Other caregiving

responsibilities (for example, elder care) remain a

drag on labor supply, accounting for nearly all of the

negative contribution of this category to the LFPR.

Additional factors: Labor supply has also been

held back by other short-term factors related to the

pandemic, including fear of contracting the virus and—

especially during the Omicron wave—high numbers of

quarantining workers.

As of early January2022, nearly

4. The contribution of caregiving responsibilities is

measured by the increase in nonparticipants in the Current

Population Survey who report “taking care of home or family”

as their current situation. Note that this question refers to the

respondent’s current situation rather than the causal reason

why they left the labor force; nonetheless, it is reasonable to

infer that caregiving responsibilities are an important factor

contributing to the net decline in LFPR.

5. Many workers have had to quarantine during the

Omicron wave, resulting in the number of workers absent

from work due to illness being more than 600,000 higher in

December2021 than is typical for this time of year and about

2.5million higher in January2022. However, because these

10 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

Percent, annual rate

7. Change in business-sector output per hour

1949–73 1974–95 1996–

2003

2004–19 2020–

NOTE: Changes are measured from Q4 of the year

immediately

preceding the period through Q4 of the nal year of the period.

OURCE

: Bureau of Labor Statistics via Haver Analytics.

sector.

Indeed, nominal wages are increasing

at the fastest pace in at least 20years. This

wage growth has been widespread across most

sectors and particularly large in the leisure

and hospitality sector and for lower-wage

workers. (See the box “Dierences in Wage

and Employment Growth across Jobs and

Workers.”) Even so, in the aggregate, these

wage gains did not keep pace with the rise in

prices last year.

Labor productivity also appears to have

accelerated

The extent to which sizable wage gains raise

rms’ costs and act as a source of ination

pressure depends importantly on the pace

of productivity growth. In that regard, the

behavior of labor productivity since the start

of the pandemic has been encouraging. Over

the 2020–21 period, productivity growth in the

business sector averaged 2.3percent per year—

about 1percentage point faster than its average

pace since the mid-2000s (gure7). Some of

this acceleration in productivity might

be the result of transitory factors. For

example, worker eort, which surged in

response to employment shortages and hiring

diculties, appears to be elevated, possibly

above sustainable levels.

But other pandemic-

related developments could have a more

persistent eect on productivity growth. For

example, the pandemic has resulted in a high

4. The average hourly earnings and compensation per

hour measures are no longer likely to be as signicantly

aected by changes in the composition of the workforce

as they were early in the pandemic, when job losses were

much larger for lower-wage workers, which raised average

wages and measured wage growth. This process then

reversed as many lower-wage workers, particularly in

services, were rehired, thus lowering average wages and

measured wage growth. The employment cost index and

Federal Reserve Bank of Atlanta wage growth measure

are largely free of such composition eects.

5. The November2021 Beige Book—in which the

Federal Reserve reports on discussions with our business

and other contacts throughout the country—reported

that many employers were planning to increase hiring

because of concerns that their current workforce was

being overworked.

MONETARY POLICY REPORT: FEBRUARY 2022 11

The industry-speci c effects of the pandemic are

also apparent in the patterns of employment and wages

for lower-paying jobs relative to higher-paying jobs. As

shown in  gure B, job losses initially aligned closely

with workers’ level of earnings, with the lowest-wage

jobs (which are disproportionately found in service-

producing industries) experiencing the greatest

employment declines. As the economy has reopened,

lower-wage employment has rebounded more.

Consistent with the rebound in labor demand for these

jobs coupled with hiring dif culties,  gure C shows

that wage growth has been especially strong for lower-

wage jobs.

Wages have increased strongly during the past

year, especially for workers in lower-paying jobs

and industries. For example,  gure A shows that

compensation growth for leisure and hospitality jobs as

measured by the employment cost index was stronger

than for goods-producing and service-producing

industries overall in the second half of 2021. The leisure

and hospitality industry was substantially affected by

social distancing earlier in the pandemic, leading to

outsized employment losses relative to other industries

and a much weaker recovery. However, job openings for

this industry are very high, which, in combination with

strong wage growth, indicates that the comparatively

weak employment rebound in leisure and hospitality

now largely re ects a lack of available workers.

Differences in Wage and Employment Growth across

Jobs and Workers

Goods production

Leisure and hospitality

Percent change from year earlier

20212020201920182017

A. Hourly compensation, by industry

Quarterly

Services production

OTE: The data are the employment cost index for tota

compensation.

SOURCE: Bureau of Labor Statistics via Haver Analytics.

(continued on next page)

Top

Bottom

Bottom-middle

100

110

Week ending February 15, 2020 = 100

202220212020

B. Employment, by wage quartile

Weekly

Top-middle

OTE: Series are adjusted to make total employment consistent

with

Current

Employment Statistics private employment. Wage q

uartile

cutos

are adjusted for wage growth over time. The data extend throug

January 15, 2022.

SOURCE: Federal Reserve Board sta calculations using ADP,

Inc.,

Payroll Processing microdata.

12 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

Differences in Wage and Employment Growth (continued)

Finally,  gure D illustrates how wages have evolved

across racial and ethnic groups over the course of

the pandemic. In 2019, median hourly wages were

around $1 higher for Asian and white workers relative

to Black and Hispanic workers. From 2019 to 2021,

median wages increased between $1.10 and $1.90 for

all groups, leaving the disparities in wage levels across

these groups little changed relative to 2019.

1. The wage estimates in  gure D are only for workers

paid hourly and exclude the incorporated self-employed.

Because hourly wages for demographic groups are published

at only an annual frequency by the Bureau of Labor Statistics,

it is not possible to infer from these data whether some

demographic groups experienced faster wage gains more

recently (for example, whether wage growth has been faster

for demographic groups with lower median wages in the

second half of 2021, mirroring the more rapid wage growth for

lower-paying jobs, as illustrated in  gure C).

Top

Bottom

Bottom-middle

Percent change from year earlier

202220212020

C. Median wage growth, by quartile

Weekly

Top-middle

OTE: Quartiles are dened by hourly wage distribution from

base

period

of year-over-year calculations. Wages are measured as hourl

earnings,

excluding tips, overtime, and other forms of compensation. Th

data extend through January 15, 2022.

OURCE: Federal Reserve Board sta calculations using ADP, I

nc.,

Payroll Processing microdata.

Dollars

D2. Change in annual median, 2019 to 2021

Change, 2019 to 2021

Dollars

D1. Annual median, 2019 and 2021

NOTE: The data exclude incorporated self-employed.

OURCE:Bureau of Labor Statistics.

D. Median hourly earnings, by race and ethnicity, wage and salary workers

2019

2021

White Black or Asian Hispanic

African American or Latino

1.2

1.6

2.0

White Black or Asian Hispanic

African American or Latino

MONETARY POLICY REPORT: FEBRUARY 2022 13

Excluding food

and energy

Trimmed mean

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

Percent change from year earlier

20212020201920182017201620152014

8. Change in the price index for personal consumption

expenditures

Monthly

Total

NOTE: The data extend through December 2021.

OURCE: For trimmed mean, Federal Reserve Bank of Dallas; for all

else, Bureau of Economic Analysis; all via Haver Analytics.

rate of new business formation, the widespread

adoption of remote work technology, and a

wave of labor-saving investments. Nevertheless,

it is too early to tell what the ultimate eect of

the pandemic will be on productivity growth in

coming years.

Ination increased signicantly

last year . . .

Consumer prices posted further sizable

increases in the second half of 2021.

Monthly increases in personal consumption

expenditures (PCE) prices averaged about the

same in the second half as in the rst half,

bringing the 12-month change in December

to 5.8percent—far above the Federal Open

Market Committee’s (FOMC) longer-run

objective of 2percent (gure8). The core

PCE price index, which excludes the more

volatile food and energy prices categories,

rose 4.9percent last year as supply chain

bottlenecks, hiring diculties, and other

capacity constraints amid strong demand

exerted pervasive upward pressure on prices.

Notably, these were the largest price increases

since the early 1980s. In January, a further

sizable rise in the consumer price index (CPI)

indicated that price pressures had not yet

begun to abate.

. . . and became more broad based in the

second half . . .

Whereas the sizable price increases seen last

spring were concentrated in a few key items,

inationary pressures broadened over the

second half of 2021. As an illustration, the

Federal Reserve Bank of Dallas trimmed mean

index, which removes the PCE categories with

the largest price increases and decreases each

month, rose only modestly in the rst half of

last year but picked up in the second half and

increased 3.1percent for the year as a whole—

its highest reading since 1991.

The broadening of price ination is further

evident when examining the price indexes for

major PCE categories (gure9). In the rst

half of 2021, rising ination was driven by

Differences in Wage and Employment Growth (continued)

Finally,  gure D illustrates how wages have evolved

across racial and ethnic groups over the course of

the pandemic. In 2019, median hourly wages were

around $1 higher for Asian and white workers relative

to Black and Hispanic workers. From 2019 to 2021,

median wages increased between $1.10 and $1.90 for

all groups, leaving the disparities in wage levels across

these groups little changed relative to 2019.

1. The wage estimates in  gure D are only for workers

paid hourly and exclude the incorporated self-employed.

Because hourly wages for demographic groups are published

at only an annual frequency by the Bureau of Labor Statistics,

it is not possible to infer from these data whether some

demographic groups experienced faster wage gains more

recently (for example, whether wage growth has been faster

for demographic groups with lower median wages in the

second half of 2021, mirroring the more rapid wage growth for

lower-paying jobs, as illustrated in  gure C).

Top

Bottom

Bottom-middle

Percent change from year earlier

202220212020

C. Median wage growth, by quartile

Weekly

Top-middle

OTE: Quartiles are dened by hourly wage distribution from base

period of year-over-year calculations. Wages are measured as hourly

earnings, excluding tips, overtime, and other forms of compensation. The

data extend through January 15, 2022.

OURCE: Federal Reserve Board sta calculations using ADP, Inc.,

Payroll Processing microdata.

Dollars

D2. Change in annual median, 2019 to 2021

Change, 2019 to 2021

Dollars

D1. Annual median, 2019 and 2021

NOTE: The data exclude incorporated self-employed.

OURCE:Bureau of Labor Statistics.

D. Median hourly earnings, by race and ethnicity, wage and salary workers

2019

2021

White Black or Asian Hispanic

African American or Latino

1.2

1.6

2.0

White Black or Asian Hispanic

African American or Latino

14 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

Brent oil

Agriculture

and livestock

100

120

Dollars per barrel

100

120

140

160

2014 2015 2016 2017 2018 2019 2020 2021 2022

10. Spot prices for commodities

Week ending January 3, 2014 = 100

Industrial metals

OTE: The data are weekly averages of daily data and extend through

February 18, 2022.

OURCE: For oil, ICE Brent Futures via Bloomberg; for industrial

metals, S&P GSCI Industrial Metals Index Spot via Haver Analytics; for

agriculture and livestock, S&P GSCI Agriculture & Livestock Spot

Index

via Haver Analytics.

Percent change from year earlier

Monthly

NOTE: The data extend through December 2021.

OURCE

: Bureau of Economic Analysis via Haver Analytics.

Services

ex. energy

and housing

Goods ex. food,

beverages, and

energy

2021202020192018

Housing

services

Percent change from year earlier

9. Personal consumption expenditures price indexes

Percent change from year earlier

NOTE: The data are monthly and extend through December 2021.

OURCE

: Bureau of Economic Analysis via Haver Analytics.

Food and

beverages

2021202020192018

Energy

sharp increases in prices for certain goods

such as motor vehicles, which experienced

strong demand coupled with severe supply

chain bottlenecks; a recovery in demand

for nonhousing services, where many prices

rebounded after having softened earlier in

the pandemic; and rapid increases in energy

prices. In the second half, prices of those items

continued to move higher, and prices began to

rise more rapidly for food and beverages (as

increases in the costs of food commodities,

labor, and transportation were passed on to

consumers) as well as for housing services

(as rents began to reect the large increase

in housing demand). (See the box “How

Widespread Has the Rise in Ination Been?”)

. . . with further upward pressure on

ination from rising commodity and

import prices

Oil prices continued climbing over the

second half of last year and into this year,

reaching their highest level in over seven years

(gure10). Demand for oil rose as the global

economy recovered further, and oil supply was

constrained by U.S. oil production disruptions

due to Hurricane Ida and by only modest

production increases by OPEC (Organization

of the Petroleum Exporting Countries) and

its partners. Geopolitical tensions with Russia

have also contributed to higher energy prices,

including oil and natural gas.

MONETARY POLICY REPORT: FEBRUARY 2022 15

was stable at around 35percent between 2016

and 2019—close to the average share observed

since the mid-1990s—and continued to be stable

in 2020. However, the share of products with more

than 3percent in ation increased last year to above

60percent. And, as is evident from the black line, the

share of categories with price increases of more than

3percent (annual rate) over a three-month window

increased gradually over the course of the year. As

shown by the left panel, the share of product categories

with in ation above 3percent temporarily reached a

similar level on two other occasions since the 1990s

(in 2001 and 2007), but this share is still notably lower

than that in the high-in ation regime of the 1970s.

As seen in  gure B, which reports the shares of

product categories with 12-month price changes

above 3percent separately for goods and services, the

increase in the breadth of large price increases was

especially unusual for goods. Yet the share of higher

in ation in services has also been moving up in the

past few months, likely in part because of mounting

in ation pressures from the labor market.

in ation but is somewhat more volatile. A price increase

of 3percent is one standard deviation above the mean of

annualized price increases for the different PCE product

categories from 2016 to 2019.

Consumer price in ation increased markedly in

2021, with the price index for personal consumption

expenditures (PCE) rising 5.8percent over the

12 months through December, following a subdued

increase of 1.3percent in 2020. In the  rst half of last

year, the increase in in ation was driven by a fairly

small number of categories. In contrast, over the second

half of the year, relatively high price increases became

more widespread, suggesting that broader-based

in ationary pressures had taken hold. This discussion

reviews how in ation evolved across a comprehensive

set of product categories last year to help shed light on

the forces generating higher in ation.

Although price increases driven by bottlenecks and

production constraints have been more concentrated

in a relatively small set of product categories that have

been particularly affected by these supply–demand

imbalances, labor shortages, rising wages, and other

broad-based cost pressures likely contributed to a pickup

in in ation across a wide range of goods and services.

Figure A divides PCE into 146 product categories

and presents the share of those categories for which

prices were increasing by over 3percent.

This share

1. The  gure presents the consumption-weighted share of

product categories with 12-month price changes—and, for the

recent period, annualized three-month price changes—over

3percent. The calculation based on three-month changes

provides a timely account of broadening in total PCE price

How Widespread Has the Rise in In ation Been?

12-month changes

100

Percent

1976 1981 1986 1991 1996 2001 2006 2011 2016 2021

A. Share of personal consumption expenditures product categories with ination over 3 percent

Monthly

100

Percent

2021202020192018

Monthly

3-month changes

OTE

: Each series is created from 146 product categories. Each product category is weighted by its expenditure share in personal consumption expenditures. Series a

derived

from 12-month price changes, except where otherwise indicated. The data extend through December 2021. The at line in each panel marks where 50 percent o

product categories experience ination over 3 percent.

OURCE: Bureau of Economic Analysis; Federal Reserve Board sta calculations.

(continued on next page)

16 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

Goods

100

Percent

1976 1981 1986 1991 1996 2001 2006 2011 2016 2021

B. Share of personal consumption expenditures goods and services categories with ination over 3 percent

Monthly

Services

100

Percent

2021202020192018

Monthly

OTE

: The series for goods is created from 81 product categories, and the series for services is created from 65 product categories.

Each product category is weighted by its

expenditure

share in personal consumption expenditures (PCE) goods or PCE services. Series are derived from 12-month price changes. The data extend through Decembe

2021. The at line in each panel marks where 50 percent of product categories experience ination over 3 percent.

OURCE

: Bureau of Economic Analysis; Federal Reserve Board sta calculations.

Services

While robust price increases became more prevalent

across product categories in the past year, the size of

price increases still varied signi cantly across product

categories. To better understand the drivers of the high

aggregate in ation last year,  gure C presents the full

distribution of price changes for different products and

further emphasizes the different roles being played by

prices of goods versus services in explaining changes in

this distribution compared with the 2016–19 period.

In  gure C, the blue line depicts the distribution of

annualized monthly price changes observed from 2016

to 2019, while the black line depicts the dis trib ution in

2021.

In both periods, this distribution is very wide,

re ec t ing the sizable heterogeneity in price behavior

across items. The higher and broader in ation during 2021

is re ected in the chart as a rightward shift in the dis trib u-

tion of price changes relative to the 2016–19 period.

2. For each of the 146 disaggregated product categories

mapped back to 1972, the chart presents one-month

annualized in ation rates for each of the months indicated in

the legend. From 2016 to 2019 there are 7,008 observations

(48months times 146 categories) sorted into 51 bins (negative

25 or lower, negative 24, . . . , negative 1, 0, 1, . . . , 24, and

25 or higher), while in 2021 there are 1,752 observations

(12 months times 146 categories). The product categories

are weighted according to their share in overall PCE. The

comparison shown in  gure C does not importantly depend

on the length of the pre-pandemic comparison period; for

example, the distribution of price changes over 2000 to 2019

looks similar to the distribution over 2016 to 2019.

3. As the price change distribution shifts rightward and

in ation becomes more broadly experienced across product

categories, a greater percent of spending occurs on products

with in ation exceeding 3percent, as depicted in  gure A.

However, by combining all increases of at least 3percent,

 gure A does not portray the marked increase in the number

of very large price increases, particularly for goods affected by

supply chain disruptions.

How Widespread Has the Rise in In ation Been? (continued)

(continued)

Share of PCE in each bin

C. Distribution of ination across personal consumption

expenditures product categories

Annualized monthly price change for a given product category

2016 to 2019

2021

25 20 15 10 50510 15 20 25–+

NOTE: The height of each line indicates the share of personal

consumption

expenditures (PCE) spent on product categories whose

annualized

monthly price changed by the percentage indicated on the

horizontal

axis. Values on the horizontal axis are binned in unit

increments

and are truncated at positive and negative 25 percent. Blue

shading

indicates that the PCE spending share was greater in 2016 to

2019

than in 2021 for the associated values of price change on the

horizontal

axis. Gray shading indicates that the PCE spending share was

greater

in 2021 than in 2016 to 2019 for the associated values of price

change

on the horizontal axis. The histogram includes 146 product

categories over the periods indicated.

SOURCE: Bureau of Economic Analysis; Federal Reserve Board sta

calculations.

MONETARY POLICY REPORT: FEBRUARY 2022 17

Four aspects of the change in the distribution are worth

noting:

(1) fewer items with price decreases, which are

depicted in the blue shaded areas below zero on

the horizontal axis

(2) a notable decline in the occurrence of price

increases of between 1 and 4percent, shown by the

blue shaded area in the middle of the distribution

(3) more items with in ation between 5 and

12percent as well as slightly more with in ation

between 13 and 24percent, shown in the gray shaded

area in those ranges on the horizontal axis

(4) a striking 6percentage point increase at the very

top of the distribution, indicated by the large (gray

shaded) spike in the share of items with price increases

of at least 25percent

These features of the distribution of price changes

can be better understood by considering the

contributions of goods and services to the changes.

First, the left panel of  gure D shows the contribution

of goods to the total price change distribution between

2016 and 2019 (the blue line) and 2021 (the black

line). Goods account for about 4percentage points

of the 6percentage point increase in the spike at the

top of the price change distribution in  gure C as well

as nearly all of the rightward shift in the price change

distribution in excess of 12percent in ation. Moreover,

the increased occurrence of high in ation for goods

is a stark departure from small positive or slightly

negative price changes between 2016 and 2019 (seen

D. Distribution of ination across personal consumption expenditures product categories

Share of PCE in each bin

D1. Contribution of goods

2016 to 2019

Annualized monthly price change for a given product category

2021

25 20 15 10 50510152025–+

Share of PCE in each bin

D2. Contribution of services

Annualized monthly price change for a given product category

2016 to 2019

2021

25 20 15 10 50510152025–+

N: The height of each line indicates the share of personal consumption expenditures (PCE) spent on product categories whose annualized monthly

price changed by the percentage indicated on the horizontal axis. Values on the horizontal axis are binned in unit increments and are truncated at positive

and negative 25 percent. Blue shading indicates that the PCE spending share was greater in 2016 to 2019 than in 2021 for the associated values of price

change on the horizontal axis. Gray shading indicates that the PCE spending share was greater in 2021 than in 2016 to 2019 for the associated values of

price change on the horizontal axis. The histograms include 81 product categories for goods (left panel) and 65 product categories for services (right

panel) over the periods indicated.

S: Bureau of Economic Analysis; Federal Reserve Board sta calculations.

in the blue shading). These observations are consistent

with the very large price increases in goods categories

such as motor vehicles and other categories disrupted

by supply constraints against the backdrop of strong

demand as consumption shifted away from services

during the pandemic.

Second, the right panel of  gure D shows the

contribution of services to the total price change

distribution. Services account for the vast majority of

the shift from the middle of the distribution of price

changes (the blue shaded area) to in ation between

5 and 12percent (the gray shaded area), while they

account for less than one-third of the increase in the

spike at the top of the distribution.

In summary, the share of products experiencing

notable price increases moved appreciably higher

in 2021, with the broadening due to both goods and

services prices. That said, most of last year’s very high

in ation readings were concentrated in goods—a

re ection of strong demand in the face of supply

bottlenecks that have particularly affected these items.

Finally, although currently more widespread than in

recent history, large price increases were considerably

less widespread than was seen during the high-in ation

regime of the 1970s. In the period ahead, the large

price changes in goods may ease once supply chain

disruptions  nally resolve, but, if labor shortages

continue and wages rise faster than productivity in a

broad-based way, in ation pressures may persist and

continue to broaden out.

18 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

CIE, projected onto

10-year SPF

Michigan survey,

next 12 months

SPF, 10 years ahead

CIE, projected onto Michigan

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

Percent

202220202018201620142012201020082006

12. Measures of ination expectations

Michigan survey,

next 5 to 10 years

OTE

: The Survey of Professional Forecasters (SPF) data are

quarterly, begin in 2007:Q1, and extend through 2022:Q1. The Index of

Common Ination Expectations (CIE) data are quarterly and extend

through 2022:Q1. The Michigan survey data are monthly and extend

through February 2022; the February data are preliminary.

OURCE: University of Michigan Surveys of Consumers; Federal

Reserve Bank of Philadelphia, SPF; Federal Reserve Board, CIE;

Federal Reserve Board sta calculations.

Nonfuel commodity prices have risen with the

global economic recovery since the rst half

of last year, reecting considerable increases

in the prices of both industrial metals and

agricultural commodities. Although still

below their peak last year, lumber prices have

increased sharply again in recent months

because of elevated demand from residential

construction and supply disruptions.

Import prices and the cost of transporting

imported goods—a cost not included

in measured import prices—are rising,

and bottlenecks in supply chains have

exacerbated the rise (see the box “Supply

Chain Bottlenecks in U.S. Manufacturing

and Trade”). Import price ination has also

remained elevated largely because of continued

increases in commodity prices, bringing the

12-month change through January 2022 to

6.9percent (gure11).

Measures of near-term ination

expectations rose notably, but longer-

term expectations moved up less

Ination expectations likely inuence actual

ination by aecting wage- and price-setting

decisions. In the University of Michigan

Surveys of Consumers, households’

expectations for ination over the next

12months continued to climb, reaching

levels that are among the highest observed

since the early 1980s (gure12). In contrast,

expectations for average ination over the next

5 to 10years from the same survey attened

out in the second half of 2021 after having

moved up modestly in the rst half, and

they now stand near levels observed about a

decade ago. Meanwhile, 10-year PCE ination

expectations in the Survey of Professional

Forecasters edged up, on net, since mid-2021

and stood at 2.2percent in the rst quarter

of this year. That increase was driven by

higher expectations for the next ve years,

with expectations for ination remaining at

2percent over years 6 through 10.

12-month percent change

202220212020201920182017201620152014

11. Nonfuel import price index

Monthly

OURCE

: Bureau of Labor Statistics via Haver Analytics.

MONETARY POLICY REPORT: FEBRUARY 2022 19

Over the past year, global transportation and

distribution networks have been overwhelmed, and

manufacturers have struggled to  nd the materials

and labor needed to meet demand for their products.

Demand for goods has been notably boosted,

as ongoing concerns about COVID-19 have led

consumers and businesses to shift spending away from

services, such as travel, in favor of goods, such as

those related to increased time at home. While some

distribution and production bottlenecks showed signs

of improvement toward the end of last year, other

bottlenecks are expected to remain for some time.

The surge in demand for imports has strained

shipping networks worldwide, and U.S. ports have

been particularly congested. About one-third of all

U.S. goods imports (by value) arrive via seaborne

containers, and, consistent with the strength in imports

of consumer and capital goods in 2021, the number of

containers processed at domestic ports last year was

signi cantly higher than in any previous year ( gureA).

Supply Chain Bottlenecks in U.S. Manufacturing and Trade

Real goods imports

100

120

140

2019:Q4 = 100

2021202020192018201720162015201420132012

A. U.S. imports

Seaborne containers

OTE: The seaborne containers data are monthly, are not

seasonally

adjusted,

and extend through December 2021. The real goods

imports

data are quarterly and are seasonally adjusted.

OURCE

: Bureau of Economic Analysis; Maryland Por

Administration;

Virginia Port Authority; South Carolina

Ports

Authority;

Port of Houston Authority; Port of Los Angeles; Port o

Long

Beach; Port of New York and New Jersey; Port of

Oakland;

Georgia

Ports Authority; Northwest Seaport Alliance; all via Have

Analytics; Federal Reserve Board sta calculations.

Vessel schedule

reliability

200

400

600

800

1,000

December 2019 = 100

100

2022202120202019

B. Developments in shipping

Percent of vessels on schedule

Cost of chartering

a container ship

OTE

: “On schedule” is dened as a vessel arriving within 1 day of its

listed schedule. The shipping data are monthly averages of daily data and

extend through February 22, 2022. Vessel reliability data are monthly

S: NewConTex, © VHSS e.V., Hamburg and Bremen

Shipbrokers’ Association; Sea-Intelligence (2021), Global Liner

Performance, issue 125 (January).

and extend through December 2021.

The combined ports of Los Angeles and Long Beach

have faced substantial congestion, with the number of

ships waiting for a berth recently reaching an all-time

high.

Elevated levels of port congestion in the United

States and abroad have caused on-time arrivals of

global shipping vessels to plunge and have resulted in

dramatic increases in charter rates for container ships

( gure B). Moreover, once goods arrive in port, major

bottlenecks in U.S. trucking and rail transportation have

further delayed their movement. Trucking cargo rates

have risen sharply since mid-2020, and some measures

are now more than 15percent above the levels

prevailing in 2019.

1. Though primarily driven by strong demand for goods,

the congestion has been worsened by COVID-19 outbreaks

in emerging Asia, where port delays have tied up vessels and

containers, sending ripple effects through the global network.

(continued on the next page)

20 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

Supply Chain Bottlenecks (continued)

Distribution problems have also weighed heavily

on domestic production. In 2021, a record number

of manufacturers reported that an insuf cient supply

of materials was one reason they were unable to

produce at full capacity ( gure C). Together with

increasingly strong demand for goods, these limitations

on production led to backlogs of orders and to supplier

delivery times well above historical norms ( gure D).

With supply unable to satisfy demand, prices for a

wide range of goods increased last year, sometimes

sharply. Indeed, the producer price index for overall

manufacturing was more than 15percent higher in

the fourth quarter of 2021 than its year-earlier level

(  gureE).

Domestic production has been further hampered

by manufacturers’ inability to hire and retain skilled

Percent change from year earlier

202220212020201920182017

E. Producer price index for manufacturing

Monthly

SOURCE: Bureau of Labor Statistics via Haver Analytics.

Insucient supply of labor

Logistics/transportation

constraints

Percent of responses

20212016201120062001

C. Reasons for operating below capacity

Quarterly

Insucient supply

of materials

NOTE:Gaps in series represent the end of the Annual Survey of

Plant

Capacity

in 2006 and the start of the Quarterly Survey of Plant

Capacity

2008. Survey respondents are given the choice of many reasons

for

operating below capacity and may select more than one reason.

OURCE

: Census Bureau, Survey of Plant Capacity Utilization.

Order backlogs

Diusion index

2022201720122007

D. Suppliers’ delivery times and order backlogs

Monthly

Delivery

times

OTE:

Values greater than 50 indicate that more respondents reported

longer delivery times or order backlogs relative to a month earlier tha

reported shorter delivery times or order backlogs.

SOURCE: Institute for Supply Management, ISM Manufacturing

Report on Business.

(continued)

MONETARY POLICY REPORT: FEBRUARY 2022 21

industry executives suggest that they expect production

bottlenecks to continue well into this year.

Outside the auto sector, supply chain bottlenecks

show some signs of improvement. Capacity expansion

at some ports in late 2021 and waning seasonal

demand likely contributed to recent declines in

the cost of shipping. Additionally, inland rail hubs

have decongested somewhat, facilitating the  ow

of containers inland. Also, late last year, domestic

manufacturers saw slower increases in the price of

inputs, improving delivery times, and fewer items in

short supply than they had earlier. A few commodities

have experienced a notable increase in availability.

One example is steel, for which delivery times and

prices have fallen sharply after having been elevated for

much of last year.

labor. Despite adding about 350,000 workers in 2021,

by the end of the year manufacturing employment was

still about 250,000 below where it was just before

the pandemic. Although manufacturers have long

noted dif culties in  nding workers, labor market

conditions were particularly tight in 2021. At the end

of the year, factory workers were quitting their jobs at

near-record rates, and manufacturing plants had listed

approximately 850,000 job openings—about twice as

many openings as in the 2017–19 period.

The motor vehicle sector has faced a particularly

acute and well-publicized shortage of semiconductor

chips, re ecting a combination of factors. On the

demand side, consumers’ appetite for cars and

trucks has remained remarkably strong, and the chip

content per vehicle has increased.

Meanwhile, the

supply of semiconductors was disrupted by COVID-

induced shutdowns in foreign countries—such as

Malaysia and Vietnam—that are major players in the

semiconductor supply chain. Even when enough

of certain types of chips have been available, an

undersupply of complementary chips has, at times,

created problems for manufacturers. These chip

shortages have led to widespread shutdowns and

production slowdowns at U.S. motor vehicle assembly

plants. Without an ample supply of new vehicles, many

dealerships sold off remaining inventories and raised

prices. The lean inventories and high prices weighed

heavily on vehicle sales for much of 2021. Recently,

however, semiconductor shortages have begun to

ease somewhat, as indicated by an increase in U.S.

vehicle production ( gure F). Nevertheless, these

shortages have persisted, and statements by some auto

2. Although the chip content per vehicle has been rising

for a while, demand for some vehicles particularly rich

in semiconductors—notably, electric vehicles and luxury

models—has risen especially sharply during the pandemic.

Millions of units, annual rate

20222021202020192018201720162015

F. Light motor vehicle production

NOTE: The data are quarterly averages and are adjusted using

Federal

Reserve

Board seasonal factors. The dot represents the monthly value

for

January 2022.

SOURCE: Ward’s Automotive Group, AutoInfoBank and

Intelligence

Data

Query; Chrysler Group LLC, North American Production Data

;

General

Motors Corporation, GM Motor Vehicle Assembly Productio

Data.

22 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

5-year

1.0

1.5

2.0

2.5

3.0

3.5

Percent

2022202020182016201420122010

13. Ination compensation implied by Treasury

Ination-Protected Securities

Daily

5-to-10-year

OTE: The data are at a business-day frequency and are based on

smoothed nominal and ination-indexed Treasury yield curves.

OURCE: Federal Reserve Bank of New York; Federal Reserve Board

sta calculations.

Market-based measures of ination

compensation, which are based on nancial

instruments linked to ination, are sending a

similar message. A measure of CPI ination

compensation over the next ve years implied

by Treasury Ination-Protected Securities

(TIPS) continued to rise, on net, through the

second half of 2021, reaching its highest level

over the past decade.

In contrast, the TIPS-

based measure of CPI ination compensation

5 to 10years ahead rose over the rst half of

2021 but has settled around 2¼ to 2½percent

since then (gure13). While elevated relative

to pre-pandemic levels, this measure is well

within the range of values observed in the rst

half of the previous decade and, because CPI

ination tends to run around ¼percentage

point above PCE price ination, it suggests

ination compensation close to 2percent on a

PCE basis.

The common ination expectations (CIE)

index constructed by Federal Reserve Board

sta combines a wide variety of ination

expectations measures—including the

measures cited earlier—into a single indicator

that is rescaled to match the level and volatility

of existing ination expectation indicators.

6. Ination compensation implied by the yields

on Treasury securities, known as the TIPS breakeven

ination rate, is dened as the dierence between yields

on conventional Treasury securities and yields on TIPS,

which are linked to actual outcomes regarding headline

CPI ination. Inferring ination expectations from such

market-based measures of ination compensation is not

straightforward, because these measures are aected

by changes in premiums that provide compensation for

bearing ination and liquidity risks. These measures

likely also capture shifts in the demand and supply of

TIPS relative to those of nominal Treasury securities.

7. The CIE is estimated using a dynamic factor

model. The level of the model’s estimated factor does

not have an economic interpretation and therefore must

be rescaled to match an existing indicator of ination

expectations to yield a level interpretation. For more

details, see Hie Joo Ahn and Chad Fulton (2021),

“Research Data Series: Index of Common Ination

Expectations,” FEDS Notes (Washington: Board of

Governors of the Federal Reserve System, March5),

https://doi.org/10.17016/2380-7172.2873.

MONETARY POLICY REPORT: FEBRUARY 2022 23

The measures used in the CIE dier along

several key dimensions—the type of economic

agent, data source (survey- or market-based

measure), time horizon, and ination measure.

Both CIE indexes shown in gure12 look

most similar to the measures of longer-term

expectations: They trended up in the rst half

of last year, reversing the downward drift

observed in the years before the pandemic, but

then attened out at a level similar to those

observed roughly a decade ago.

Gross domestic product growth stepped

down modestly in the second half of

last year . . .

The level of real gross domestic product

(GDP) recovered further in the second half

of 2021, but growth was somewhat slower,

on average, than in the rst half (gure14).

GDP growth is reported to have slowed

notably to 2.3percent at an annual rate in

the third quarter but rebounded to a brisk

7percent in the fourth quarter. Despite the

solid average growth in the second half, several

factors—including last summer’s Delta wave

and waning scal stimulus—likely weighed

on demand growth. Moreover, supply chain

bottlenecks, hiring diculties, and other

capacity constraints continued to signicantly

restrain economic activity. While there have

been some recent signs of these constraints

easing, the time frame for further improvement

is highly uncertain. All told, at the end of 2021

GDP stood 3percent above its level in the

fourth quarter of 2019, before the pandemic

began, but 1.5percent below its level if growth

had continued at its average pace over the ve

years before the pandemic.

. . . while the rapid spread of the

Omicron variant appears to have slowed

the pace of economic activity early

thisyear

Fueled by the highly transmissible Omicron

variant, new cases of COVID-19 began

rising sharply in mid-December, peaked in

mid-January with daily cases about three

times as high as last winter’s surge, and have

17.0

17.5

18.0

18.5

19.0

19.5

20.0

Trillions of chained 2012 dollars

2021201920172015

14. Real gross domestic product

Quarterly

OURCE

: Bureau of Economic Analysis via Haver Analytics.

24 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

fallen quickly since then. Although Omicron

appears to cause less severe symptoms than

previous variants, several indicators suggest

it has damped the pace of economic activity

early this year. High-frequency indicators

reveal that ight cancellations, school closures,

and temporary closings of small businesses

jumped as the new year began, while demand

for COVID-sensitive services like air travel,

lodging, and restaurant meals agged.

Nevertheless, with cases rapidly declining

and spending indicators having rebounded,

Omicron seems likely to cause the continued

reopening of the economy to slow only briey.

Real consumer spending

growth eased . . .

Consumer spending on goods edged lower,

on balance, over the second half of 2021 as

the boost from scal stimulus waned and

low inventories held back purchases of some

goods, particularly motor vehicles. Even so,

goods spending remains quite elevated relative

to its pre-pandemic trend (gure15). The

further reopening of the economy boosted

spending on services in the second half, albeit

at a less rapid pace than last spring, as the

Delta wave weighed on demand for in-person

services in the summer and the Omicron wave

began to do so late in the year. Despite the

continued recovery in services spending, this

spending remains well below its pre-pandemic

trend. In all, the data over the second half

of 2021 indicate only a moderate amount

of rebalancing of consumer demand toward

services and away from goods.

. . . as higher prices damped otherwise

healthy income and wealth positions . . .

Real consumer spending has been supported

by further gains in household income and

wealth, but that support was curbed by the

marked rise in prices over the past year,

especially for households that have not

beneted from higher asset prices. Household

disposable income in nominal terms has

proven resilient due to the improving labor

market, even as scal stimulus has waned,

Goods

6.5

7.0

7.5

8.0

8.5

9.0

9.5

Trillions of chained 2012 dollars

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

202120192017201520132011200920072005

15. Real personal consumption expenditures

Trillions of chained 2012 dollars

Services

OTE

: The data are monthly and extend through December 2021.

OURCE

: Bureau of Economic Analysis via Haver Analytics.

MONETARY POLICY REPORT: FEBRUARY 2022 25

Michigan survey

100

110

2018 average = 100

202220202018201620142012201020082006

Monthly

18. Indexes of consumer sentiment

Conference Board

OTE: The data extend through February 2022. The February data for

the Michigan survey are preliminary.

OURCE: University of Michigan Surveys of Consumers; Conference

Board.

but after factoring in the higher prices, real

disposable incomes edged lower over the year.

Nevertheless, also supporting consumption,

in the aggregate, are the substantial savings

households have accumulated from curtailed

services spending and historic levels of

household-focused scal stimulus distributed

earlier in the pandemic, as evidenced by a

personal saving rate that, while no longer

elevated, has not fallen below its pre-pandemic

trend (gure16). Furthermore, as a result of

the large gains in home and equity prices since

mid-2020, the wealth position of households

that own these assets remains very solid

(gure17).

. . . and contributed to declining

consumer sentiment

Amid the continued acceleration in prices

in the second half of last year and despite

solid household balance sheets, a closely

watched index of consumer sentiment

plunged (gure18). Since the middle of

2021, the University of Michigan index

fell below the levels seen at the onset of the

pandemic, as survey respondents’ concerns

over ination weighed heavily on their

outlooks. The Conference Board index, an

alternative measure of consumer sentiment,

also deteriorated but, in contrast to the

Michigan index, remains well above its earlier

pandemiclows.

Meanwhile, consumer credit conditions

continued to normalize

Financing has been generally available to

support these gains in consumer spending.

Standards for consumer loans, which banks

reported eased in 2021 relative to 2020, are

now generally in line with the standards

that persisted before the pandemic; as a

result, nancing conditions are now largely

accommodative for borrowers with high

credit scores, though lending standards and

terms remain somewhat tighter than pre-

pandemic levels for borrowers with low credit

scores. After initial declines at the onset of

the pandemic, the growth rate of consumer

5.0

5.5

6.0

6.5

7.0

7.5

8.0

Ratio

202120192017201520132011200920072005

17. Wealth-to-income ratio

Quarterly

NOTE: The series is the ratio of household net worth to disposable

personal income. The data extend through 2021:Q3.

OURCE: For net worth, Federal Reserve Board, Statistical Release

Z.1, “Financial Accounts of the United States”; for income, Bureau of

Economic Analysis via Haver Analytics.

PercentMonthly

202120192017201520132011200920072005

16. Personal saving rate

NOTE: The data extend through December 2021.

OURCE

: Bureau of Economic Analysis via Haver Analytics.

26 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

Existing home sales

1.0

1.2

1.4

Millions, annual rate

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

202220202018201620142012201020082006

21. New and existing home sales

Millions, annual rate

New home sales

OTE: The data are monthly. New home sales include only

single-family sales and extend through December 2021. Existing home

sales include single-family, condo, and co-op sales.

OURCE: For new home sales, Census Bureau; for existing home sales,

National Association of Realtors; all via Haver Analytics.

Single-family

permits

Multifamily starts

1.0

1.2

1.4

1.6

1.8

2.0

Millions of units, annual rate

202220202018201620142012201020082006

20. Private housing starts and permits

Monthly

Single-family starts

OURCE

: Census Bureau via Haver Analytics.

credit recovered strongly in 2021, driven by

the continued expansion of auto loans and an

appreciable rebound in credit card balances

(gure19). Delinquency rates for nonprime

auto and credit card borrowers remained well

below pre-pandemic levels, likely stemming

from forbearance programs and scal support.

Housing construction fell as supply

constraints held back activity . . .

Residential investment is well above pre-

pandemic levels but fell back somewhat last

year, as construction was limited by persistent

bottlenecks that led to materials shortages. In

recent months, the sector has shown signs of

a rebound, as single-family permits have risen

steadily (gure20). Nevertheless, the timing

of the resolution of these supply constraints

remains highly uncertain. Prices of lumber and

other materials have moved up appreciably,

and shortages of other construction inputs—

such as labor and lots ready for development—

remain acute.

. . . amid surging demand for housing . . .

Demand for housing surged earlier during the

pandemic and has remained strong, with home

sales well above levels seen in the years before

the pandemic despite very tight inventory of

homes available for sale (gure21). This surge

in demand is likely due to a combination of

factors, including increased work-from-home

arrangements; shifts away from other types

of consumer spending, such as travel and

leisure; and mortgage rates that remain low

despite notable recent increases (gure22).

Meanwhile, mortgage credit remained

broadly available for a wide range of potential

borrowers. Although mortgage credit for

borrowers with low credit scores remained

tighter than before the pandemic, it eased over

the second half of last year.

. . . which has contributed to record

house price growth

As a result of supply constraints and surging

demand, house price growth reached record

Billions of dollars, monthly rate

2021201920172015201320112009

19. Consumer credit ows

NOTE:

The data are seasonally adjusted by the Federal Reserve Board.

SOURCE: Federal Reserve Board, Statistical Release G.19, “Consumer

Credit.”

Student loans

Auto loans

Credit cards

MONETARY POLICY REPORT: FEBRUARY 2022 27

CoreLogic

price index

S&P/Case-Shiller

national index

100

110

120

130

2005:Q1 = 100

202120192017201520132011200920072005

23. Real prices of existing single-family houses

Quarterly

Zillow index

OTE: Series are deated by the personal consumption expenditures

price index.

OURCE: Bureau of Economic Analysis via Haver Analytics;

CoreLogic Home Price Index; Zillow, Inc., Real Estate Data;

S&P/Case-Shiller U.S. National Home Price Index. The S&P/Case-Shiller

index is a product of S&P Dow Jones Indices LLC and/or its aliates.

(For Dow Jones Indices licensing information, see the note on the

Contents page.)

2.5

3.0

3.5

4.0

4.5

5.0

5.5

Percent

202220202018201620142012

22. Mortgage rates

Weekly

OTE

: The data are contract rates on 30-year, xed-rate conventional

home mortgage commitments and extend through February 17, 2022.

OURCE

: Freddie Mac Primary Mortgage Market Survey.

levels, and, even after adjusting for overall

ination, home prices have surpassed their

peak of the mid-2000s (gure23). According

to data from Zillow, national house prices

rose almost 20percent last year. Moreover,

strong house price growth has been widespread

across the United States, as nearly 80percent

of metropolitan areas experienced annual

house price increases of at least 10percent.

Homebuying sentiment, as measured by the

Michigan survey, remains depressed, reecting

the low inventory of homes and high prices.

Business investment slowed in response

to supply constraints . . .

Investment in equipment and intangibles

grew at an annual rate of just 4percent in the

second half of last year, a marked step-down

from the nearly 14percent pace in the rst

half. As with other sectors of the economy,

investment demand has remained strong, while

supply constraints have limited spending,

as evidenced by shipments of capital goods

increasingly lagging orders and equipment

prices rising sharply. Supply bottlenecks in the

motor vehicle sector have been particularly

acute, and business spending on vehicles

declined appreciably in the second half of

2021. Investment in nonresidential structures

declined further last year despite a sharp

rebound in oil drilling and remains well below

pre-pandemic levels (gure24). This sector

typically lags in recoveries, and shortages of

building materials may be further restraining

activity.

. . . while nancing conditions remain

accommodative

Corporate nancing conditions through capital

markets remained broadly accommodative

for nonnancial rms and continued to be

supported by corporate bond yields that

remain very low by historical standards. Amid

these low yields and ample investor demand,

gross issuance of corporate bonds continued at

a robust pace, albeit down from the exceptional

pace seen in 2020. In contrast, bank lending

to businesses was, on net, subdued last year.

Structures

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

Billions of chained 2012 dollars

350

400

450

500

550

600

650

202120182015201220092006

24. Real business xed investment

Billions of chained 2012 dollars

Equipment and

intangible capital

OTE: Business xed investment is known as “private nonresidential

xed investment” in the national income and product accounts. The data

are quarterly.

SOURCE: Bureau of Economic Analysis via Haver Analytics.

28 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

Current account

Percent of nominal GDP

20212019201720152013201120092007200520032001

26. U.S. trade and current account balances

Quarterly

Trade

OTE: GDP is gross domestic product. Current account balance data

extend through 2021:Q3.

OURCE: Bureau of Economic Analysis via Haver Analytics.

While commercial real estate loans grew at a

modest pace similar to the years just before

the pandemic, commercial and industrial

loan balances contracted as a result of loan

forgiveness associated with the Paycheck

Protection Program (PPP), elevated paydowns,

and generally weak borrower demand.

Meanwhile, nancing conditions for small

businesses have improved notably over the past

year and have generally been stable in recent

months. Lending standards have eased, and

loan origination volumes are in line with pre-

pandemic levels, though loan demand remains

weak for the smallest rms. Moreover, default

and delinquency rates are now within their pre-

pandemic range. Nevertheless, the pandemic

continues to negatively aect the operations of

small businesses, especially in the most aected

industries (accommodation and food services,

arts, entertainment, and recreation).

The strong U.S. demand has partly been

met through a rapid rise in imports

Driven by the strength in U.S. economic

activity, particularly the strong demand for

goods and a desire to restock inventories, U.S.

imports have continued to increase at a notable

pace. High levels of imported goods have

kept international logistics channels operating

under high pressure, which has continued to

impair the timely delivery of goods to U.S.

customers. By contrast, U.S. exports increased

modestly over the second half of 2021 and

remain below pre-pandemic levels (gure25).

Given the relative strength in imports

compared with exports, both the nominal

trade decit and the current account decit

have increased as a share of GDP relative to

2019 (gure26).

Federal scal actions provided a

diminishing degree of support to

economic activity . . .

In response to the pandemic, the federal

government enacted a historic set of scal

policies to ameliorate hardship caused by

the viral outbreak and support the economic

recovery. Policies such as stimulus checks,

Imports

1,500

1,750

2,000

2,250

2,500

2,750

3,000

3,250

3,500

3,750

Billions of chained 2012 dollars

20212019201720152013201120092007

25. Real imports and exports of goods

and services

Quarterly

Exports

OURCE

: Bureau of Economic Analysis via Haver Analytics.

MONETARY POLICY REPORT: FEBRUARY 2022 29

Expenditures

Percent of nominal GDP

202220172012200720021997

Annual

27. Federal receipts and expenditures

Receipts

OTE: The receipts and expenditures data are on a unied-budget

basis and are for scal years (October through September); gross

domestic product (GDP) data are on a 4-quarter basis ending in Q3. The

dots represent scal year 2022 projections for receipts and expenditures

from the Congressional Budget Oce’s July 2021 report,

An Update to the

Budget and Economic Outlook: 2021 to 2031.

OURCE: Department of the Treasury, Financial Management Service;

Oce of Management and Budget and Bureau of Economic Analysis via

Haver Analytics.

supplemental unemployment insurance,

and child tax credit payments have aided

households; grants-in-aid have supported state

and local governments; and business support

programs such as the PPP have helped sustain

rms. Although these temporary policies

continue to support the level of GDP, they

have begun to unwind and are now likely

imposing a drag on GDP growth as the eects

on spending wane over time. In addition to

pandemic-support policies, the Infrastructure

Investment and Jobs Act will gradually boost

spending on infrastructure over the next

10years and is only partially oset by new

revenues and other spending reductions.

. . . while signicantly raising the budget

decit and federal debt

Overall, the Congressional Budget Oce

estimates that scal policies enacted since

the start of the pandemic—including the

infrastructure bill—will increase federal

decits by roughly $5.4trillion by the end

of scal year 2030, with the largest decit

eects in scal 2020 and 2021.

These policies,

combined with the eects of automatic

stabilizers—the reduction in tax receipts

and increase in transfers that occur as a

consequence of depressed economic activity—

caused the federal decit to surge to 15percent

of nominal GDP in scal 2020 and remain

elevated at 12½percent in scal 2021. But with

scal support fading, the decit is expected to

fall sharply this year to a level closer to that

observed in the years just before the pandemic

(gure27).

8. For more information, see Congressional Budget

Oce (2020), “The Budgetary Eects of Laws Enacted in

Response to the 2020 Coronavirus Pandemic, March and

April2020,” June, https://www.cbo.gov/system/files/2020-

06/56403-CBO-covid-legislation.pdf; Congressional

Budget Oce (2021), “The Budgetary Eects of Major

Laws Enacted in Response to the 2020–21 Coronavirus

Pandemic, December2020 and March2021,” September,

https://www.cbo.gov/system/files/2021-09/57343-

Pandemic.pdf; and Congressional Budget Office

(2021), “Senate Amendment 2137 to H.R. 3684, the

Infrastructure Investment and Jobs Act, as Proposed on

August1, 2021,” August9, https://www.cbo.gov/system/

files/2021-08/hr3684_infrastructure.pdf.

30 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

Debt held by

the public

100

120

Percent of nominal GDP

1.0

1.5

2.0

2.5

3.0

3.5

28. Federal government debt and net interest outlays

Percent of nominal GDP

1901 1921 1941 1961 1981 2001 2021

Net interest outlays

on federal debt

NOTE: The data for net interest outlays are annual, begin in 1948, and

extend through 2021. Net interest outlays are the cost of servicing the

debt held by the public. Federal debt held by the public equals federal

debt less Treasury securities held in federal employee dened-benet

retirement accounts, evaluated at the end of the quarter. The data for

federal debt are annual from 1901 to 1951 and quarterly thereafter and

extend through 2021:Q3. GDP is gross domestic product.

OURCE: For GDP, Bureau of Economic Analysis via Haver

Analytics; for federal debt, Congressional Budget Oce and

Federal

Reserve Board, Statistical Release Z.1, “Financial Accounts of the

United States.”

As a result of the unprecedented scal support

over the past two years, federal debt held by

the public jumped to around 100percent of

nominal GDP in 2020—the highest debt-

to-GDP ratio since 1947—and remained

at a similar level in 2021. Nevertheless, net

interest outlays—primarily reecting debt

service payments—have remained relatively

at over the past two years due to historically

low interest rates on government borrowing

(gure28).

State and local government nances have

been bolstered by federal aid and strong

growth in tax revenue . . .

Federal policymakers have provided a

historic level of scal support to state and

local governments, with aid totaling nearly

$1trillion—more than covering pandemic-

related budget shortfalls in the aggregate.

Moreover, following the pandemic-induced

slump, total state tax collections rose smartly

in 2021, pushed up by the economic expansion

(gure29). At the local level, property taxes

have continued to rise apace, and the typically

long lags between changes in the market

value of real estate and changes in taxable

assessments suggest that property tax revenues

will continue to rise going forward, given the

rise in house prices. Meanwhile, conditions

in municipal bond markets remained

accommodative: Yields stayed near historical

lows, and issuance continued at a solid pace,

on par with pre-pandemic issuance.

. . . but hiring and construction outlays

continued to lag

Despite the return to in-person schooling this

year and the strong scal position of state

and local governments, employment levels

have regained only about one-half of their

sizable pandemic losses, with the shortfall

concentrated in public education (gure30).

One reason appears to be that public-sector

wages have not kept pace with the rapid

gains in the private sector, which is likely

inhibiting the ability of these governments

to sta back up to pre-pandemic levels.

Total state taxes

Percent change from year earlier

2021202020192018201720162015201420132012

29. State and local tax receipts

NOTE: State tax data are year-over-year percent changes of

12-month

moving averages, begin in June 2012, extend through December 2021,

and are aggregated over all states except Wyoming, for which data are

not available. Revenues from Washington, DC, are also excluded. Data

are missing for July through December for Connecticut, October through

December for New Mexico, and December for Nevada and Oregon, as

these states have longer reporting lags than others. Property tax data are

year-over-year percent changes of 4-quarter moving averages, begin in

2012:Q2, extend through 2021:Q3, and are primarily collected by local

governments.

OURCE: Monthly State Government Tax Revenue Data via Urban

Institute; Census Bureau, Quarterly Summary of State and Local

Government Tax Revenue.

Property taxes

MONETARY POLICY REPORT: FEBRUARY 2022 31

2-year

5-year

Percent

202220202018201620142012

32. Yields on nominal Treasury securities

Daily

10-year

OURCE

: Department of the Treasury via Haver Analytics.

February 22, 2022

.25

.50

.75

1.00

1.25

1.50

1.75

2.00

2.25

Percent

202620252024202320222021

31. Market-implied federal funds rate path

Quarterly

July 9, 2021

OTE: The federal funds rate path is implied by quotes on overnight

OURCE

: Bloomberg; Federal Reserve Board sta estimates.

index swaps—a derivative contract tied to the eective federal funds

rate. The implied path as of July 9, 2021, is compared with that as of

February 22, 2022. The path is estimated with a spline approach,

assuming a term premium of 0 basis points. The July 9, 2021, path extends

through 2025:Q3 and the February 22, 2022, path through 2026:Q1.

Meanwhile, real construction outlays by state

and local governments appear to have declined

signicantly in 2021, and real infrastructure

spending by these governments is currently

about 10percent below pre-pandemic levels.

Financial Developments

The path of the federal funds rate

expected to prevail over the next few

years steepened notably

The market-based expected path of the federal

funds rate steepened notably amid news about

the labor market recovery, rising ination

pressures, and the accompanying prospect

of tighter monetary policy. Market-based

measures suggest that investors anticipate

the federal funds rate will soon begin to rise

and move above 1percent in the middle of

this year, about two and a half years earlier

than expected in July (gure31).

Similarly,

according to the results of the Survey of

Primary Dealers and the Survey of Market

Participants, both conducted by the Federal

Reserve Bank of New York in January, the

median respondent views the target range

as most likely to increase later in the current

quarter, about one and a half years earlier

than in the June surveys.

Treasury yields increased substantially

across maturities . . .

Yields on nominal Treasury securities across

maturities have risen notably since early July,

with much of the increase having occurred in

the past couple of months as the anticipation

for an imminent start to the removal of

monetary accommodation has rmed

(gure32). Uncertainty about longer-term

9. These measures are based on a straight read of

market quotes and are not adjusted for term premiums.

10. The results of the Survey of Primary Dealers and

the Survey of Market Participants are available on the

Federal Reserve Bank of New York’s website at

https://www.newyorkfed.org/markets/primarydealer_

survey_questions.html and https://www.newyorkfed.org/

markets/survey_market_participants, respectively.

18.0

18.5

19.0

19.5

20.0

20.5

Millions

202220202018201620142012201020082006

Monthly

30. State and local government payroll employment

NOTE: The data are seasonally adjusted.

SOURCE: Bureau of Labor Statistics via Haver Analytics.

32 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

Yield

100

150

200

250

Basis points

202220202018201620142012

34. Yield and spread on agency mortgage-backed

securities

Percent

Spread

OTE: The data are daily. 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.

OURCE: Department of the Treasury; J.P. Morgan. Courtesy of J.P.

High-yield corporate

Municipal

Percent

2010 2012 2014 2016 2018 2020 2022

33. Corporate bond yields, by securities rating, and

municipal bond yield

Daily

Investment-grade corporate

OTE: Investment-grade corporate reects the eective yield of the

ICE Bank of America Merrill Lynch (BofAML) triple-B U.S.

Corporate

Index (C0A4). High-yield corporate reects the eective yield of the ICE

BofAML High Yield Index (H0A0). Municipal reects the yield to worst

of the ICE BofAML U.S. Municipal Securities Index (U0A0).

OURCE

: ICE Data Indices, LLC, used with permission.

interest rates—as measured by the implied

volatility embedded in the prices of near-term

swap options on 10-year swap interest rates—

also increased markedly, reportedly reecting

an increase in uncertainty about ination and

the policy outlook.

. . . while spreads of other long-term

debt to Treasury securities widened

moderately

Across credit categories, corporate bond yields

have risen substantially, and their spreads

over yields on comparable-maturity Treasury

securities have widened moderately since early

July (gure33). Still, both yields and spreads

remain near the bottom of their historical

distributions, and corporate credit quality is

generally healthy and stable. News about the

spread of new coronavirus variants appeared

to have only limited and temporary eects on

corporate bond spreads.

Since early July, yields on 30-year agency

mortgage-backed securities—an important

pricing factor for home mortgage rates—

increased, and spreads over comparable-

maturity Treasury securities widened

moderately but stayed near the low end of

their historical range (gure34). Municipal

bond yields moved higher, and spreads

over comparable-maturity Treasury

securities widened to levels close to their

historicalmedians.

Broad equity price indexes declined

slightly on net

Broad indexes of equity prices decreased a

little, on net, since early July. Recent declines

amid expectations of an earlier beginning to

the removal of policy accommodation have

oset previous gains, which were supported

by strong corporate earnings that had

seemed resilient to pandemic developments

(gure35). Stocks of small-capitalization rms

underperformed notably, as the likelihood

for a tighter stance of monetary policy has

increased. Bank stock prices rose, on net,

buoyed by an improved economic outlook

MONETARY POLICY REPORT: FEBRUARY 2022 33

VIX

Percent

2022202020182016201420122010

36. S&P 500 volatility

Daily

Expected volatility

OTE: The VIX is a measure of implied volatility that represents the

expected annualized change in 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.

OURCE: Cboe Volatility Index® (VIX®) via Bloomberg; Renitiv

Datascope and Federal Reserve Board sta estimates.

S&P 500 index

100

150

200

250

300

350

400

December 31, 2010 = 100

202220202018201620142012

35. Equity prices

Daily

Dow Jones bank index

OURCE

: S&P Dow Jones Indices LLC via Bloomberg. (For Dow

Jones Indices licensing information, see the note on the Contents page.)

and expectations of higher levels of interest

rates and net interest margins in the future.

Measures of volatility for the S&P 500 index,

both an option-implied metric (the VIX) and

a comparable forward-looking measure based

on realized volatility, increased somewhat

amid evolving monetary policy expectations

and concerns over the Omicron variant and

stand above their respective historical medians

(gure36). (For a discussion of nancial

stability issues, see the box “Developments

Related to Financial Stability.”)

Markets for Treasury securities, mortgage-

backed securities, and corporate and

municipal bonds functioned well . . .

Markets for Treasury securities and mortgage-

backed securities functioned smoothly since

July even as some measures of liquidity

conditions for Treasury securities deteriorated

moderately, which reected increased yield

volatility due, in part, to uncertainty about the

path of monetary policy. Measures of market

functioning in corporate and municipal bond

markets indicated liquid and stable trading

conditions. Bid-ask spreads for corporate

bonds across credit ratings currently stand

below pre-pandemic levels and near the

bottom of their historical distributions.

. . . while short-term funding market

conditions remained stable

Short-term funding markets continued to

function smoothly. The eective federal funds

rate and other overnight unsecured rates

declined slightly relative to the interest rate

on reserve balances since early July. Secured

overnight rates remained stable, with the

Secured Overnight Financing Rate steady

at the oering rate on the overnight reverse

repurchase agreement (ON RRP) facility on

most days since early July. Ample liquidity and

a limited supply of Treasury bills kept short-

term interest rates low and led to increased

usage of the ON RRP facility. (See the box

“Developments in the Federal Reserve’s

Balance Sheet and Money Markets” in Part 2.)

34 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

pandemic, including airlines, hotels, and restaurants,

leverage remains elevated and interest coverage ratios

are lower.

Vulnerabilities from  nancial-sector leverage

are well within their historical range. Risk-based

capital ratios at domestic bank holding companies

reached a 20-year high during the  rst quarter of

2021. These capital ratios declined modestly over

the rest of the year as banks increased their share

repurchases and dividend payouts amid an improved

economic outlook and the Federal Reserve’s lifting of

restrictions on capital distributions. Throughout 2021,

robust economic growth and strong capital markets

contributed to high bank pro tability, which fosters

resilience through greater loss absorption capacity and

an ability to retain earnings to raise capital if needed.

In contrast, leverage at certain nonbank  nancial

institutions, including life insurers and hedge funds, has

remained near historical highs. Data limitations and

the complexity of hedge fund strategies can obscure

the true nature of leverage in that sector. However, one

common measure of hedge fund leverage, the ratio of

gross notional exposures to equity capital, is near its

peak since data became available in 2012.

This discussion reviews vulnerabilities in the U.S.

 nancial system. The framework used by the Federal

Reserve Board for assessing the resilience of the U.S.

 nancial system focuses on  nancial vulnerabilities

in four broad areas: asset valuations, business and

household debt, leverage in the  nancial sector,

and funding risks. Although some asset valuations

are elevated, measures of household and business

leverage have declined, and the banking system has

shown considerable resilience since the onset of the

pandemic. Structural vulnerabilities in other parts of

the  nancial system are still being addressed, including

those related to various types of investment funds and

vulnerabilities in Treasury market functioning.

Prices of risky assets remain elevated, supported

in part by a low interest rate environment and low

term premiums on Treasury securities. One common

measure of equity valuations, the ratio of equity prices

to forecast earnings, remains high compared with

historical values. Spreads on corporate bonds and

leveraged loans continue to be low. Price indexes for

a range of commercial real estate sectors are at or

near historical highs, and vacancy rates have declined.

Residential home prices have continued to rise, with

nearly 80percent of metropolitan statistical areas

seeing double-digit annual growth rates during 2021.

Non nancial-sector leverage has broadly declined.

The rapid growth of nominal gross domestic product

(GDP) has brought the ratio of nominal credit to

nominal GDP, which measures the aggregate debt

owed by the private non nancial sector relative

to the size of the economy, down to near its pre-

pandemic levels ( gure A). Household debt relative

to nominal GDP remains  rmly below its long-

run trend, and household credit growth has been

driven almost exclusively by prime-rated borrowers.

Homeowner equity is high, and mortgage delinquency

and foreclosure rates are below their pre-pandemic

levels despite the end of pandemic-related relief and

forbearance programs. Because of high corporate cash

holdings, aggregate net non nancial business leverage

sits at its lowest level since 2014. Fueled by strong

earnings and low borrowing costs, most businesses

saw a sharp increase in their ability to service their

debt burdens, with the interest coverage ratio (the ratio

of earnings to interest expenses) for the median  rm

solidly above pre-pandemic levels and near historical

highs. However, for  rms in industries hit hardest by the

Developments Related to Financial Stability

Actual ratio

1.0

1.2

1.4

1.6

1.8

Ratio

202220172012200720021997199219871982

A. Private nonnancial-sector credit-to-GDP ratio

and trend

Quarterly

Hodrick-Prescott

lter trend

OTE: The dots represent 2022:Q1 nowcasts. The shaded bars indicate

periods

of business recession as dened by the National Bureau of

Economic Research.

SOURCE: Federal Reserve Board, Statistical Release Z.1, “Financial

Accounts of the United States”; National Income and Product Accounts,

Bureau of Economic Analysis; Federal Reserve Board sta calculations.

GDP is gross domestic product.

(continued)

MONETARY POLICY REPORT: FEBRUARY 2022 35

York, SEC, and Commodity Futures Trading Commission

released a report detailing ongoing vulnerabilities in the

U.S. Treasury market and principles to promote a well-

functioning Treasury market.

The report also outlined

multiple ongoing workstreams designed to further

enhance the group’s understanding of Treasury market

vulnerabilities and to consider policy options that may

further strengthen the market.

LIBOR Transition

The shift away from the widely used U.S. dollar

(USD) LIBOR reference rates stepped up notably in

recent months, in line with regulatory guidance to

end most new use of USD LIBOR by December31,

2021, and well ahead of the cessation of those rates

on June30, 2023. The transition away from USD

LIBOR has largely been completed in  oating-rate debt

markets, where nearly 90percent of new issuance

now references the Secured Overnight Financing Rate

(SOFR). In securitization markets, the government-

sponsored enterprises had stopped accepting LIBOR

adjustable-rate mortgages (ARMs) in 2020, are now

accepting only SOFR ARMs, and have tied all of their

associated MBS issuance to SOFR. Interest rate swap

markets saw increases in volumes for SOFR-based

trades in the second half of 2021, and this pace

accelerated rapidly in January such that SOFR-based

swaps trading now accounts for the majority of risk

traded in this market, indicating widespread awareness

and adoption of risk-free reference rates. Eurodollar

futures have lagged the swap market, although volumes

for SOFR-based futures contracts are increasing there

also. The transition in business lending has been slower,

although recent data suggest that the use of USD LIBOR

as a reference rate for business loans has fallen sharply

since the start of the year and that the pace of SOFR

adoption is accelerating.

2. See U.S. Department of the Treasury, Board of Governors

of the Federal Reserve System, Federal Reserve Bank of New

York, U.S. Securities and Exchange Commission, and U.S.

Commodity Futures Trading Commission (2021), Recent

Disruptions and Potential Reforms in the U.S. Treasury

Market: A Staff Progress Report (Washington: Department of

the Treasury, Board of Governors, FRBNY, SEC, and CFTC,

November), https://home.treasury.gov/system/files/136/IAWG-

Treasury-Report.pdf.

Funding markets remain relatively stable. Domestic

banks continue to maintain signi cant levels of high-

quality liquid assets. Assets under management at

prime and tax-exempt money market funds (MMFs),

which experienced signi cant out ows during the

March2020 turmoil, continued to decline, on net,

since mid-2021, while those at government MMFs

remained near historical highs. In December2021, the

Securities and Exchange Commission (SEC) proposed

reforms to MMFs intended to mitigate the  nancial

stability risks they pose, including the adoption of

swing pricing for certain fund types, increased liquidity

requirements, and other measures meant to make them

more resilient to redemptions. The market for digital

assets, including stablecoins, has grown rapidly. The

market value of stablecoins exceeded $150billion as of

January2022. As detailed in a November2021 report

released by the President’s Working Group on Financial

Markets, the Federal Deposit Insurance Corporation,

and the Of ce of the Comptroller of the Currency, some

stablecoins are partially backed by assets that may lose

value or become illiquid, making them susceptible to

runs.

Prefunded resources at central counterparties

(CCPs) are high, particularly relative to current market

volatility, reducing the likelihood of margin shortfalls

and liquidity strains if volatility increases. Nevertheless,

increased retail trading has exposed new challenges

for the risk-management frameworks of the CCPs that

clear equities and equity options. Financial institutions

with signi cant holdings of long-term  xed-rate debt

instruments (for example, Treasury securities, agency

mortgage-backed securities (MBS), corporate bonds,

and mortgage loans), such as banks and mutual funds,

may recognize revaluation losses if long-term interest

rates increase further, though some of those losses

could be offset by higher interest income.

Treasury Market Resilience

In November2021, the Interagency Working Group

composed of staff from the Department of the Treasury,

Federal Reserve Board, Federal Reserve Bank of New

1. See President’s Working Group on Financial Markets,

Federal Deposit Insurance Corporation, and Of ce of the

Comptroller of the Currency (2021), Report on Stablecoins

(Washington: PWGFM, FDIC, and OCC, November), https://

home.treasury.gov/system/files/136/StableCoinReport_

Nov1_508.pdf.

36 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

100

110

120

130

140

150

160

2005 average = 100

202120192017201520132011200920072005

39. Foreign real gross domestic product

Quarterly

NOTE: Foreign gross domestic product is computed on a

representative sample of 40 countries and aggregated using U.S. trade

weights. The data extend through 2021:Q3.

OURCE: Federal Reserve Bank of Dallas, Database of Global

Economic Indicators, “Real Gross Domestic Product,” accessed via

https://www.dallasfed.org/institute/dgei/gdp.aspx.

Return on assets

Percent, annual rate

2.0

1.5

1.0

1.5

2.0

202120192017201520132011200920072005

38. Protability of bank holding companies

Percent, annual rate

Return on equity

OTE:The data are quarterly and are seasonally adjusted.

OURCE: Federal Reserve Board, Form FR Y-9C, Consolidated

Financial Statements for Bank Holding Companies.

Percent

202220202018201620142012201020082006

37. Growth in total loans and leases

Monthly

NOTE: The data are calculated as monthly annualized growth rates

and are seasonally and break adjusted.

OURCE: Federal Reserve Board, Statistical Release H.8, “Assets and

Liabilities of Commercial Banks in the United States.”

Bank credit expanded and bank

protability remained strong

Total loans and leases outstanding at

commercial banks expanded signicantly

in the second half of last year, driven by

continued solid growth in commercial real

estate, residential real estate, and consumer

loans, which outweighed declines in

commercial and industrial loans (gure37). In

both October and January, the Senior Loan

Ocer Opinion Survey on Bank Lending

Practices, conducted by the Federal Reserve,

reported easier standards for most loan

categories over the second half of 2021.

the January survey, respondents generally

anticipated a further easing of lending

standards and stronger loan demand over

the current year. Bank protability remained

strong, declining slightly over the second half

of last year but remaining at pre-pandemic

levels, helped by the continued release of

loan loss reserves, given solid credit quality

indicators (gure38). Delinquency rates on

bank loans remained low relative to historical

averages throughout the second half of 2021.

International Developments

The recovery abroad continued in the

second half of the year . . .

Economic activity abroad continued to

recover briskly in the second half of last

year (gure39), as a noticeable pickup in

vaccinations and greater adaptability allowed

many foreign economies to further reopen.

Unemployment rates in advanced foreign

economies (AFEs) have now generally returned

to levels near those that prevailed before the

pandemic. That said, the emergence of the

Delta variant of the virus last summer slowed

the recovery of some economies, especially in

Asia, and resulted in factory and port closures,

which, in turn, exacerbated supply bottlenecks.

11. The survey is available on the Federal Reserve

Board’s website at https://www.federalreserve.gov/data/

sloos/sloos.htm.

MONETARY POLICY REPORT: FEBRUARY 2022 37

Percentage point contribution

Advanced foreign economies Emerging market economies

41. Consumer price ination in foreign economies

NOTE: The advanced foreign economy aggregate is the average o

Canada, the euro area, and the United Kingdom, weighted by U.S. goods

imports. The emerging market economy aggregate is the average o

Argentina, Brazil, Chile, China, Colombia, Hong Kong, India, Israel,

Mexico, Russia, Saudi Arabia, Singapore, South Korea, and the 5

original member countries of the Association of Southeast Asian

Nations, weighted by U.S. goods imports. The ination measure is the

Harmonised Index of Consumer Prices for the euro area and the

consumer price index for other economies. The key identies bars in

order from top to bottom. The data are the Q4-over-Q4 percent change

for 2021.

SOURCE:Haver Analytics.

Energy

Food

Core

Mexico

Canada

China

Euro area

12-month percent change

2016 2017 2018 2019 2020 2021 2022

40. Consumer price ination in selected foreign

economies

Monthly

United Kingdom

OURCE: For the United Kingdom, Oce for National Statistics; for

the euro area, Statistical Oce of the European Communities; for

Canada, Statistics Canada; for Mexico, Instituto Nacional de

Estadística, Geografía e Informática; for China, China National Bureau

of Statistics; all via Haver Analytics.

More recently, the Omicron outbreak has been

a headwind and a risk, especially for countries

with lower vaccination rates; and order

backlogs in industries such as automobile

manufacturing remain high. Still, production

bottlenecks in Asia have started to unwind.

. . . and foreign ination increased

signicantly in most economies

As in the United States, foreign ination has

picked up noticeably since late 2020 (gure40).

This higher ination has been mostly driven

by soaring prices for energy and food, which,

combined, account for well over half of the

level of ination abroad (gure41). Higher

prices for core goods have also contributed to

the rise of ination, but core ination abroad

has risen less than in the United States, in part

because demand for durable goods in foreign

economies appears to have increased relatively

less sharply.

Many foreign central banks are tightening

monetary policy or have signaled a future

shift in stance

In light of elevated ination, many

policymakers are moving to reduce the

signicant monetary stimulus undertaken since

the start of the pandemic. Several emerging

market central banks, including those of

Brazil, Korea, and Mexico, have already raised

their policy rates because of concerns over the

persistence of inationary pressures.

In AFEs, a few central banks, including

those of New Zealand, Norway, and the

United Kingdom, have started raising their

policy rates, and the Bank of Canada has

signaled its intention to raise its policy rate

soon (gure42). Others have taken steps to

normalize their balance sheet policies: The

Bank of Canada, the Bank of England, and

the Reserve Bank of Australia have ceased net

asset purchases, and the European Central

Bank plans to reduce its asset purchases

this year. In contrast, the Bank of Japan

has communicated that it is not in a rush

to tighten policy, noting that measures of

38 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS

Germany

Japan

Canada

Percent

2006 2008 2010 2012 2014 2016 2018 2020 2022

43. Nominal 10-year government bond yields in

selected advanced foreign economies

Weekly

United Kingdom

OTE: The data are weekly averages of daily benchmark yields and

extend through February 18, 2022.

SOURCE: Bloomberg.

Canada

Japan

Euro area

100

150

200

250

300

Basis points

2016 2017 2018 2019202020212022

42. 12-month policy expectations for selected advanced

foreign economies

Weekly

United Kingdom

OTE:The data are weekly averages of daily 12-month m

arket-implied

central

bank policy rates. The 12-month policy rates are implied

quotes on overnight index swaps tied to the policy rates. The data extend

through February 18, 2022.

OURCE: Bloomberg; Federal Reserve Board sta estimations.

underlying ination in Japan remain below its

2percenttarget.

Foreign nancial conditions tightened

some but remain accommodative . . .

Expectations for faster removal of monetary

policy accommodation, amid higher ination

and easing concerns about the pandemic,

led to notable increases in sovereign yields in

several AFEs (gure43). Despite expectations

for tighter monetary policy, the strength in

corporate earnings and reduced concerns

about the pandemic have supported AFE

equities, which are little changed, on net,

sincemid-2021.

The change in nancial conditions in emerging

market economies (EMEs) has been relatively

muted despite the shift in advanced-economy

monetary policy expectations and increased

geopolitical tensions. Net inows to EME-

dedicated funds stepped down and hovered

around zero, in contrast with notable outows

during the 2013–14 period, and EME

sovereign spreads widened only somewhat

(gure44). In China, solvency problems in the

real estate sector and regulatory uncertainty

appeared to weigh on stock prices of large

Chinese rms listed in Hong Kong, with

the Hang Seng Index decreasing notably.

Brazilian equity prices also decreased amid

political uncertainty, while some other

EME stock indexes registered moderate

gains. More recently, geopolitical tensions

surrounding Russia and Ukraine have led to

the underperformance of Eastern European

equity indexes.

MONETARY POLICY REPORT: FEBRUARY 2022 39

EMBI+ (left scale)

125

100

125

Billions of dollars

900

600

300

600

900

20222020201820162014201220102008

44. Emerging market mutual fund ows and spreads

Basis points

Jan.

NOTE: The bond and equity fund ows data are semiannual sums of

weekly data from December 28, 2006, to December 29, 2021, and a monthly

sum of weekly data from December 30, 2021, to January 26, 2022. Weekly

data span Thursday through Wednesday, and the semiannual and monthly

values are sums over weekly data for weeks ending in that half year or

month. The fund ows data exclude funds located in China. The J.P.

Morgan Emerging Markets Bond Index Plus (EMBI+) data are weekly

averages of daily data, extend through January 28, 2022, and exclude

Venezuela.

OURCE: For bond and equity fund ows, EPFR Global; for EMBI+,

J.P. Morgan Emerging Markets Bond Index Plus via Bloomberg.

Equity fund ows (right scale)

Bond fund ows (right scale)

AFE dollar index

EME dollar index

100

105

110

115

Week ending December 27, 2019 = 100

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

45. U.S. dollar exchange rate indexes

Weekly

Broad dollar index

Dollar appreciation

OTE

: The data, which are in foreign currency units per dollar, are

weekly averages of daily values of the broad dollar index, advanced

foreign economies (AFE) dollar index, and emerging market economies

(EME) dollar index. The weekly data extend through February 18, 2022.

As indicated by the leftmost arrow, increases in the data reect U.S.

dollar appreciation and decreases reect U.S. dollar depreciation.

OURCE

: Federal Reserve Board, Statistical Release H.10, “Foreig

Exchange Rates.”

. . . and the dollar appreciated

moderately on net

The broad dollar index—a measure of the

trade-weighted value of the dollar against

foreign currencies—has risen modestly since

mid-2021 (gure45). The dollar appreciated

against Latin American currencies amid

increased political uncertainty in some

countries, while it was mixed against Asian

EME currencies. The dollar appreciated

against many AFE currencies, in part reecting

the more notable increase in the U.S. near-term

yields compared with the AFE counterparts.

The Federal Open Market Committee

has maintained the federal funds rate

near zero . . .

The Federal Open Market Committee

(FOMC) has been providing forward guidance

for the target range for the federal funds rate,

indicating that the range would be maintained

at 0to ¼percent until specic employment

and ination criteria had been met. Consistent

with that guidance, the FOMC has maintained

the target range for the federal funds rate at

0 to ¼percent (gure46). In December, the

Committee concluded that the ination criteria

in the forward guidance had been met and

the target range would be maintained until

labor market conditions had reached levels

consistent with the Committee’s assessments

of maximum employment. In January, the

Committee stated that, with ination well

above 2percent and a strong labor market, it

expected it would soon be appropriate to raise

the target range for the federal funds rate.

. . . and the Committee has gradually

reduced the monthly pace of its net

asset purchases of Treasury securities

and agency mortgage-backed securities,

which will end in early March

From June2020 until November2021,

the Federal Reserve had been expanding

its holdings of Treasury securities by

$80billion per month and its holdings of

agency mortgage-backed securities (MBS)

by $40billion per month. At its November

meeting, in light of the substantial further

progress the economy had made toward

maximum employment and price stability, the

Committee decided to reduce the monthly pace

of its net asset purchases by $10billion per

month for Treasury securities and by $5billion

per month for agency MBS. At its December

meeting, in light of ination developments and

the further improvement in the labor market,

the Committee began to reduce the monthly

pace of net purchases more rapidly, by

Part 2

monetary PoLiCy

Target federal funds rate

2-year Treasury rate

Percent

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

46. Selected interest rates

Daily

10-year Treasury rate

OTE: The 2-year and 10-year Treasury rates are the constant-maturity yields based on the most actively traded securities.

OURCE

: Department of the Treasury; Federal Reserve Board.

42 PART 2: MONETARY POLICY

$20billion per month for Treasury securities

and by $10billion per month for agency MBS.

At its January meeting, the Committee decided

to continue to reduce the monthly pace of

net purchases and conclude net purchases in

earlyMarch.

The FOMC will continue to monitor the

implications of incoming information for

the economic outlook

The Committee will continue to monitor

incoming economic data and would be pre-

pared to adjust the stance of monetary

policy as appropriate to manage risks that

could impede the attainment of its goals.

The Committee’s assessments will take

into account a wide range of information,

including read ings on public health, labor

market conditions, ination pressures and

ination expectations, and nancial and

international developments. With appropriate

policy, ination is expected to decline over the

course of the year as supply constraints ease

and demand moderates due to waning eects

of scal support and the removal of monetary

policy accommodation. The FOMC will use its

policy tools as appropriate to prevent higher

ination from becoming entrenched while

promoting a sustainable expansion and strong

labormarket.

The Federal Reserve issued a statement

regarding principles for reducing the size

of its balance sheet

Following the conclusion of its January

meeting, the FOMC issued a set of

principles regarding its planned approach for

signicantly reducing the size of the Federal

Reserve’s balance sheet.

With these principles,

12. See the January 26, 2022, press release

regarding the Principles for Reducing the Size of the

Federal Reserve’s Balance Sheet, available at https://

www.federalreserve.gov/newsevents/pressreleases/

monetary20220126c.htm.

the Committee reiterated its view that changes

in the target range for the federal funds rate are

its primary means of adjusting the stance of

monetary policy and conveyed its expectation

that reducing the size of the Federal Reserve’s

balance sheet would occur after the process

of increasing the target range for the federal

funds rate had begun. The Committee also

noted that it would determine the timing

and pace of reductions in the size of its

balance sheet so as to promote its maximum-

employment and price-stability goals and

that reductions would occur over time in a

predictable manner, primarily by adjusting

the amounts reinvested of principal payments

received from securities held in the System

Open Market Account (SOMA). Furthermore,

the FOMC communicated that, over time,

it intended to maintain securities holdings

in amounts needed to implement monetary

policy eciently and eectively in its ample

reserves regime. The Committee also noted

that, in the longer run, it intended to hold

primarily Treasury securities in the SOMA,

thereby minimizing the eect of Federal

Reserve holdings on the allocation of credit

across sectors of the economy. Finally, the

Committee emphasized that it was prepared

to adjust any details of its approach in light of

economic and nancial developments.

The size of the Federal Reserve’s balance

sheet continued to grow, although at a

diminished pace since November

The Federal Reserve’s balance sheet has grown

to $8.9trillion from $8.1trillion in July,

reecting continued net asset purchases of

U.S. Treasury securities and agency mortgage-

backed securities to support smooth market

functioning and foster accommodative

nancial conditions, thereby supporting the

ow of credit to households and businesses

(gure47). All of the Federal Reserve’s

emergency credit and liquidity facilities have

MONETARY POLICY REPORT: FEBRUARY 2022 43

been closed for new lending for some time,

and the residual outstanding balances at those

facilities have continued to decline.

Reserve balances have changed little, on net,

since July and stand near $4trillion. Usage of

the overnight reverse repurchase agreement

facility increased signicantly. (See the box

“Developments in the Federal Reserve’s

Balance Sheet and Money Markets.”)

13. A list of credit and liquidity facilities established

by the Federal Reserve in response to COVID-19 is

available on the Federal Reserve’s website at https://www.

federalreserve.gov/funding-credit-liquidity-and-loan-

facilities.htm.

The Federal Reserve established two

standing repurchase agreement facilities

In July of last year, the Federal Reserve

established a domestic standing repurchase

agreement (repo) facility and a standing repo

facility for foreign and international monetary

authorities. These facilities are intended

to serve as backstops in money markets

to support the eective implementation

of monetary policy and smooth market

functioning. The rates for these facilities have

been maintained at levels somewhat higher

than rates in overnight funding markets,

consistent with their intended roles as

backstops.

Trillions of dollars

202220212020201920182017201620152014201320122011201020092008

47. Federal Reserve assets and liabilities

Weekly

Other assets

Credit and liquidity facilities

Agency debt and mortgage-backed securities holdings

Treasury securities held outright

Federal Reserve notes in circulation

Deposits of depository institutions

Capital and other liabilities

OTE: “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 reverse repurchase agreements, the U.S.

Treasury

General Account, and the U.S. Treasury Supplementary Financing Account. The key identies shaded areas in order from top to bottom. The data

extend through February 16, 2022.

OURCE: Federal Reserve Board, Statistical Release H.4.1, “Factors Aecting Reserve Balances.”

44 PART 2: MONETARY POLICY

The size of the Federal Reserve’s balance sheet

increased from $4.2trillion before the pandemic

to its current level of roughly $8.9 trillion, largely

re ecting an increase in System Open Market Account

holdings from asset purchases ( gure A). As net asset

purchases have continued, albeit at a slower pace in

recent months, the Federal Reserve’s liabilities have

also increased ( gure B).

This discussion reviews

recent developments in the size and composition of

the Federal Reserve’s balance sheet and conditions in

money markets.

The Federal Reserve’s net asset purchases continued

at a pace of $120billion per month from July

through October. At its November meeting—in light

of the substantial further progress the economy had

made toward the Federal Open Market Committee’s

goals since December2020—the Committee

decided to begin reducing the monthly pace of its

net asset purchases by $10billion per month for

Treasury securities and $5billion per month for

agency mortgage-backed securities. At its December

meeting—in light of in ation developments and further

improvement in the labor market—the Committee

decided to double the pace of reductions in its net

asset purchases, implying that increases in securities

holdings would cease by mid-March. The Federal

Reserve’s net asset purchases since July2021 have led

to an $813 billion increase in its total assets ( gure C).

Federal Reserve liabilities increased in line with

changes in its assets. The level of reserve balances was

little changed, on net, while other liabilities—most

1. For general explanations of several liabilities on the

Federal Reserve’s bala2nce sheet, see the box “The Role of

Liabilities in Determining the Size of the Federal Reserve’s

Balance Sheet” in Board of Governors of the Federal Reserve

System (2019), Monetary Policy Report (Washington: Board of

Governors, February), pp. 41–43, https://www.federalreserve.

gov/monetarypolicy/files/20190222_mprfullreport.pdf.

Developments in the Federal Reserve’s Balance Sheet and

Money Markets

Trillions of dollars

2019 2020 2021 2022

A. Federal Reserve assets

Weekly

NOTE: MBS is mortgage-backed securities. The key identies shaded areas in order

from top to bottom. The data extend through February 16, 2022.

OURCE: Federal Reserve Board, Statistical Release H.4.1, “Factors Aecting Reserve

Balances.”

Other assets

Loans

Central bank liquidity swaps

Repurchase agreements

Agency debt and MBS

Treasury securities

held outright

Trillions of dollars

2019 2020 2021 2022

B. Federal Reserve liabilities

Weekly

SOURCE: Federal Reserve Board, Statistical Release H.4.1, “Factors Aecting Reserve

Balances.”

Reverse repurchase agreements

Deposits of depository institutions (reserves)

U.S. Treasury General Account

Other deposits

Capital and other liabilities

Federal Reserve notes

NOTE: “Capital and other liabilities” includes Treasury contributions. The key identies

shaded areas in order from top to bottom. The data extend through February 16, 2022.

(continued)

notably the overnight reverse repurchase agreements

(ON RRP)—increased substantially. Another Federal

MONETARY POLICY REPORT: FEBRUARY 2022 45

the beginning of July2021 to a low of $42billion on

December16, 2021. Following the debt limit resolution

on December16, 2021, which raised the debt limit of

the U.S. government, both net Treasury bill issuance

and the TGA balance increased to more normal levels.

Money markets continued to function smoothly

amid these developments, with ample liquidity putting

broad downward pressure on short-term interest rates.

In addition, the limited supply of Treasury bills during

the debt limit episode pushed bill yields lower. In this

environment of ample liquidity, limited Treasury bill

supply, and low repurchase agreement rates, the

ON RRP facility continued to serve its intended

purpose of helping to provide a  oor under short-term

interest rates and support effective implementation

of monetary policy.

Usage of the facility has nearly

doubled, on average, since early July, primarily driven

by greater participation from government money

market funds.

The ON RRP take-up reached a record

high of $1.9trillion on year-end before retracing to

around $1.6trillion in early January.

2. For details, see U.S. Congress, Senate (2021), “A Joint

Resolution Relating to Increasing the Debt Limit,” S.J. Res.,

117 Cong. Congressional Record (daily edition), vol. 167,

December14, pp. S 9134–53, https://www.congress.gov/

bill/117th-congress/senate-joint-resolution/33.

3. The ON RRP facility helps keep the effective federal

funds rate from falling below the target range set by the

Federal Open Market Committee, as institutions with access

to the ON RRP should be unwilling to lend funds below

the ON RRP’s preannounced offering rate. The ON RRP

facility is primarily used by nonbank counterparties such as

money market funds. The rate offered through the ON RRP

facility complements the interest on reserve balances rate in

supporting effective monetary policy implementation.

4. In light of the potential for expanded use of the facility

and given growth in money market fund assets under

management in recent years, the Federal Open Market

Committee raised the per-counterparty cap on ON RRP

participation to $160billion per day from $80billion at its

September2021 meeting.

Reserve liability—balances maintained in the Treasury

General Account (TGA)—varied signi cantly over

recent months in connection with developments

related to the debt limit. The U.S. Treasury lowered its

outstanding balance in the TGA from $725billion in

C. Balance sheet comparison

Billions of dollars

February16,

2022

July7,

2021

Change

Assets

Total securities

Treasury securities 5,739 5,202 537

Agency debt and MBS 2,707 2,322 385

Net unamortized premiums 350 351 −1

Repurchase agreements 0 0 0

Loans and lending facilities

PPPLF 28 88 −60

Other loans and lending

facilities 40 72 −32

Central bank liquidity swaps 0 1 −1

Other assets 48 61 −13

Total assets 8,911 8,098 813

Liabilities and capital

Federal Reserve notes 2,185 2,139 45

Reserves held by depository

institutions 3,797 3,856 −59

Reverse repurchase

agreements

Foreign o cial and

international accounts 257 264 −7

Others 1,644 786 858

U.S. Treasury General

Account 709 725 −16

Other deposits 251 237 14

Other liabilities and capital 67 91 −24

Total liabilities and capital 8,911 8,098 813

Note: MBS is mortgage-backed securities. PPPLF is Paycheck Protection

Program Liquidity Facility.

Source: Federal Reserve Board, Statistical Release H.4.1, “Factors A ecting

Reserve Balances.”

In conjunction with the Federal Open

Market Committee (FOMC) meeting held on

December 14–15, 2021, meeting participants

submitted their projections of the most likely

outcomes for real gross domestic product

(GDP) growth, the unemployment rate, and

ination for each year from 2021 to 2024

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 aect 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 dened as

the future path of policy that each participant

deems most likely to foster outcomes for

economic activity and ination that best

satisfy his or her individual interpretation of

the statutory mandate to promote maximum

employment and price stability.

The following material was released after the conclusion of the December 14–15, 2021, meeting of

the Federal Open Market Committee.

Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their

individual assumptions of projected appropriate monetary policy, December 2021

Percent

Variable

Median

Central tendency

Range

2021 2022 2023 2024

Longer

run

2021 2022 2023 2024

Longer

run

2021 2022 2023 2024

Longer

run

Change in real GDP

.... 5.5 4.0 2.2 2.0 1.8 5.5 3.6–4.5 2.0–2.5 1.8–2.0 1.8–2.0 5.3–5.8 3.2–4.6 1.8–2.8 1.7–2.3 1.6–2.2

September projection 5.9 3.8 2.5 2.0 1.8 5.8–6.0 3.4–4.5 2.2–2.5 2.0–2.2 1.8–2.0 5.5–6.3 3.1–4.9 1.8–3.0 1.8–2.5 1.6–2.2

Unemployment rate

..... 4.3 3.5 3.5 3.5 4.0 4.2–4.3 3.4–3.7 3.2–3.6 3.2–3.7 3.8–4.2 4.0–4.4 3.0–4.0 2.8–4.0 3.1–4.0 3.5–4.3

September projection 4.8 3.8 3.5 3.5 4.0 4.6–4.8 3.6–4.0 3.3–3.7 3.3–3.6 3.8–4.3 4.5–5.1 3.0–4.0 2.8–4.0 3.0–4.0 3.5–4.5

PCE ination

.......... 5.3 2.6 2.3 2.1 2.0 5.3–5.4 2.2–3.0 2.1–2.5 2.0–2.2 2.0 5.3–5.5 2.0–3.2 2.0–2.5 2.0–2.2 2.0

September projection 4.2 2.2 2.2 2.1 2.0 4.0–4.3 2.0–2.5 2.0–2.3 2.0–2.2 2.0 3.4–4.4 1.7–3.0 1.9–2.4 2.0–2.3 2.0

Core PCE ination

..... 4.4 2.7 2.3 2.1 4.4 2.5–3.0 2.1–2.4 2.0–2.2 4.4–4.5 2.4–3.2 2.0–2.5 2.0–2.3

September projection 3.7 2.3 2.2 2.1 3.6–3.8 2.0–2.5 2.0–2.3 2.0–2.2 3.5–4.2 1.9–2.8 2.0–2.3 2.0–2.4

Memo: Projected

appropriate policy path

Federal funds rate

...... 0.1 0.9 1.6 2.1 2.5 0.1 0.6–0.9 1.4–1.9 1.9–2.9 2.3–2.5 0.1 0.4–1.1 1.1–2.1 1.9–3.1 2.0–3.0

September projection 0.1 0.3 1.0 1.8 2.5 0.1 0.1–0.4 0.4–1.1 0.9–2.1 2.3–2.5 0.1 0.1–0.6 0.1–1.6 0.6–2.6 2.0–3.0

N: Projections of change in real gross domestic product (GDP) and projections for both measures of ination are percent changes from the fourth quarter of the previous

year to the fourth quarter of the year indicated. PCE ination and core PCE ination are the percentage rates of change in, respectively, the price index for personal consump-

tion expenditures (PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civilian unemployment rate in the

fourth quarter of the year indicated. Each participant’s projections are based on his or her assessment of appropriate monetary policy. Longer-run projections represent each

participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the econ-

omy. The projections for the federal funds rate are the value of the midpoint of the projected appropriate target range for the federal funds rate or the projected appropriate

target level for the federal funds rate at the end of the specied calendar year or over the longer run. The September projections were made in conjunction with the meeting of

the Federal Open Market Committee on September 21–22, 2021. One participant did not submit longer-run projections for the change in real GDP, the unemployment rate, or

the federal funds rate in conjunction with the September 21–22, 2021, meeting, and one participant did not submit such projections in conjunction with the December 14–15,

2021, meeting.

1. For each period, the median is the middle projection when the projections are arranged from lowest to highest. When the number of projections is even, the median is the

average of the two middle projections.

2. The central tendency excludes the three highest and three lowest projections for each variable in each year.

3. The range for a variable in a given year includes all participants’ projections, from lowest to highest, for that variable in that year.

4. Longer-run projections for core PCE ination are not collected.

Part 3

summary of eConomiC ProjeCtions

48 PART 3: SUMMARY OF ECONOMIC PROJECTIONS

−3

−2

−1

2016 2017 2018 2019 2020 2021 2022 2023 2024

Median of projections

Central tendency of projections

Range of projections

Actual

Percent

Change in real GDP

Longer

run

2016 2017 2018 2019 2020 2021 2022 2023 2024

Percent

Unemployment rate

Longer

run

2016 2017 2018 2019 2020 2021 2022 2023 2024

Percent

PCE ination

Longer

run

2016 2017 2018 2019 2020 2021 2022 2023 2024

Percent

Core PCE ination

Longer

run

Figure 1. Medians, central tendencies, and ranges of economic projections, 2021–24 and over the longer run

N: Denitions of variables and other explanations are in the notes to table 1. The data for the actual values of the

variables are annual.

MONETARY POLICY REPORT: FEBRUARY 2022 49

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2021 2022 2023 2024

Longer run

Percent

Figure 2. FOMC participants’ assessments of appropriate monetary policy: Midpoint of target range or target

evel for the federal funds rate

: Each shaded circle indicates the value (rounded to the nearest 1/8 percentage point) of an individual participant’s

udgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal

funds ra

te at the end of the specied calendar year or over the longer run. One participant did not submit longer-run projec-

tions f

or the federal funds rate.

50 PART 3: SUMMARY OF ECONOMIC PROJECTIONS

1.4−

1.5

1.6−

1.7

1.8−

1.9

2.0−

2.1

2.2−

2.3

2.4−

2.5

2.6−

2.7

2.8−

2.9

3.0−

3.1

3.2−

3.3

3.4−

3.5

3.6−

3.7

3.8−

3.9

4.0−

4.1

4.2−

4.3

4.4−

4.5

4.6−

4.7

4.8−

4.9

5.0−

5.1

5.2−

5.3

5.4−

5.5

5.6−

5.7

5.8−

5.9

6.0−

6.1

6.2−

6.3

Percent range

December projections

September projections

Number of participants

2021

1.4−

1.5

1.6−

1.7

1.8−

1.9

2.0−

2.1

2.2−

2.3

2.4−

2.5

2.6−

2.7

2.8−

2.9

3.0−

3.1

3.2−

3.3

3.4−

3.5

3.6−

3.7

3.8−

3.9

4.0−

4.1

4.2−

4.3

4.4−

4.5

4.6−

4.7

4.8−

4.9

5.0−

5.1

5.2−

5.3

5.4−

5.5

5.6−

5.7

5.8−

5.9

6.0−

6.1

6.2−

6.3

Percent range

Number of participants

2022

1.4−

1.5

1.6−

1.7

1.8−

1.9

2.0−

2.1

2.2−

2.3

2.4−

2.5

2.6−

2.7

2.8−

2.9

3.0−

3.1

3.2−

3.3

3.4−

3.5

3.6−

3.7

3.8−

3.9

4.0−

4.1

4.2−

4.3

4.4−

4.5

4.6−

4.7

4.8−

4.9

5.0−

5.1

5.2−

5.3

5.4−

5.5

5.6−

5.7

5.8−

5.9

6.0−

6.1

6.2−

6.3

Percent range

Number of participants

2023

1.4−

1.5

1.6−

1.7

1.8−

1.9

2.0−

2.1

2.2−

2.3

2.4−

2.5

2.6−

2.7

2.8−

2.9

3.0−

3.1

3.2−

3.3

3.4−

3.5

3.6−

3.7

3.8−

3.9

4.0−

4.1

4.2−

4.3

4.4−

4.5

4.6−

4.7

4.8−

4.9

5.0−

5.1

5.2−

5.3

5.4−

5.5

5.6−

5.7

5.8−

5.9

6.0−

6.1

6.2−

6.3

Percent range

Number of participants

2024

1.4−

1.5

1.6−

1.7

1.8−

1.9

2.0−

2.1

2.2−

2.3

2.4−

2.5

2.6−

2.7

2.8−

2.9

3.0−

3.1

3.2−

3.3

3.4−

3.5

3.6−

3.7

3.8−

3.9

4.0−

4.1

4.2−

4.3

4.4−

4.5

4.6−

4.7

4.8−

4.9

5.0−

5.1

5.2−

5.3

5.4−

5.5

5.6−

5.7

5.8−

5.9

6.0−

6.1

6.2−

6.3

Percent range

Number of participants

Longer run

Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2021–24 and over the longer run

N: Denitions of variables and other explanations are in the notes to table 1.

MONETARY POLICY REPORT: FEBRUARY 2022 51

2.4−

2.5

2.6−

2.7

2.8−

2.9

3.0−

3.1

3.2−

3.3

3.4−

3.5

3.6−

3.7

3.8−

3.9

4.0−

4.1

4.2−

4.3

4.4−

4.5

4.6−

4.7

4.8−

4.9

5.0−

5.1

Percent range

December projections

September projections

Number of participants

2021

2.4−

2.5

2.6−

2.7

2.8−

2.9

3.0−

3.1

3.2−

3.3

3.4−

3.5

3.6−

3.7

3.8−

3.9

4.0−

4.1

4.2−

4.3

4.4−

4.5

4.6−

4.7

4.8−

4.9

5.0−

5.1

Percent range

Number of participants

2022

2.4−

2.5

2.6−

2.7

2.8−

2.9

3.0−

3.1

3.2−

3.3

3.4−

3.5

3.6−

3.7

3.8−

3.9

4.0−

4.1

4.2−

4.3

4.4−

4.5

4.6−

4.7

4.8−

4.9

5.0−

5.1

Percent range

Number of participants

2023

2.4−

2.5

2.6−

2.7

2.8−

2.9

3.0−

3.1

3.2−

3.3

3.4−

3.5

3.6−

3.7

3.8−

3.9

4.0−

4.1

4.2−

4.3

4.4−

4.5

4.6−

4.7

4.8−

4.9

5.0−

5.1

Percent range

Number of participants

2024

2.4−

2.5

2.6−

2.7

2.8−

2.9

3.0−

3.1

3.2−

3.3

3.4−

3.5

3.6−

3.7

3.8−

3.9

4.0−

4.1

4.2−

4.3

4.4−

4.5

4.6−

4.7

4.8−

4.9

5.0−

5.1

Percent range

Number of participants

Longer run

Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2021–24 and over the longer run

: Denitions of variables and other explanations are in the notes to table 1.

52 PART 3: SUMMARY OF ECONOMIC PROJECTIONS

1.5−

1.6

1.7−

1.8

1.9−

2.0

2.1−

2.2

2.3−

2.4

2.5−

2.6

2.7−

2.8

2.9−

3.0

3.1−

3.2

3.3−

3.4

3.5−

3.6

3.7−

3.8

3.9−

4.0

4.1−

4.2

4.3−

4.4

4.5−

4.6

4.7−

4.8

4.9−

5.0

5.1−

5.2

5.3−

5.4

5.5−

5.6

Percent range

December projections

September projections

Number of participants

2021

1.5−

1.6

1.7−

1.8

1.9−

2.0

2.1−

2.2

2.3−

2.4

2.5−

2.6

2.7−

2.8

2.9−

3.0

3.1−

3.2

3.3−

3.4

3.5−

3.6

3.7−

3.8

3.9−

4.0

4.1−

4.2

4.3−

4.4

4.5−

4.6

4.7−

4.8

4.9−

5.0

5.1−

5.2

5.3−

5.4

5.5−

5.6

Percent range

Number of participants

2022

1.5−

1.6

1.7−

1.8

1.9−

2.0

2.1−

2.2

2.3−

2.4

2.5−

2.6

2.7−

2.8

2.9−

3.0

3.1−

3.2

3.3−

3.4

3.5−

3.6

3.7−

3.8

3.9−

4.0

4.1−

4.2

4.3−

4.4

4.5−

4.6

4.7−

4.8

4.9−

5.0

5.1−

5.2

5.3−

5.4

5.5−

5.6

Percent range

Number of participants

2023

1.5−

1.6

1.7−

1.8

1.9−

2.0

2.1−

2.2

2.3−

2.4

2.5−

2.6

2.7−

2.8

2.9−

3.0

3.1−

3.2

3.3−

3.4

3.5−

3.6

3.7−

3.8

3.9−

4.0

4.1−

4.2

4.3−

4.4

4.5−

4.6

4.7−

4.8

4.9−

5.0

5.1−

5.2

5.3−

5.4

5.5−

5.6

Percent range

Number of participants

2024

1.5−

1.6

1.7−

1.8

1.9−

2.0

2.1−

2.2

2.3−

2.4

2.5−

2.6

2.7−

2.8

2.9−

3.0

3.1−

3.2

3.3−

3.4

3.5−

3.6

3.7−

3.8

3.9−

4.0

4.1−

4.2

4.3−

4.4

4.5−

4.6

4.7−

4.8

4.9−

5.0

5.1−

5.2

5.3−

5.4

5.5−

5.6

Percent range

Number of participants

Longer run

Figure 3.C. Distribution of participants’ projections for PCE ination, 2021–24 and over the longer run

N: Denitions of variables and other explanations are in the notes to table 1.

MONETARY POLICY REPORT: FEBRUARY 2022 53

1.7−

1.8

1.9−

2.0

2.1−

2.2

2.3−

2.4

2.5−

2.6

2.7−

2.8

2.9−

3.0

3.1−

3.2

3.3−

3.4

3.5−

3.6

3.7−

3.8

3.9−

4.0

4.1−

4.2

4.3−

4.4

4.5−

4.6

Percent range

December projections

September projections

Number of participants

2021

1.7−

1.8

1.9−

2.0

2.1−

2.2

2.3−

2.4

2.5−

2.6

2.7−

2.8

2.9−

3.0

3.1−

3.2

3.3−

3.4

3.5−

3.6

3.7−

3.8

3.9−

4.0

4.1−

4.2

4.3−

4.4

4.5−

4.6

Percent range

Number of participants

2022

1.7−

1.8

1.9−

2.0

2.1−

2.2

2.3−

2.4

2.5−

2.6

2.7−

2.8

2.9−

3.0

3.1−

3.2

3.3−

3.4

3.5−

3.6

3.7−

3.8

3.9−

4.0

4.1−

4.2

4.3−

4.4

4.5−

4.6

Percent range

Number of participants

2023

1.7−

1.8

1.9−

2.0

2.1−

2.2

2.3−

2.4

2.5−

2.6

2.7−

2.8

2.9−

3.0

3.1−

3.2

3.3−

3.4

3.5−

3.6

3.7−

3.8

3.9−

4.0

4.1−

4.2

4.3−

4.4

4.5−

4.6

Percent range

Number of participants

2024

Figure 3.D. Distribution of participants’ projections for core PCE ination, 2021–24

N: Denitions of variables and other explanations are in the notes to table 1.

54 PART 3: SUMMARY OF ECONOMIC PROJECTIONS

0.13−

0.37

0.38−

0.62

0.63−

0.87

0.88−

1.12

1.13−

1.37

1.38−

1.62

1.63−

1.87

1.88−

2.12

2.13−

2.37

2.38−

2.62

2.63−

2.87

2.88−

3.12

3.13−

3.37

Percent range

December projections

September projections

Number of participants

2021

0.13−

0.37

0.38−

0.62

0.63−

0.87

0.88−

1.12

1.13−

1.37

1.38−

1.62

1.63−

1.87

1.88−

2.12

2.13−

2.37

2.38−

2.62

2.63−

2.87

2.88−

3.12

3.13−

3.37

Percent range

Number of participants

2022

0.13−

0.37

0.38−

0.62

0.63−

0.87

0.88−

1.12

1.13−

1.37

1.38−

1.62

1.63−

1.87

1.88−

2.12

2.13−

2.37

2.38−

2.62

2.63−

2.87

2.88−

3.12

3.13−

3.37

Percent range

Number of participants

2023

0.13−

0.37

0.38−

0.62

0.63−

0.87

0.88−

1.12

1.13−

1.37

1.38−

1.62

1.63−

1.87

1.88−

2.12

2.13−

2.37

2.38−

2.62

2.63−

2.87

2.88−

3.12

3.13−

3.37

Percent range

Number of participants

2024

0.13−

0.37

0.38−

0.62

0.63−

0.87

0.88−

1.12

1.13−

1.37

1.38−

1.62

1.63−

1.87

1.88−

2.12

2.13−

2.37

2.38−

2.62

2.63−

2.87

2.88−

3.12

3.13−

3.37

Percent range

Number of participants

Longer run

Figure 3.E. Distribution of participants’ judgments of the midpoint of the appropriate target range for the

feder

al funds rate or the appropriate target level for the federal funds rate, 2021–24 and over the longer run

: Denitions of variables and other explanations are in the notes to table 1.

MONETARY POLICY REPORT: FEBRUARY 2022 55

Median projection and condenceinterval basedon historical forecast errors

−3

−2

−1

2016 2017 2018 2019 2020 2021 2022 2023 2024

Median of projections

70% condence interval

Actual

Percent

Change in real GDP

FOMC participants’ assessments of uncertainty and risks around their economicprojections

Lower Broadly

similar

Higher

December projections

September projections

Number of participants

Uncertainty about GDP growth

Weighted to

downside

Broadly

balanced

Weighted to

upside

December projections

September projections

Number of participants

Risks to GDP growth

Figure 4.A. 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 r

eal gross domestic product (GDP) from the fourth quarter of the previous year to the fourth quarter of the year

indica

ted. The condence interval around the median projected values is assumed to be symmetric and is based on root mean

squar

ed errors of various private and government forecasts made over the previous 20 years; more information about these da

is a

vailable in table 2. Because current conditions may dier from those that prevailed, on average, over the previous 20 years,

the width and sha

pe of the condence interval estimated on the basis of the historical forecast errors may not reect FOMC

participants’

current assessments of the uncertainty and risks around their projections; these current assessments are summa-

riz

ed 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 condence interval shown in the historical fan

chart as lar

gely consistent with their assessments of the uncertainty about their projections. Likewise, participants who judge

the

risks to their pr

ojections as “broadly balanced” would view the condence interval around their projections as approximately

symmetric. F

or denitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.”

56 PART 3: SUMMARY OF ECONOMIC PROJECTIONS

Median projection and condence interval based on historical forecast errors

2016 2017 2018 2019 2020 2021 2022 2023 2024

Median of projections

70% condence interval

Actual

Percent

Unemployment rate

FOMC participants’ assessmentsof uncertainty and risks around their economic projections

Lower Broadly

similar

Higher

December projections

September projections

Number of participants

Uncertainty about the unemployment rate

Weighted to

downside

Broadly

balanced

Weighted to

upside

December projections

September projections

Number of participants

Risks to the unemployment rate

Figure 4.B. 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

vilian unemployment rate in the fourth quarter of the year indicated. The condence interval around the median projected

lues is assumed to be symmetric and is based on root mean squared errors of various private and government forecasts made

er the previous 20 years; more information about these data is available in table 2. Because current conditions may dier fro

those tha

t prevailed, on average, over the previous 20 years, the width and shape of the condence interval estimated on the

basis of

the historical forecast errors may not reect FOMC participants’ current assessments of the uncertainty and risks

ound their projections; these current assessments are summarized in the lower panels. Generally speaking, participants who

udge the uncertainty about their projections as “broadly similar” to the average levels of the past 20 years would view the

width of

the condence interval shown in the historical fan chart as largely consistent with their assessments of the uncertainty

bout their projections. Likewise, participants who judge the risks to their projections as “broadly balanced” would view the

condence interv

al around their projections as approximately symmetric. For denitions of uncertainty and risks in economic

projections, see the box “Forecast Uncertainty.”

MONETARY POLICY REPORT: FEBRUARY 2022 57

Median projection and condence interval based on historical forecast errors

2016 2017 2018 2019 2020 2021 2022 2023 2024

Median of projections

70% condence interval

Actual

Percent

PCE ination

FOMC participants’ assessments of uncertainty and risks around their economic projections

Lower Broadly

similar

Higher

December projections

September projections

Number of participants

Uncertainty about PCE ination

Weighted to

downside

Broadly

balanced

Weighted to

upside

December projections

September projections

Number of participants

Risks to PCE ination

Lower Broadly

similar

Higher

December projections

September projections

Number of participants

Uncertainty about core PCE ination

Weighted to

downside

Broadly

balanced

Weighted to

upside

December projections

September projections

Number of participants

Risks to core PCE ination

Figure 4.C. Uncertainty and risks in projections of PCE ination

: The blue and red lines in the top panel show actual values and median projected values, respectively, of the percent

change in the price inde

x for personal consumption expenditures (PCE) from the fourth quarter of the previous year to the

ourth quarter of the year indicated. The condence interval around the median projected values is assumed to be symmetric

and is based on r

oot mean squared errors of various private and government forecasts made over the previous 20 years; more

inf

ormation about these data is available in table 2. Because current conditions may dier from those that prevailed, on average,

er the previous 20 years, the width and shape of the condence interval estimated on the basis of the historical forecast errors

y not reect FOMC participants’ current assessments of the uncertainty and risks around their projections; these current

assessments ar

e summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their

ojections as “broadly similar” to the average levels of the past 20 years would view the width of the condence interval show

in the historica

l fan chart as largely consistent with their assessments of the uncertainty about their projections. Likewise,

participants w

ho judge the risks to their projections as “broadly balanced” would view the condence interval around their

ojections as approximately symmetric. For denitions of uncertainty and risks in economic projections, see the box “Forecast

Uncertainty.”

58 PART 3: SUMMARY OF ECONOMIC PROJECTIONS

−1.00

−0.75

−0.50

−0.25

0.00

0.25

0.50

0.75

1.00

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Diusion index

Change in real GDP

−1.00

−0.75

−0.50

−0.25

0.00

0.25

0.50

0.75

1.00

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Diusion index

Unemployment rate

−1.00

−0.75

−0.50

−0.25

0.00

0.25

0.50

0.75

1.00

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Diusion index

PCE ination

−1.00

−0.75

−0.50

−0.25

0.00

0.25

0.50

0.75

1.00

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Diusion index

Core PCE ination

Figure 4.D. Diusion indexes of participants’ uncertainty assessments

N: 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 diusion indexes

represents the number of participants who responded “Higher” minus the number who responded “Lower,” divided by the tota

number of participants. Figure excludes March 2020 when no projections were submitted.

MONETARY POLICY REPORT: FEBRUARY 2022 59

−1.00

−0.75

−0.50

−0.25

0.00

0.25

0.50

0.75

1.00

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Diusion index

Change in real GDP

−1.00

−0.75

−0.50

−0.25

0.00

0.25

0.50

0.75

1.00

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Diusion index

Unemployment rate

−1.00

−0.75

−0.50

−0.25

0.00

0.25

0.50

0.75

1.00

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Diusion index

PCE ination

−1.00

−0.75

−0.50

−0.25

0.00

0.25

0.50

0.75

1.00

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Diusion index

Core PCE ination

Figure 4.E. Diusion indexes of participants’ risk weightings

N: For each SEP, participants provided responses to the question “Please indicate your judgment of the risk weighting

around your projections.” Each point in the diusion 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.

60 PART 3: SUMMARY OF ECONOMIC PROJECTIONS

2016 2017 2018 2019 2020 2021 2022 2023 2024

Midpoint of target range

Median of projections

70% condence interval*

Actual

Percent

Federal funds rate

Figure 5. 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

or the federal funds rate at the end of the year indicated. The actual values are the midpoint of the target range; the median

ojected values are based on either the midpoint of the target range or the target level. The condence interval around the

median pr

ojected values is based on root mean squared errors of various private and government forecasts made over the

evious 20 years. The condence interval is not strictly consistent with the projections for the federal funds rate, primarily

because these pr

ojections 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 ar

ound the future path of the federal funds rate generated by the uncertainty about the macroeconomic variables as

ll as additional adjustments to monetary policy that may be appropriate to oset the eects of shocks to the economy.

The condence interval is assumed to be symmetric except when it is truncated at zero - the bottom of the lowest target range

or the federal funds rate that has been adopted in the past by the Committee. This truncation would not be intended to indicat

the lik

elihood of the use of negative interest rates to provide additional monetary policy accommodation if doing so was judged

ppropriate. In such situations, the Committee could also employ other tools, including forward guidance and large-scale asset

pur

chases, to provide additional accommodation. Because current conditions may dier from those that prevailed, on average,

er the previous 20 years, the width and shape of the condence interval estimated on the basis of the historical forecast errors

y not reect FOMC participants’ current assessments of the uncertainty and risks around their projections.

* The condence interval is derived from forecasts of the average level of short-term interest rates in the fourth quarter of the

year indica

ted; more information about these data is available in table 2. The shaded area encompasses less than a 70 percent

condence interval if the condence interval has been truncated at zero.

MONETARY POLICY REPORT: FEBRUARY 2022 61

Table 2. Average historical projection error ranges

Percentage points

Variable 2021 2022 2023 2024

Change in real GDP

...... ±0.7 ±1.7 ±2.2 ±2.3

Unemployment rate

...... ±0.1 ±1.0 ±1.6 ±2.0

Total consumer prices

.... ±0.2 ±0.9 ±1.0 ±0.9

Short-term interest rates

.. ±0.1 ±1.5 ±2.1 ±2.5

N: Error ranges shown are measured as plus or minus the root mean squared

error of projections for 2001 through 2020 that were released in the winter by var-

ious private and government forecasters. As described in the box “Forecast Un-

certainty,” under certain assumptions, there is about a 70 percent probability that

actual outcomes for real GDP, unemployment, consumer prices, and the federal

funds rate will be in ranges implied by the average size of projection errors made

in the past. For more information, see David Reifschneider and Peter Tulip (2017),

“Gauging the Uncertainty of the Economic Outlook Using Historical Forecasting

Errors: The Federal Reserve’s Approach,” Finance and Economics Discussion

Series 2017–020 (Washington: Board of Governors of the Federal Reserve System,

February), https://dx.doi.org/10.17016/FEDS.2017.020.

1. Denitions of variables are in the general note to table 1.

2. Measure is the overall consumer price index, the price measure that has been

most widely used in government and private economic forecasts. Projections are

percent changes on a fourth quarter to fourth quarter basis.

3. For Federal Reserve sta forecasts, measure is the federal funds rate. For

other forecasts, measure is the rate on 3-month Treasury bills. Projection errors

are calculated using average levels, in percent, in the fourth quarter.

62 PART 3: SUMMARY OF ECONOMIC PROJECTIONS

reported in table2 would imply a probability of about

70percent that actual GDP would expand within a

range of 2.3 to 3.7percent in the current year, 1.3 to

4.7percent in the second year, 0.8 to 5.2percent in

the third year, and 0.7 to 5.3percent in the fourth year.

The corresponding 70percent con dence intervals

for overall in ation would be 1.8 to 2.2percent in

the current year, 1.1 to 2.9percent in the second

year, 1.0 to 3.0percent in the third year, and 1.1 to

2.9percent in the fourth year. Figures 4.A through4.C

illustrate these con dence bounds in “fan charts”

that are symmetric and centered on the medians of

FOMC participants’ projections for GDP growth, the

unemployment rate, and in ation. 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 re ected in

the widths of the con dence intervals shown in the

top panels of  gures4.A through 4.C. Participants’

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

(continued)

Forecast Uncertainty

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 con dence 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  gure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  gures 4.A through 4.C provide information

on the uncertainty around the economic projections,

 gure1 provides information on the range of views

across FOMC participants. A comparison of  gure1

with  gures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.

current assessments of the uncertainty surrounding

their projections are summarized in the bottom-left

panels of those  gures. 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  gures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

 gures4.A through 4.C.

As with real activity and in ation, 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

in ation 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  nal line in

table2 shows the error ranges for forecasts of short-

term interest rates. They suggest that the historical

con dence intervals associated with projections of

the federal funds rate are quite wide. It should be

noted, however, that these con dence 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

MONETARY POLICY REPORT: FEBRUARY 2022 63

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 con dence 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  gure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  gures 4.A through 4.C provide information

on the uncertainty around the economic projections,

 gure1 provides information on the range of views

across FOMC participants. A comparison of  gure1

with  gures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.

current assessments of the uncertainty surrounding

their projections are summarized in the bottom-left

panels of those  gures. 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  gures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

 gures4.A through 4.C.

As with real activity and in ation, 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

in ation 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  nal line in

table2 shows the error ranges for forecasts of short-

term interest rates. They suggest that the historical

con dence intervals associated with projections of

the federal funds rate are quite wide. It should be

noted, however, that these con dence 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

AFE advanced foreign economy

ARM adjustable-rate mortgage

BLS Bureau of Labor Statistics

CCP central counterparty

CIE commoninationexpectations

COVID-19 coronavirus disease 2019

CPI consumerpriceindex

CPS Current Population Survey

EME emerging market economy

FOMC Federal Open Market Committee; also, the Committee

GDP gross domestic product

LFPR labor force participation rate

MBS mortgage-backed securities

MMF money market fund

ON RRP overnight reverse repurchase agreement

OPEC OrganizationofthePetroleumExportingCountries

PCE personalconsumptionexpenditures

PPP Paycheck Protection Program

repo repurchase agreement

SEC SecuritiesandExchangeCommission

SOFR Secured Overnight Financing Rate

SOMA System Open Market Account

S&P Standard & Poor’s

TGA Treasury General Account

TIPS TreasuryInation-ProtectedSecurities

USD U.S. dollar

VIX impliedvolatilityfortheS&P500index

abbreviations

Board of Governors of the Federal Reserve System

For use at 11:00 a.m. EST

February 25, 2022

Monetary Policy rePort

February 25, 2022