Monetary Policy Report — Board of Governors of the Federal Reserve System (June 12, 2020)
Summary
Monetary Policy Report of the Board of Governors of the Federal Reserve System dated June 12, 2020, submitted to the President of the Senate and the Speaker of the House of Representatives under section 2B of the Federal Reserve Act, with a letter from Jerome H. Powell, Chair. The summary says employers shed nearly 20 million jobs from payrolls after February, and that the unemployment rate jumped from a 50-year low of 3.5 percent in February to a post-World War II high of 14.7 percent in April before moving down to 13.3 percent in May. It says real personal consumption expenditures plummeted 6.7 percent in March and 13.2 percent in April, and that financial system vulnerabilities amplified some of the pandemic's economic effects. The report also reprints the FOMC statement on longer-run goals, including the 2 percent inflation goal.
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For use at 11:00 a.m. EDT
June 12, 2020
Monetary Policy Report
June 12, 2020
Board of Governors of the Federal Reserve System
Letter of Transmittal
Board of Governors of the
Federal Reserve System
Washington, D.C., June 12, 2020
The President of the Senate
The Speaker of the House of Representatives
The Board of Governors is pleased to submit its Monetary Policy Report pursuant to
section 2B of the Federal Reserve Act.
Sincerely,
Jerome H. Powell, Chair
Statement on Longer-Run Goals and Monetary Policy Strategy
Adopted effective January 24, 2012; as amended effective January 29, 2019
The Federal Open Market Committee (FOMC) is firmly committed to fulfilling its statutory
mandate from the Congress of promoting maximum employment, stable prices, and moderate
long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public
as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and
businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary
policy, and enhances transparency and accountability, which are essential in a democratic society.
Inflation, employment, and long-term interest rates fluctuate over time in response to economic and
financial disturbances. Moreover, monetary policy actions tend to influence economic activity and
prices with a lag. Therefore, the Committee’s policy decisions reflect its longer-run goals, its medium-
term outlook, and its assessments of the balance of risks, including risks to the financial system that
could impede the attainment of the Committee’s goals.
The inflation rate over the longer run is primarily determined by monetary policy, and hence the
Committee has the ability to specify a longer-run goal for inflation. The Committee reaffirms its
judgment that inflation at the rate of 2 percent, as measured by the annual change in the price
index for personal consumption expenditures, is most consistent over the longer run with the
Federal Reserve’s statutory mandate. The Committee would be concerned if inflation were running
persistently above or below this objective. Communicating this symmetric inflation goal clearly to the
public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability
and moderate long-term interest rates and enhancing the Committee’s ability to promote maximum
employment in the face of significant economic disturbances. The maximum level of employment
is largely determined by nonmonetary factors that affect the structure and dynamics of the labor
market. These factors may change over time and may not be directly measurable. Consequently,
it would not be appropriate to specify a fixed goal for employment; rather, the Committee’s policy
decisions must be informed by assessments of the maximum level of employment, recognizing that
such assessments are necessarily uncertain and subject to revision. The Committee considers a
wide range of indicators in making these assessments. Information about Committee participants’
estimates of the longer-run normal rates of output growth and unemployment is published four
times per year in the FOMC’s Summary of Economic Projections. For example, in the most
recent projections, the median of FOMC participants’ estimates of the longer-run normal rate of
unemployment was 4.4 percent.
In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its
longer-run goal and deviations of employment from the Committee’s assessments of its maximum
level. These objectives are generally complementary. However, under circumstances in which the
Committee judges that the objectives are not complementary, it follows a balanced approach in
promoting them, taking into account the magnitude of the deviations and the potentially different
time horizons over which employment and inflation are projected to return to levels judged
consistent with its mandate.
The Committee intends to reaffirm these principles and to make adjustments as appropriate at its
annual organizational meeting each January.
Note: The Committee did not reaffirm this statement in January 2020 in light of its ongoing review of its monetary
policy strategy, tools, and communications practices. This statement is a reprint of the statement affirmed in January 2019.
Contents
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Economic and Financial Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Monetary Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Special Topics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Part 1: Recent Economic and Financial Developments. . . . . . . . . . . . . . . . . . . . . 5
Domestic Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Financial Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
International Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Part 2: Monetary Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Part 3: Summary of Economic Projections. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
List of Boxes
Disparities in Job Loss during the Pandemic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Federal Fiscal Policy Response to COVID-19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Small Businesses during the COVID-19 Crisis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Developments Related to Financial Stability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Policy Response to COVID-19 in Foreign Economies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Federal Reserve Actions to Ensure Smooth Functioning of Treasury and MBS Markets. . . . . . . 45
Developments on the Federal Reserve’s Balance Sheet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Note: This report reflects information that was publicly available as of 2 p.m. EDT on June 10, 2020.
Unless otherwise stated, the time series in the figures extend through, for daily data, June 9, 2020; for monthly data,
May 2020; and, for quarterly data, 2020:Q1. In bar charts, except as noted, the change for a given period is measured to
its final quarter from the final quarter of the preceding period.
For figures 16 and 31, note that the S&P 500 Index and the Dow Jones Bank Index are products of S&P Dow Jones Indices LLC and/or its affiliates and
have been licensed for use by the Board. Copyright © 2020 S&P Dow Jones Indices LLC, a division of S&P Global, and/or its affiliates. All rights reserved.
Redistribution, reproduction, and/or photocopying in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more
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LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.
1
Summary
The COVID-19 outbreak is causing to a collapse in second-quarter real PCE.
tremendous human and economic hardship Likewise, in the housing market, residential
across the United States and around the world. sales and construction in April posted outsized
The virus and the measures taken to protect declines that are close to some of the largest
public health have induced a sharp decline in ever recorded, and heightened uncertainty
economic activity and a surge in job losses, and weak demand have led many businesses
with the unemployment rate, which had been to put investment plans on hold or cancel
at a 50-year low, soaring to a postwar record them outright. These data, along with other
high. Weaker demand and significantly lower information, suggest that real gross domestic
oil prices are holding down consumer price product will contract at a rapid pace in the
inflation. The disruptions to economic activity second quarter after tumbling at an annual rate
here and abroad significantly affected financial of 5 percent in the first quarter of 2020.
conditions and impaired the flow of credit to
U.S. households and businesses. In response The labor market. The severe economic
to these developments, the Federal Reserve repercussions of the pandemic have been
quickly lowered its policy rate to close to especially visible in the labor market. Since
zero to support economic activity and took February, employers have shed nearly
extraordinary measures to stabilize markets 20 million jobs from payrolls, reversing almost
and bolster the flow of credit to households, 10 years of job gains. The unemployment rate
businesses, and communities. Financial jumped from a 50-year low of 3.5 percent
conditions have improved, in part reflecting in February to a post–World War II high
policy measures to support the economy and of 14.7 percent in April and then moved
the flow of credit. The Federal Reserve is down to a still very elevated 13.3 percent
committed to using its full range of tools to in May. The most severe job losses have
support the U.S. economy in this challenging been sustained by those with lower earnings
time, thereby promoting its maximum- and by the socioeconomic groups that are
employment and price-stability goals. disproportionately represented among low-
wage jobs.
Economic and Financial
Developments Inflation. Consumer price inflation has slowed
abruptly. The 12-month change in the price
Economic activity. In response to the public index for PCE was just 0.5 percent in April.
health emergency precipitated by the spread The 12-month measure of PCE inflation that
of COVID-19, many protective measures were excludes food and energy items (so-called
adopted to limit the transmission of the virus. core inflation), which historically has been
These social-distancing measures effectively a better indicator of where overall inflation
closed parts of the economy, resulting in a will be in the future than the total figure, fell
sudden and unprecedented fall in economic from 1.8 percent in February to 1.0 percent in
activity and historic increases in joblessness. April. This slowing reflected monthly readings
Although virus mitigation efforts in many for March and April that were especially
places did not begin until the final two weeks of low because of large price declines in some
March, real personal consumption expenditures categories most directly affected by social
(PCE) plummeted 6.7 percent in March and an distancing. Overall inflation also has been held
unprecedented 13.2 percent in April. Indicators down by substantially lower energy prices,
suggest spending rose in May, but the April which more than offset the effects of surging
data and May indicators taken together point prices for food. Despite the sharp slowing in
2 Summary
inflation, survey-based measures of longer- Financial stability. The COVID-19 pandemic
run inflation expectations have generally been has abruptly halted large swaths of economic
stable at relatively low levels. However, market- activity and led to swift financial repercussions.
based measures of inflation compensation have Despite increased resilience from the financial
moved down to some of the lowest readings and regulatory reforms adopted since 2008,
ever seen. financial system vulnerabilities—most notably
those associated with liquidity and maturity
Financial conditions. In late February and transformation in the nonbank financial
over much of March as COVID-19 spread, sector—have amplified some of the economic
equity prices plunged and nominal Treasury effects of the pandemic. Accordingly,
yields dropped substantially, with yields financial-sector vulnerabilities are expected
on longer-term securities reaching all-time to be significant in the near term. The strains
record lows. Spreads of yields on corporate on household and business balance sheets
bonds over those on comparable-maturity from the economic and financial shocks since
Treasury securities widened significantly as March will likely create persistent fragilities.
the credit quality of firms declined and market Financial institutions may experience strains
functioning deteriorated; in addition, loans as a result. The Federal Reserve, with approval
were unavailable for most firms, particularly of the Secretary of the Treasury, established
firms below investment grade. At the most new credit and liquidity facilities under
acute phase of this period, trading conditions section 13(3) of the Federal Reserve Act to
became extremely illiquid and some critical alleviate severe dislocations that arose in a
markets stopped functioning properly. number of financial markets and to support
Consumer borrowing also fell as spending the flow of credit to households, businesses,
slumped. Several markets supporting consumer and state and local governments. Furthermore,
lending experienced severe strains around as financial stresses abroad risked spilling
this period, including the agency residential over into U.S. credit markets, the Federal
mortgage-backed securities (MBS) market Reserve and several other central banks
as well as the auto, credit card, and student announced the expansion and enhancement
loan securitization markets. In response, the of dollar liquidity swap lines. In addition, the
Federal Reserve took unprecedented measures Federal Reserve introduced a new temporary
to restore smooth market functioning and to repurchase agreement facility for foreign
support the flow of credit in the economy, monetary authorities. The Federal Reserve
including the creation of a number of has also made a number of adjustments to its
emergency credit and liquidity facilities.1 These regulatory and supervisory regime to facilitate
actions, along with the aggressive response market functioning and reduce regulatory
of fiscal policy, stabilized financial markets impediments to banks supporting households,
and led to a notable improvement in financial businesses, and municipal customers affected
conditions for both firms and households as by COVID-19. (See the box “Developments
well as state and local governments. Even so, Related to Financial Stability” in Part 1.)
lending standards for both households and
businesses have become less accommodative, International developments. The spread of
and borrowing conditions are tight for low- COVID-19 throughout the world and the
rated households and businesses. measures taken to contain it have produced
devastating effects on the global economy.
Amid widespread and stringent shutdowns,
recent data suggest that global economic
1 A list of funding, credit, liquidity, and loan facilities activity in the first half of the year has
established by the Federal Reserve in response to
COVID-19 is available on the Board’s website at https://
experienced a sharp and synchronized
www.federalreserve.gov/funding-credit-liquidity-and- contraction greater than that in the Global
loan-facilities.htm. Financial Crisis. The many mandated closures
MONETARY POLICY REPORT: JUNE 2020 3
of nonessential businesses abroad and the price-stability goals. The Committee noted that
collapse in consumer demand contributed to it would continue to monitor the implications
a significant deterioration in labor markets of incoming information for the economic
and subdued inflation. Unlike past recessions, outlook, including information related to
services activity in the foreign economies has public health, as well as global developments
dropped more sharply than manufacturing, and muted inflation pressures, and that it
with restrictions on movement having would use its tools and act as appropriate to
severely curtailed spending on travel, tourism, support the economy.
restaurants, and recreation. Against this
backdrop, foreign governments and central Safeguarding market functioning. Market
banks have responded strongly and swiftly functioning deteriorated in many markets
to support incomes and to improve market in late February and much of March,
liquidity and the provision of credit. More including the critical Treasury and agency
recently, economic activity has begun to revive MBS markets. The Federal Reserve swiftly
in some foreign economies as authorities eased took a series of policy actions to address
social-distancing restraints. these developments. The FOMC announced
it would purchase Treasury securities and
The rapid spread of COVID-19 weighed agency MBS in the amounts needed to
heavily on global risk sentiment, with financial ensure smooth market functioning and the
stresses intensifying and liquidity conditions effective transmission of monetary policy
deteriorating in many foreign financial to broader financial conditions. The Open
markets. Aggressive fiscal and monetary Market Desk began offering large-scale
policy responses in the United States and overnight and term repurchase agreement
abroad, however, helped boost sentiment and operations. The Federal Reserve coordinated
improve market functioning. On balance, with other central banks to enhance the
financial conditions abroad remain tighter provision of liquidity via the standing U.S.
than at the beginning of the year, especially dollar liquidity swap line arrangements and
in some emerging market economies. Since announced the establishment of temporary
February, global equity prices moved lower, U.S. dollar liquidity arrangements (swap
sovereign interest rates in the European lines) with additional central banks. The
periphery increased somewhat, and measures Federal Reserve also established a temporary
of sovereign spreads in emerging market repurchase agreement facility for foreign
economies widened significantly. In many and international monetary authorities.
advanced economies, long-term interest rates (Separately, the Board introduced several
reached historically low levels. facilities with the backing of the U.S. Treasury
to more directly support the flow of credit to
Monetary Policy the economy.) Since these policy actions were
announced, the functioning of Treasury and
Easing monetary policy. In light of the effects MBS markets has gradually improved. (See
of COVID-19 on economic activity and the box “Federal Reserve Actions to Ensure
on risks to the outlook, the FOMC rapidly Smooth Functioning of Treasury and MBS
lowered the target range for the federal funds Markets” in Part 2.) Reflecting these policy
rate. Specifically, at two meetings in March, responses, the size of the Federal Reserve’s
the FOMC lowered the target range for the balance sheet increased significantly. (See the
federal funds rate by a total of 1½ percentage box “Developments on the Federal Reserve’s
points, bringing it to the current range of 0 to Balance Sheet” in Part 2.)
¼ percent. The Committee expects to maintain
this target range until it is confident that the Fed Listens. The Federal Reserve has released a
economy has weathered recent events and is on report on its Fed Listens initiative. This initiative
track to achieve its maximum-employment and is part of a broad review of the monetary policy
4 Summary
strategy, tools, and communication practices Federal Reserve, and other federal agencies
the Federal Reserve uses to pursue its statutory are making aggressive efforts to support small
dual-mandate goals of maximum employment businesses. (See the box “Small Businesses
and price stability. A key component of the during the COVID-19 Crisis” in Part 1.)
review was a series of public Fed Listens events
aimed at consulting with a broad range of Federal fiscal policy response to COVID-19.
stakeholders in the U.S. economy on issues While the economic consequences resulting
pertaining to the dual-mandate objectives. from the pandemic have been historically
large, the amount of fiscal support that has
Special Topics been enacted constitutes the fastest and largest
fiscal response to any postwar economic
Disparities in job loss during the pandemic. downturn. The pieces of legislation enacted
The deterioration in labor market conditions since the arrival of the pandemic that have
since February has been sudden, severe, and composed this response are expected to raise
widespread. At the same time, workers in government outlays and reduce tax revenues
some industries, occupations, demographic by nearly $2 trillion in the current fiscal year.
groups, and locations have experienced (See the box “Federal Fiscal Policy Response
more significant employment declines than to COVID-19” in Part 1.)
others. Although disparities in labor market
outcomes often arise during recessions, factors Policy response to COVID-19 in foreign
unique to this episode have also contributed economies. Authorities in many foreign
to the recent divergence. Job losses have been economies have implemented fiscal,
especially severe for those with lower earnings monetary, and regulatory measures to
and for the socioeconomic groups that are mitigate disruptions caused by the COVID-19
disproportionately represented among low- pandemic. Sizable fiscal packages targeted
wage jobs. (See the box “Disparities in Job the sudden loss of income by firms and
Loss during the Pandemic” in Part 1.) households. Actions by central banks,
including purchases of sovereign and
Small businesses during the COVID-19 crisis. private bonds, have aimed to restore market
Small businesses make up nearly half of U.S. functioning, sustain the provision of credit
private-sector employment and play key to businesses and households during the
roles in local communities. The pandemic pandemic, and support the economic recovery.
poses acute risks to the survival of many Regulatory changes have focused on ensuring
small businesses. Their widespread failure that banks sustain their capacity to absorb
would adversely alter the economic landscape pandemic-related losses while continuing to
of local communities and potentially slow lend to households and firms. (See the box
the economic recovery and future labor “Policy Response to COVID-19 in Foreign
productivity growth. The Congress, the Economies” in Part 1.)
5
Part 1
Recent Economic and Financial Developments
Domestic Developments
The COVID-19 outbreak has led to an
acute weakening in the labor market
since February
In response to the public health crisis caused 1. Nonfarm payroll employment
by the spread of COVID-19, households,
Monthly Millions of jobs
businesses, and governments took dramatic
measures to slow the spread of the virus. As 155
a result, many sectors of the economy were
150
effectively closed from mid-March through
April but have seen some gradual lifting of 145
restrictions since then. The severity, scope, and 140
speed of the ensuing downturn in economic
135
activity have been significantly worse than any
recession since World War II. After posting 130
strong gains in both January and February, 125
payroll employment plummeted by an
unprecedented 22 million in March and April 2006 2008 2010 2012 2014 2016 2018 2020
before adding back 2.5 million jobs in May SOURCE: Bureau of Labor Statistics via Haver Analytics.
(figure 1). The unemployment rate jumped to
14.7 percent in April, the highest level since the
Great Depression. In May, the unemployment
rate fell to 13.3 percent, which was almost 2. Civilian unemployment rate
10 percentage points above the February level
Monthly Percent
(figure 2). Although unemployment soared
for all major racial and ethnic groups, the 16
unemployment rate for Hispanics posted the 14
largest increase over this period (figure 3). (For 12
more discussion of the pandemic’s effects on
10
the labor market, see the box “Disparities in
8
Job Loss during the Pandemic.”)
6
Data received since the survey week for payroll 4
employment in May suggest that job gains 2
have continued.2 Although initial claims for
2006 2008 2010 2012 2014 2016 2018 2020
SOURCE: Bureau of Labor Statistics.
2. The Bureau of Labor Statistics (BLS) conducts
a monthly survey, the Current Employment Statistics
survey, to estimate payroll employment. In that survey,
employers are asked to report the number of workers
on their payrolls during the reference period, which
is the pay period that includes the 12th of the month.
The unemployment and labor force participation rates
(along with other data) are estimated based on a separate
monthly survey conducted by the Census Bureau for the
BLS, the Current Population Survey, which references the
week including the 12th of the month.
6 Part 1: Recent Economic and Financial Developments
3. Unemployment rate, by race and ethnicity
Monthly Percent
20
18
Black or African American
16
14
12
Hispanic or Latino
10
White 8
6
Asian
4
2
2008 2010 2012 2014 2016 2018 2020
NOTE: Unemployment rate measures total unemployed as a percentage of the labor force. Persons whose ethnicity is identified as Hispa nic or Latino
may be of any race. The shaded bar with top cap indicates the period of the Great Recession as defined by the National Bureau of Economic Research
(NBER). The NBER has determined that recent economic activity peaked in February 2020.
SOURCE: Bureau of Labor Statistics via Haver Analytics.
unemployment insurance have remained
high, it is unclear whether these new claims
reflect additional large numbers of layoffs
or that states are clearing their backlogs of
applications. In addition, weekly employment
data from the payroll processor ADP indicate
4. Labor force participation rates and
employment-to-population ratio
that rehiring has continued and that payroll
employment will likely move up again in June,
Percent Percent albeit from what remains a very low level.
68
85
Labor force participation rate 66 The labor force participation rate (LFPR)—
84 64 the share of the population that is either
83 62 working or actively looking for work—fell
Employment-to-
population ratio 60 from around 63½ percent early this year
82
58 to 60.8 percent in May (figure 4). The May
81 56 LFPR reading was one of the lowest since the
80 Prime-age labor force
54 early 1970s.3 Poor employment prospects or
participation rate 52 concerns about safety in the workplace might
79
50 have caused some of the newly unemployed
2006 2008 2010 2012 2014 2016 2018 2020 to exit the labor force or induced others to
NOTE: The data are monthly. The prime-age labor force participation
refrain from entering.4 However, with so much
rate is a percentage of the population aged 25 to 54. The labor force
participation rate and the employment-to-population ratio are
percentages of the population aged 16 and over. 3. The LFPR in April, at 60.2 percent, was the lowest
SOURCE: Bureau of Labor Statistics via Haver Analytics. since January 1973.
4. Individuals who have been placed on temporary
layoff or expect to be recalled are classified as in the
labor force and unemployed. Recently, the BLS reported
MONETARY POLICY REPORT: JUNE 2020 7
of the labor market shut in and most new
hiring at a standstill, the distinction between
being unemployed and out of the labor
force likely has become especially blurred.
The employment-to-population ratio for
individuals 16 and over—the share of that
segment of the population who are working—
combines movements in both unemployment
and labor force participation. This measure
was 51.3 percent in April and 52.8 percent in
May, the lowest readings in the history of this
series, which began in 1948.
Wages are likely being held down,
although compositional shifts have 5. Measures of change in hourly compensation
temporarily boosted some wage measures
Percent change from year earlier
While reliable data are limited, anecdotal
8
evidence suggests that the economic downturn
7
is putting downward pressure on wages. Atlanta Fed’s
Compensation per hour, 6
The series on wage growth computed by the business sector Wage Growth Tracker
5
Federal Reserve Bank of Atlanta, which 4
tracks the median 12-month wage growth 3
of individuals reporting to the Current 2
Population Survey, has changed little in Employment
cost index, 1
private sector +
recent months (figure 5).5 In contrast, 0
_
measures that look at average wage costs have Average hourly earnings,
private sector 1
jumped because of compositional effects,
2004 2006 2008 2010 2012 2014 2016 2018 2020
as COVID-19 mitigation efforts and weaker
NOTE: Business-sector compensation is on a 4-quarter percent change
demand have disproportionately affected basis. For the private-sector employment cost index, change is over the
lower-wage workers and left relatively more 12 months ending in the last month of each quarter; for private-sector
average hourly earnings, the data are 12-month percent changes and
higher-wage workers on payrolls. Indeed, begin in March 2007; for the Atlanta Fed’s Wage Growth Tracker, the
data are shown as a 3-month moving average of the 12-month percent
average hourly earnings from the payroll change and extend through April 2020.
survey jumped 6.7 percent over the 12 months SOURCE: Bureau of Labor Statistics; Federal Reserve Bank of Atlanta,
Wage Growth Tracker; all via Haver Analytics.
ending in May, largely reflecting this change in
the composition of private payrolls. In the first
quarter, both the employment cost index (ECI)
and compensation per hour, which include
both wages and benefits, posted moderate
that a large number of job losers on temporary layoff
improperly classified themselves as being “employed
but on unpaid absence” in March, April, and May. If
these respondents had correctly classified themselves as
unemployed but on temporary layoff, the unemployment
rate would have been 5 percentage points higher in April
and 3 percentage points higher in May.
5. The Federal Reserve Bank of Atlanta’s measure
differs from others in that it measures the wage growth
only of workers who were employed both in the current
survey month and 12 months earlier.
8 Part 1: Recent Economic and Financial Developments
Disparities in Job Loss during the Pandemic
For nearly all industries, occupations, demographic large among lower-paid workers who may be less
groups, and locations, employment was substantially able to financially weather an extended period of
lower in May than in February. While job loss has been unemployment. Indeed, estimates of employment
pervasive, some groups have experienced more severe declines based on a worker’s previous wage (using data
employment declines than others, particularly workers from the payroll provider ADP), shown in figure A, also
with lower earnings and the socioeconomic groups that indicate this disproportionate pattern of job loss. From
are disproportionately represented among low-wage February to mid-April, employment fell substantially
jobs; employment declines have also been larger in more for workers who were previously earning wages
some states than in others. Although disparities in labor in the bottom fourth of wage earners, compared with
market outcomes across groups often widen during other workers. Despite somewhat more rapid job
recessions, certain factors unique to this episode—in growth for lower-wage earners in subsequent weeks,
particular, the social-distancing measures taken by employment for lower-wage earners remains roughly
households, businesses, and governments to limit 35 percent lower than in February, compared with
in-person interactions—have contributed to the recent 5 to 15 percent lower employment for higher-wage
divergence. earners. These differences are also consistent with
Because jobs differ in the degree to which they results from a recent survey conducted by the Federal
involve personal contact and physical proximity, in Reserve Board that indicated that among households
whether they provide an “essential function,” and in with an annual income of $40,000 or less, nearly
whether their business operations can be conducted 40 percent of individuals who were employed in
remotely, social-distancing measures have had February experienced job loss in March or early April,
disparate consequences across industries and, in compared with 20 percent of the population overall.2
turn, on particular types of workers who tend to work Figure B illustrates that the decline in employment
in heavily affected industries. For example, the net (as a fraction of the population) has also been especially
proportion of jobs lost since February has been greater large for people aged 16 to 24 compared with older
in industries such as accommodation and food services workers, for people without a bachelor’s degree
(where social-distancing regulations have severely compared with those with at least a bachelor’s degree,
affected many businesses and where workers are and for Hispanics compared with other races and
frequently unable to work from home) and smaller in ethnicities. In addition, employment rates have dropped
industries such as professional and business services somewhat more for women than for men, and for
and financial activities (where workers may be less Asians and African Americans compared with whites. In
affected by social distancing and are generally more general, the groups with the larger employment declines
able to conduct work from home).1 In keeping with this are most commonly employed in the industries that have
pattern, states that rely heavily on tourism—such as experienced the greatest net employment declines thus
Hawaii and Nevada—saw exceptionally large increases far, such as accommodation, food service, and retail
in unemployment through April (the most recent month trade; these demographic groups are also less likely to
for which state unemployment rate data are available). report being able to work from home.
Net job loss since February thus far has been In the months ahead, labor market prospects for the
concentrated in lower-wage industries, suggesting that unemployed and underemployed—both overall and
employment declines have been disproportionately for particularly hard-hit groups of workers—will largely
depend on the course of the COVID-19 outbreak
1. In May, employment in the accommodation and food itself and on actions taken to halt its spread. Recent
service industry was 40 percent lower than in February. job losses differ from those of previous recessions
By contrast, employment in professional and business not only in the suddenness and severity with which
services was around 10 percent lower than in February, they occurred, but also in the unusually high share of
and employment in financial activities was 3 percent
lower. Responses to a 2017–18 survey by the U.S. Census (continued)
Bureau indicated that less than 20 percent of workers in
accommodation and food service reported being able to
work from home, compared with more than 50 percent in 2. See Board of Governors of the Federal Reserve
professional and business services and financial activities. See System (2020), Report on the Economic Well-Being of U.S.
Bureau of Labor Statistics (2019), “Job Flexibilities and Work Households in 2019, Featuring Supplemental Data from
Schedules—2017–2018 Data from the American Time Use April 2020 (Washington: Board of Governors, May) https://
Survey,” press release, September 24, https://www.bls.gov/ www.federalreserve.gov/publications/files/2019-report-
news.release/pdf/flex2.pdf. economic-well-being-us-households-202005.pdf.
MONETARY POLICY REPORT: JUNE 2020 9
A. Employment declines for low-, middle-, and B. Decline in employment-to-population ratio, by
high-wage workers demographic group
Weekly Week ending February 16, 2020 = 100
Men
110 Women
100 16–24
Top 25–54
Top-middle 55+
90
Less than a high school diploma
Bottom-middle 80 High school graduates, no college
Some college or associate’s degree
70 Bachelor’s degree and higher
60 White
Bottom African American
50 Asian
Hispanic
Feb. Mar. Apr. May 0 2 4 6 8 10 12 14
Percentage points
NOTE: Data are weekly and extend through May 10, 2020. Wage NOTE: The data are seasonally adjusted and represent the change from
quartiles are defined using the February wage distribution. February to May 2020.
SOURCE: Federal Reserve Board staff calculations using ADP, LLC, SOURCE: Bureau of Labor Statistics via Haver Analytics.
microdata.
workers who expect them to be temporary.3 Research workers’ expectations of being recalled may prove
has shown that workers who return to their previous true, and many recent job losses may turn out to be
employers after a temporary layoff tend to earn wages temporary layoffs from which workers can quickly
similar to what they were making previously, whereas recover. However, if economic activity remains weak
laid-off workers who do not return to their previous for a prolonged period, businesses that had intended
employer experience a longer-lasting decline in to reopen at full capacity may instead be compelled
earnings.4 If public health conditions improve quickly to shutter completely or to resume operations at a
so that social-distancing measures can be further diminished scale, turning many temporary layoffs
relaxed and consumers become more willing to into permanent job losses. Perhaps reflecting this
engage in a wider range of commercial activities, possibility, the number of unemployed workers
reporting that they had permanently separated from
their previous employer rose by roughly 300,000
3. Among unemployed job losers surveyed in the Current
Population Survey, fully 90 percent of those surveyed in between April and May, even as the total number of
mid-April reported that they expected to be recalled by unemployed persons began to decline. As lower-paid
their previous employer. This proportion declined slightly to workers are disproportionately employed by small
87 percent among those surveyed in mid-May. In addition, businesses—which typically have fewer financial
the Federal Reserve Board’s recent survey of U.S. households
resources than larger firms—they may be at heightened
reports that around 90 percent of individuals who experienced
job loss in March or early April said that their employer risk of seeing their former employers shut down and
indicated that they would return to their job at some point; hence experiencing the scarring effects of permanent
see Board of Governors, Report on the Economic Well-Being separations.5
of U.S. Households in 2019, in box note 2. By comparison,
the share of job losers who expected to be recalled by their
previous employer never exceeded 50 percent at any point 5. See Gregory Acs and Austin Nichols (2007), “Low-
during the Great Recession. Income Workers and Their Employers: Characteristics and
4. See Louis S. Jacobson, Robert J. LaLonde, and Challenges,” paper presented at “Public and Private Roles
Daniel G. Sullivan (1993), “Earnings Losses of Displaced in the Workplace: What Are the Next Steps in Supporting
Workers,” American Economic Review, vol. 83 (September), Working Families?” a roundtable held at the Urban Institute,
pp. 685–709; Shigeru Fujita and Giuseppe Moscarini (2017), Washington, May 23, http://webarchive.urban.org
“Recall and Unemployment,” American Economic Review, /UploadedPDF/411532_low_income_workers.pdf; and
vol. 107 (December), pp. 3875–916; and Marta Lachowska, Nicholas Bloom, Fatih Guvenen, Benjamin S. Smith, Jae Song,
Alexandre Mas, and Stephen A. Woodbury (forthcoming), and Till von Wachter (2018), “The Disappearing Large-Firm
“Sources of Displaced Workers’ Long-Term Earnings Losses,” Wage Premium,” American Economic Review Papers and
American Economic Review. Proceedings, vol. 108 (May), pp. 317–22.
10 Part 1: Recent Economic and Financial Developments
6. Change in the price index for personal consumption gains, with neither series reflecting much of the
expenditures pandemic’s repercussions.6
Monthly 12-month percent change
Price inflation has moved significantly lower
Trimmed mean 3.0
As measured by the 12-month change in
Excluding food
2.5 the price index for personal consumption
and energy
2.0 expenditures (PCE), inflation was just
1.5
0.5 percent in April, compared with 1.6 percent
over the same period a year ago (figure 6). The
1.0
Total abrupt slowing in total PCE price inflation this
.5 year partly reflects sharp declines in consumer
0 energy prices that resulted from the collapse in
oil prices. In contrast, food prices have moved
2013 2014 2015 2016 2017 2018 2019 2020 higher despite declines in food commodity
NOTE: The data extend through April 2020. prices, likely reflecting higher demand at retail
SOURCE: For trimmed mean, Federal Reserve Bank of Dallas; for all
else, Bureau of Economic Analysis; all via Haver Analytics. grocery stores in combination with pandemic-
related supply chain issues. In addition to
the drop in energy prices, the unprecedented
reductions in demand for some services as a
result of social distancing have led to sharp
drops in prices for airfares and lodging away
from home. These price declines led the
12-month measure of core PCE inflation—that
is, inflation excluding volatile consumer food
and energy prices—to move significantly lower,
falling from 1.8 percent in February to just
1.0 percent in April, as the monthly readings
for March and April were exceptionally
low. An appreciation of the dollar has also
contributed to the slowing in core inflation.
The trimmed mean measure of PCE price
inflation constructed by the Federal Reserve
Bank of Dallas provides an alternative way
to purge measured inflation of transitory
influences, and it is less sensitive than the core
measure to extreme price movements such
as the recent outsized swings in airfares and
lodging.7 The 12-month change in this measure
6. The ECI references the March survey week, a period
before most of the pandemic-induced layoffs. The wage
component of compensation per hour also references the
March survey week but was adjusted by the BLS with
additional information to better capture job losses during
the latter half of March.
7. The trimmed mean price index excludes whichever
prices showed the largest increases or decreases in a given
month. Over the past 20 years, changes in the trimmed
MONETARY POLICY REPORT: JUNE 2020 11
edged down to 1.9 percent in April from 7. Spot and futures prices for crude oil
2.1 percent in February.
Weekly Dollars per barrel
Oil prices are notably lower this spring 160
Against the backdrop of a global collapse 140
in the demand for oil and a rapid increase in Brent spot price 120
oil inventories, the Brent price of crude oil 100
plunged from about $65 per barrel in early 80
January to around $20 per barrel at the end
24-month-ahead 60
of April (figure 7).8 More recently, prices futures contracts
40
have rebounded to about $40 per barrel, as
an agreement between OPEC (Organization 20
of the Petroleum Exporting Countries) 2006 2008 2010 2012 2014 2016 2018 2020
and Russia to cut oil production by nearly
NOTE: The data are weekly averages of daily data. The weekly data
10 percent of global output appears to have begin on Thursdays and extend through June 3, 2020.
SOURCE: ICE Brent Futures via Bloomberg.
taken effect. Additionally, the dramatic
downturn in global oil demand appears to
be abating as countries begin to ease their
COVID-19 lockdown policies. The decline
in oil prices has contributed to similar
movements in retail gasoline prices, which have
also fallen in recent months.
Reported prices of imports other than 8. Nonfuel import prices and industrial metals indexes
energy fell
January 2014 = 100 January 2014 = 100
After rising early this year, nonfuel import
prices fell in April, as the dollar appreciated 120 Industrial metals
and the sharp decline in global demand put 110 102
downward pressure on non-oil commodity
100 100
prices—a substantial component of nonfuel
import prices (figure 8). Prices of industrial 90
98
metals fell sharply in the first months of the 80
year but edged up in May, as economic activity 70
Nonfuel import prices 96
in some economies began to revive. 94
60
2014 2015 2016 2017 2018 2019 2020
NOTE: The data for nonfuel import prices are monthly and extend
through April 2020. The data for industrial metals are monthly averages
of daily data and extend through May 31, 2020.
mean index have averaged about ¼ percentage point SOURCE: For nonfuel import prices, Bureau of Labor Statistics; for
above core PCE inflation and 0.1 percentage point above industrial metals, S&P GSCI Industrial Metals Spot Index via Haver
total PCE inflation. Analytics.
8. On April 20, the price of front-month oil futures
contracts for West Texas Intermediate (WTI) closed at
negative $38 per barrel. These WTI futures contracts
are settled by physical delivery; as worries about the
lack of available storage space intensified, prices
spiraled downward. Few contracts were actually traded
at these negative prices, and prices recovered in the
following days.
12 Part 1: Recent Economic and Financial Developments
9. Surveys of inflation expectations However, survey-based measures of
long-run inflation expectations have been
Percent
broadly stable . . .
Despite the tumultuous situation of recent
Michigan survey, 4
next 5 to 10 years
NY Fed survey,
3 years ahead
months, survey-based measures of inflation
expectations at medium- and longer-term
3
horizons, which likely influence actual
inflation by affecting wage- and price-setting
2
Survey of Professional
decisions, so far have changed little (figure 9).
Forecasters,
next 10 years
In the University of Michigan Surveys of
1
Consumers, the median value for inflation
expectations over the next 5 to 10 years was
2006 2008 2010 2012 2014 2016 2018 2020 2.7 percent in May and has fluctuated around
NOTE: The series are medians of the survey responses. The Michigan
2½ percent since the end of 2016. In the
survey data are monthly. The Survey of Professional Forecasters data for Survey of Consumer Expectations, conducted
inflation expectations for personal consumption expenditures are
quarterly, begin in 2007:Q1, and extend through 2020:Q2. The NY Fed by the Federal Reserve Bank of New York,
survey data are monthly and begin in June 2013.
SOURCE: University of Michigan Surveys of Consumers; Federal
the median of respondents’ expected inflation
Reserve Bank of New York, Survey of Consumer Expectations; Federal rate three years ahead moved lower, on net, in
Reserve Bank of Philadelphia, Survey of Professional Forecasters.
the second half of last year and has averaged
2.5 percent since. In the Survey of Professional
Forecasters, conducted by the Federal Reserve
Bank of Philadelphia, the median expectation
for the annual rate of increase in the PCE price
index over the next 10 years edged down to
1.9 percent in the second-quarter survey, below
the 2 percent level that had been reported for
some time.
. . . but market-based measures of
inflation compensation are notably lower
Market-based measures of inflation
compensation can also be used to make
10. 5-to-10-year-forward inflation compensation
inferences about inflation expectations.
Weekly Percent However, the inference is not straightforward
because market-based measures can be
3.5
Inflation swaps importantly affected by changes in premiums
3.0
that provide compensation for bearing
2.5 inflation and liquidity risks. Measures of
2.0 longer-term inflation compensation—derived
TIPS breakeven rates 1.5
either from differences between yields on
nominal Treasury securities and those on
1.0
comparable-maturity Treasury Inflation-
.5 Protected Securities (TIPS) or from inflation
2012 2014 2016 2018 2020
swaps—have decreased, on net, since the
NOTE: The data are weekly averages of daily data and extend through
end of 2019 (figure 10). The 5-year and
June 5, 2020. TIPS is Treasury Inflation-Protected Securities. 5-to-10-year-forward measures of inflation
SOURCE: Federal Reserve Bank of New York; Barclays; Federal Reserve
Board staff estimates. compensation are about 60 basis points and
40 basis points lower, respectively, than at the
MONETARY POLICY REPORT: JUNE 2020 13
beginning of the year.9 Both measures dropped
sharply in March, with the 5-year measure
reaching the lowest level since the Global
Financial Crisis and the 5-to-10-year measure
hitting new historical lows. These declines
partly reflected a reduction in the relative
liquidity of TIPS compared with nominal
Treasury securities. As liquidity improved,
inflation compensation partially retraced. The
TIPS-based measure of 5-to-10-year-forward
inflation compensation and the analogous
measure from inflation swaps are now about
1½ percent and 1¾ percent, respectively.10
Real gross domestic product has 11. Change in real gross domestic product and gross
contracted severely and with domestic income
unprecedented speed Percent, annual rate
After posting a moderate gain in 2019, real Gross domestic product
Gross domestic income 6
gross domestic product (GDP) fell at an
annual rate of 5 percent in the first quarter, 4
with that decline likely all occurring in the final 2
weeks of the quarter (figure 11). In the second Q1 +
0
_
quarter, real GDP appears to be plummeting at
a breathtaking pace. Indeed, many professional 2
forecasters are projecting second-quarter 4
real GDP to fall at an annual rate of 30 to 6
40 percent. This severe contraction reflects a
steep drop in consumer spending associated 2013 2014 2015 2016 2017 2018 2019 2020
with measures to contain the spreading virus. SOURCE: Bureau of Economic Analysis via Haver Analytics.
Uncertainty about the economic outlook
also likely has pushed down business fixed
investment, and events abroad have led to a
steep drop in exports. In the manufacturing
sector, output fell sharply in March and posted
its largest decline on record in April as many
factories closed temporarily for all or most of
9. Inflation compensation implied by the TIPS
breakeven inflation rate is based on the difference, at
comparable maturities, between yields on nominal
Treasury securities and yields on TIPS, which are indexed
to the total consumer price index (CPI). Inflation swaps
are contracts in which one party makes payments of
certain fixed nominal amounts in exchange for cash flows
that are indexed to cumulative CPI inflation over some
horizon. Inflation compensation derived from inflation
swaps typically exceeds TIPS-based compensation, but
week-to-week movements in the two measures are highly
correlated.
10. As these measures are based on CPI inflation, one
should probably subtract about ¼ percentage point—the
average differential with PCE inflation over the past two
decades—to infer inflation compensation on a PCE basis.
14 Part 1: Recent Economic and Financial Developments
12. Change in real personal consumption expenditures both months. This decrease in factory output
and disposable personal income included nearly all motor vehicle and civilian
Percent, annual rate aircraft manufacturers. However, amid some
Personal consumption expenditures
easing of restrictions, there are signs that
Disposable personal income H1
40 manufacturing activity moved up in May,
30 partly as a result of the ramp-up in automotive
20 production.
10
+
0
_ Social distancing has led to a dramatic
10 plunge in household spending and
20 earnings
30
After having increased at a solid 2.7 percent
40
pace in 2019, real PCE fell at an annual rate
2014 2015 2016 2017 2018 2019 2020 of 6.8 percent in the first quarter of 2020, one
NOTE: The values for 2020:H1 are the annualized April/Q4 changes. of the largest quarterly drops in the history
SOURCE: Bureau of Economic Analysis via Haver Analytics. of this series (figure 12).11 As concerns about
the virus outbreak grew and government
13. Personal saving rate
restrictions mounted, real PCE collapsed,
Monthly Percent falling 6.7 percent in March and a record
13.2 percent in April. Although indicators
34
point to an increase in May—which is
30
consistent with some relaxation of government
26
restrictions—taken together, the April data
22
and May indicators point to an unprecedented
18 decline in second-quarter consumer outlays.
14 Real disposable personal income (DPI), a
10 measure of households’ after-tax purchasing
6 power, fell in the first quarter, mostly because
2 of a drop in household income from wages
and salaries. However, in April, real DPI
2006 2008 2010 2012 2014 2016 2018 2020
jumped 13½ percent, pushing its April level
NOTE: The data extend through April 2020.
SOURCE: Bureau of Economic Analysis via Haver Analytics. up relative to the fourth quarter at an annual
rate of more than 30 percent. Although
14. Indexes of consumer sentiment aggregate earnings from employment
collapsed in April, this income loss was more
1985 = 100 1966 = 100
than offset by government income support
170 120 from unemployment insurance and stimulus
Conference Board
150 110
payments.12 With households unwilling or
130 unable to spend a commensurate amount of
100
110 their available aggregate income, the April
90
90 saving rate shot up to 33 percent (figure 13).
80
70
70
50
60 11. Quarterly real PCE begins in the first quarter
30
Michigan survey of 1947.
10 50
12. These programs boosted aggregate DPI; however,
the income of many individuals and households was
2002 2005 2008 2011 2014 2017 2020
lower in April than in February either because they did
NOTE: The data are monthly. not qualify for benefits or because of delays between job
SOURCE: University of Michigan Surveys of Consumers; Conference
Board. loss and the receipt of those benefits.
MONETARY POLICY REPORT: JUNE 2020 15
Consumer sentiment has tumbled . . . 15. Wealth-to-income ratio
Households’ concerns about their economic Quarterly Ratio
situation, as reflected in consumer sentiment,
may be leading them to save more for 7.5
precautionary reasons. The University of 7.0
Michigan Surveys of Consumers index of
consumer sentiment dropped almost 29 points 6.5
between February and May (figure 14), with 6.0
declines in both the current and expected
conditions indexes. The Conference Board 5.5
survey measure in May also was down sharply 5.0
from February, with respondents similarly
grim about current prospects but somewhat 2002 2005 2008 2011 2014 2017 2020
more upbeat than in the Michigan survey NOTE: The series is the ratio of household net worth to disposable
about future conditions. personal income. Household net worth incorporates preliminary
estimates for 2020:Q1.
SOURCE: For net worth, Federal Reserve Board, Statistical Release
. . . and overall household wealth fell in Z.1, “Financial Accounts of the United States”; for income, Bureau of
Economic Analysis via Haver Analytics.
the first quarter
In the first quarter, the ratio of aggregate 16. Prices of existing single-family houses
household net worth to household income
fell, driven by sharp declines in equity prices Monthly Level
(figure 15). House prices—which tend to
112
respond to economic developments more Zillow index
slowly than equity prices and are of particular 110
importance for the value of assets held by a 108
large portion of households—continued to
S&P/Case-Shiller 106
increase in the first quarter and moved up national index
further in April (figure 16). Since March, CoreLogic 104
price index
equity prices have posted sizable gains but are 102
still below their February peak.
100
Consumer lending standards have 2018 2019 2020
become less accommodative, but credit NOTE: The data for the S&P/Case-Shiller index extend through March
is still available to households with strong 2020. The data for the Zillow index and CoreLogic index extend through
April 2020.
credit profiles SOURCE: CoreLogic Home Price Index; Zillow; S&P/Case-Shiller U.S.
National Home Price Index. The S&P/Case-Shiller index is a product of
Since the onset of the pandemic, consumer S&P Dow Jones Indices LLC and/or its affiliates. (For Dow Jones
Indices licensing information, see the note on the Contents page.)
lending standards have become less
accommodative on balance. Borrowing
conditions are tight for individuals with low
credit ratings, but credit remains available to
those with strong credit profiles. Nevertheless,
consumer borrowing has fallen as spending
has slumped (figure 17). While banks have
tightened lending standards on credit card and
auto loans, according to the April Senior Loan
Officer Opinion Survey on Bank Lending
Practices (SLOOS), captive auto lenders have
rolled out generous loan incentives to boost
16 Part 1: Recent Economic and Financial Developments
17. Consumer credit flows sales.13 Due to the high cost of servicing
Billions of dollars, monthly rate
loans in forbearance and uncertainty about
whether borrowers will be able to resume
20 making payments when the forbearance period
Apr. 10
+ ends, mortgages have become hard to obtain
0_
for borrowers with low credit scores or with
10
incomes that are difficult to document. Credit
20
conditions have also tightened significantly for
30
other higher-risk loans, such as jumbo loans
40
Student loans 50
and cash-out refinances, and the increase in
Auto loans
60
costs and risks associated with originating
Credit cards
70 mortgages has raised primary mortgage rates
relative to yields on mortgage-backed securities
2008 2010 2012 2014 2016 2018 2020
(MBS). Nevertheless, mortgage rates currently
NOTE: The data are seasonally adjusted by the Federal Reserve Board.
SOURCE: Federal Reserve Board, Statistical Release G.19, “Consumer
have fluctuated around the lowest levels seen in
Credit.” the past 10 years (figure 18).
18. Mortgage rates Housing-sector activity has fallen sharply
after starting the year on a solid footing . . .
Weekly Percent
After turning up starting around the middle
of 2019 as mortgage rates moved lower, new
6 home sales, existing home sales, and single-
family starts and permits have posted outsized
5 declines beginning in March that are all
close to the largest ever recorded (figures 19
4 and 20). Similarly, the COVID-19 outbreak
and mitigation efforts have caused households’
3 perceptions of homebuying conditions and
builders’ ratings of current sales to move down
despite historically low mortgage rates.
2012 2014 2016 2018 2020
NOTE: The data are weekly through June 4, 2020.
SOURCE: Freddie Mac Primary Mortgage Market Survey.
. . . and business fixed investment has
tumbled . . .
19. New and existing home sales The pandemic has curtailed business
investment, as many investment projects were
Millions, annual rate Millions, annual rate
delayed or canceled because of lower profit
6.0 Existing home sales
expectations, concerns about future demand,
1.0 reduced credit availability, and uncertainty
5.5
about how businesses will operate in the
.8
5.0 future. Real business fixed investment—that is,
4.5 .6
private expenditures for equipment, structures,
research and development (R&D), and other
4.0
.4 intellectual property—contracted at an annual
3.5 rate of about 8.0 percent in the first quarter
New home sales
3.0
.2 of 2020, coming off a drop of 0.4 percent
for 2019 as a whole (figure 21). The decline
2008 2010 2012 2014 2016 2018 2020 was centered in equipment investment as well
NOTE: The data are monthly and extend through April 2020. New
home sales includes only single-family sales. Existing home sales includes
single-family, condo, townhome, and co-op sales.
13. Even with lending standards unchanged, credit
SOURCE: For new home sales, Census Bureau; for existing home sales, access can tighten as people lose their jobs, fall behind on
National Association of Realtors; all via Haver Analytics. their payments, and see their scores deteriorate.
MONETARY POLICY REPORT: JUNE 2020 17
as in outlays for nonresidential buildings. In 20. Private housing starts and permits
addition, lower oil prices contributed to a drop
Monthly Millions of units, annual rate
in investment in drilling and mining structures.
Investment in intellectual property like 1.2
software, R&D, and entertainment originals
1.0
recorded a tepid increase in the first quarter
after posting solid gains in 2019. Forward- Single-family starts .8
looking indicators of business spending, such Single-family .6
permits
as new orders of nondefense capital goods, .4
excluding the volatile aircraft category, have
.2
plunged recently amid sharply lower business Multifamily starts
sentiment and profit expectations from 0
industry analysts.
2008 2010 2012 2014 2016 2018 2020
. . . while corporate financing conditions NOTE: The data extend through April 2020.
SOURCE: Census Bureau via Haver Analytics.
have deteriorated
Financing conditions for nonfinancial firms
were robust early in the year but tumbled 21. Change in real business fixed investment
during the global spread of COVID-19 Percent, annual rate
(figure 22). The gross issuance of corporate Structures
12
bonds in the investment-grade segment was Equipment and intangible capital
9
solid until late February, when it became
6
intermittent at best as market functioning
3
deteriorated. Meanwhile, issuance in the Q1 +
0_
speculative-grade segment was essentially
3
nonexistent following the broad risk-off
sentiment in the market over the public 6
health crisis. While investment-grade issuance 9
recovered at a strong pace following the 12
March Federal Reserve announcement on 2014 2015 2016 2017 2018 2019 2020
corporate credit funding facilities, high-yield NOTE: Business fixed investment is known as “private nonresidential
issuance began to pick up only after the fixed investment” in the national income and product accounts.
SOURCE: Bureau of Economic Analysis via Haver Analytics.
April announcement to expand the facilities
to include support for some recent “fallen
angels”—bonds downgraded to a speculative- 22. Selected components of net debt financing for
grade credit rating from an investment-grade nonfinancial businesses
rating because of declining credit quality— Billions of dollars, monthly rate
and high-yield exchange-traded funds.14 The
Commercial paper
solvency outlook of corporate bonds for Bonds
Q1
200
both the investment- and speculative-grade Bank loans
160
Sum
segments of the market dropped over the first
120
80
14. See Board of Governors of the Federal Reserve
System (2020), “Federal Reserve Announces Extensive 40
New Measures to Support the Economy,” press release, +
0_
March 23, https://www.federalreserve.gov/newsevents/
pressreleases/monetary20200323b.htm; and Board 40
of Governors of the Federal Reserve System (2020),
“Federal Reserve Takes Additional Actions to Provide 2008 2010 2012 2014 2016 2018 2020
Up to $2.3 Trillion in Loans to Support the Economy,” NOTE: The data incorporate preliminary estimates for 2020:Q1.
press release, April 9, https://www.federalreserve.gov/ SOURCE: Federal Reserve Board, Statistical Release Z.1, “Financial
newsevents/pressreleases/monetary20200409a.htm. Accounts of the United States.”
18 Part 1: Recent Economic and Financial Developments
half of the year as the pace of downgrades
intensified and the volume of defaults picked
up. Furthermore, the monthly volume of
fallen angels reached a record high in March,
and market analysts forecast this trend to
continue with a record annual volume of
debt being downgraded to high yield this
year amid declining earnings and elevated
leverage. Spreads on corporate bond yields
over comparable-maturity Treasury securities
have widened substantially amid worsening
credit conditions. Institutional leveraged
loan issuance volume was robust to start the
first quarter, but it subsequently came to a
standstill in March because of the pandemic.
Newly launched volume increased somewhat
starting in April but remains at subdued
levels. Banks tightened standards and terms
significantly on commercial and industrial
(C&I) loans, according to respondents to
the April SLOOS, and demand for C&I
loans strengthened amid concerns about the
pandemic. C&I loan growth at banks has
picked up in the first half of the year, largely
driven by soaring credit-line drawdowns
since the beginning of March, as firms with
existing credit lines sought to increase their
internal cash buffers, and by lending to smaller
businesses through the Paycheck Protection
Program (PPP) since April.15
Both exports and imports declined
sharply in the first quarter
23. Change in real imports and exports of goods The sudden drop in global demand and
and services
production and stifled global value chains took
Percent, annual rate a toll on international trade. U.S. real exports
Imports of goods and services in the first quarter
15
Exports declined at an annual rate of nearly 9 percent,
10 as exports of services—including travel to
5 the United States—plunged (figure 23). Real
Q1 +
0
_
imports fell just over 15 percent, as U.S.
5
consumers and firms cut back on spending,
travel abroad halted, and shipments of
10
imported goods were delayed. The trade
15
20
2008 2010 2012 2014 2016 2018 2020 15. For a more detailed description of the economic
conditions for small businesses, including a discussion of
SOURCE: Bureau of Economic Analysis via Haver Analytics.
the support provided by Federal Reserve facilities, see the
box “Small Businesses during the COVID-19 Crisis.”
MONETARY POLICY REPORT: JUNE 2020 19
deficit, relative to GDP, narrowed in the first 24. U.S. trade and current account balances
quarter compared with 2019 (figure 24).
Annual Percent of nominal GDP
+
Federal fiscal stimulus will provide 0
_
substantial support to economic activity 1
in 2020 while also significantly boosting
2
the budget deficit and debt . . .
3
Federal fiscal policy measures enacted in 4
Trade
response to the pandemic have provided
5
income support for households and businesses;
6
increased grants-in-aid to state and local Current account
governments; and facilitated loans to 7
businesses, households, states, and localities. 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
The Congressional Budget Office (CBO)
NOTE: GDP is gross domestic product. The black dot refers to the
projects that in fiscal year 2020, the additional trade balance in 2020:Q1. The data for the current account balance are
through 2019.
federal government expenditures and foregone SOURCE: Bureau of Economic Analysis via Haver Analytics.
revenues from these policies will total more
than $2 trillion, around 10 percent of nominal
GDP.16 (For a more detailed discussion of 25. Federal receipts and expenditures
these policies, see the box “Federal Fiscal
Policy Response to COVID-19.”) In addition, Monthly Percent change from year earlier
the decline in economic activity has pushed 25
down tax collections while pushing up outlays Expenditures
20
for certain transfer programs—most notably 15
for unemployment insurance and Medicaid 10
(figure 25). These tax decreases and transfer 5
+
0
_
5
16. The CBO’s forecasts and estimates can be 10
found at Congressional Budget Office (2020),
Receipts 15
“Discretionary Spending under Division A, the
20
Coronavirus Preparedness and Response Supplemental
Appropriations Act, 2020” (table 1), March 4, https:// 1999 2002 2005 2008 2011 2014 2017 2020
www.cbo.gov/system/files/2020-03/hr6074.pdf; Phillip
NOTE: The data extend through April 2020 and are 12-month moving
L. Swagel (2020), “Preliminary Estimate of the sums.
Effects of H.R. 6201, the Families First Coronavirus SOURCE: Office of Management and Budget via Haver Analytics.
Response Act,” Congressional Budget Office, letter to
Nita M. Lowey, April 2, https://www.cbo.gov/system/
files/2020-04/HR6201.pdf; Phillip L. Swagel (2020),
“Preliminary Estimate of the Effects of H.R. 748,
the CARES Act, Public Law 116-136, Revised, with
Corrections to the Revenue Effect of the Employee
Retention Credit and to the Modification of a Limitation
on Losses for Taxpayers Other Than Corporations,”
Congressional Budget Office, letter to Mike Enzi, revised
April 27, https://www.cbo.gov/system/files/2020-04/
hr748.pdf; Congressional Budget Office (2020),
“Changes in Direct Spending under Division A, Small
Business Programs” (table 1), April 22, https://www.
cbo.gov/system/files/2020-04/hr266.pdf; and Phillip L.
Swagel (2020), “CBO’s Current Projections of Output,
Employment, and Interest Rates and a Preliminary
Look at Federal Deficits for 2020 and 2021, CBO Blog,
April 24, https://www.cbo.gov/publication/56335.
20 Part 1: Recent Economic and Financial Developments
Federal Fiscal Policy Response to COVID-19
In response to the immense health and economic A. Fiscal support in response to COVID-19, by legislation
(billions of dollars)
consequences of the COVID-19 pandemic, federal
lawmakers have enacted a variety of measures. These Fiscal years
measures are expected to raise government outlays and 2020 2021 2020–
reduce tax revenues—the sum of which we refer to as 2030
fiscal support—by nearly $2½ trillion over 10 years, of (1) Coronavirus Preparedness
& Response Act 1 4 8
which about $2 trillion is expected in the current fiscal
year, according to the Congressional Budget Office (2) Families First Coronavirus
Response Act 134 57 192
(CBO) (figure A, row 5). The legislation also included
$454 billion for the Department of the Treasury to fund (3) Coronavirus Aid, Relief, and
Economic Security Act 1,606 448 1,721
lending facilities established by the Federal Reserve
(4) Paycheck Protection Program
and $46 billion to provide loans to the airline industry.1 and Healthcare
Consistent with the historically large economic Enhancement Act 434 43 485
consequences resulting from the COVID-19 pandemic, (5) Total 2,176 551 2,406
the amount of fiscal support that has been enacted
NOTE: The full title of the act in row 1 is Coronavirus Preparedness and
constitutes the fastest and largest fiscal response to any Response Supplemental Appropriations Act, 2020. Values are in billions of dollars.
Funding for the Department of the Treasury to provide loans to the airline industry
postwar economic downturn. and to fund lending facilities established by the Federal Reserve are not included.
Figure B breaks down the estimated fiscal support Fiscal support is smaller over the 2020–30 period than over the 2020–21 period
mainly because of the payment of deferred payroll tax liabilities.
for fiscal year 2020 (figure A, column 1) into four broad SOURCE: Congressional Budget Office.
categories: (1) direct aid to households, (2) loans or
grants to small businesses, (3) other aid to businesses,
and (4) government purchases of goods and services or Treasury Department, nearly all of the stimulus checks
grants to state and local governments. had been disbursed. The second major piece of
The rest of this discussion provides a brief overview household income support is $230 billion in expanded
of the main components of the four stimulus bills, unemployment insurance (UI) benefits. UI benefits
focusing on the CBO’s estimate of fiscal support were increased by $600 per week through the end of
(increased outlays minus reduced tax revenues) for July; eligibility was expanded through December for
fiscal 2020, organized by the four categories assigned “gig” workers, the self-employed, and those who are
in the figure. unable to work as a result of the COVID-19 outbreak;
and benefit durations were extended by 13 weeks
through December. According to the CBO, around
Direct Aid to Households: $740 billion $70 billion in the more generous weekly benefits had
The largest component of income support is roughly been paid through the end of May. The legislation also
$290 billion in one-time payments to households. provides student loan and mortgage relief, suspending
These stimulus checks provide households with a loan payments and interest accrual on federal student
one-time refundable tax credit of $1,200 per adult loans until the end of September and reducing or
and $500 per child 16 and under, with a phaseout suspending mortgage payments for mortgages backed
at incomes between $75,000 and $100,000 for by government-sponsored enterprises.2 Another
individuals and between $150,000 and $200,000 component of the legislation provides federally
for couples. By the end of May, according to the mandated paid sick leave for workers at employers with
(continued)
1. The CBO estimates that the amounts committed will
significantly increase total lending by the Treasury Department 2. The CBO did not provide an explicit estimate of the
and the Federal Reserve. However, the CBO does not expect mortgage relief provisions, and their effects are not included
the lending will result in budgetary outlays as calculated on in the $740 billion total because they were partially
a net present value basis, and so it is not included in our implemented by the various agencies involved before the
measure of fiscal support. passage of the CARES Act.
MONETARY POLICY REPORT: JUNE 2020 21
and by six-month loan payment deferrals for new and
existing SBA borrowers.
Other Aid to Businesses: $420 billion
Businesses are aided by several provisions that
reduce tax revenues in fiscal 2020, with the largest
reduction coming from delayed payment of employer-
side payroll taxes until 2021 and 2022, which is
expected to reduce tax payments by $210 billion in
fiscal 2020 but mostly be made up in subsequent
years. An additional roughly $90 billion reduction
in fiscal 2020 tax liability results from modifications
of the treatment of net operating losses and interest
expenses for corporations. The legislation also provides
nearly $50 billion in payroll tax relief for businesses
significantly affected by COVID-19 shutdowns in
order to retain employees. Aside from tax relief,
about $20 billion in loans and grants are expected
to go to passenger and cargo air carriers and related
fewer than 500 employees. The cost of the sick leave contractors to support payroll expenses for aviation
is rebated to employers through refundable payroll tax workers affected by the pandemic. In addition, about
credits, which are expected to total about $90 billion in $50 billion in funds are expected to go to hospitals
fiscal 2020. Employees are entitled to up to two weeks to support health-care-related expenses or provide
of paid leave equal to normal earnings for employees or relief for lost revenues. Finally, while they do not
family members who are directly affected by COVID-19 show up in the CBO’s estimates of fiscal support, the
or COVID-19-related closures; additionally, employees legislation provided up to $454 billion for the Treasury
are entitled to 10 weeks of paid leave at two-thirds Department to fund lending facilities established by
normal pay for those caring for a child whose school the Federal Reserve to offer loans to businesses as well
or daycare is closed. In addition, about $90 billion in as state and local governments and provided up to
tax relief was provided to households in fiscal 2020, $46 billion to offer loans to the airline industry.
primarily through expanding the deductibility of certain
business losses from individual tax liabilities.
Direct Government Purchases and Aid to
State and Local Governments: $260 billion
Loans and Grants to Small Businesses:
The largest part of this aid category consists of
$760 billion about $150 billion in relief funding to state and local
The Paycheck Protection Program provides about governments for expenses related to dealing with the
$670 billion in support to businesses with fewer than COVID-19 pandemic. State governments will also
500 employees through loans of up to 250 percent receive an extra $30 billion through a temporary
of monthly payroll costs before the crisis (subject to increase in the share of Medicaid expenditures that
a cap of $10 million). These loans will be forgiven if the federal government covers. In addition, the Federal
employment and compensation are maintained relative Emergency Management Agency is expected to spend
to a pre-crisis level. In addition, small businesses are $50 billion in disaster relief funds to provide assistance
supported by about $90 billion in Small Business to individuals and organizations affected by the
Administration (SBA) Economic Injury Disaster Loans COVID-19 crisis.
22 Part 1: Recent Economic and Financial Developments
increases, working in tandem with the
discretionary stimulus, will support aggregate
demand and help blunt the extent of the
economic downturn.
The combination of the discretionary stimulus
measures and the response of receipts and
expenditures to the decline in economic
activity—referred to as automatic stabilizers—
are expected to cause the budget deficit to
26. Federal government debt held by the public
balloon from its already elevated level. The
Quarterly Percent of nominal GDP CBO expects the federal unified budget deficit
to widen from 4½ percent of nominal GDP
90
in fiscal 2019 to 18 percent of nominal GDP
80 in fiscal 2020, the largest annual deficit as a
70 share of GDP in the post–World War II era.17
60 The ratio of federal debt held by the public
50 to nominal GDP is expected to rise from
40
79 percent in fiscal 2019 to 101 percent by the
end of fiscal 2020, the highest debt-to-GDP
30
ratio since 1947 (figure 26).
20
1950 1960 1970 1980 1990 2000 2010 2020
. . . and state and local governments
confront a fiscal crisis as tax
NOTE: The data for gross domestic product (GDP) are at an annual
rate. Federal debt held by the public equals federal debt less Treasury revenue shrinks
securities held in federal employee defined-benefit retirement accounts,
evaluated at the end of the quarter. The data for federal debt begin in A sharp reduction in tax revenues due to
1947 and are annual from 1947 to 1950. The value for 2020:Q1
incorporates preliminary estimates. a collapse in income and retail sales tax
SOURCE: For GDP, Bureau of Economic Analysis via Haver
Analytics; for federal debt, Federal Reserve Board, Statistical Release
revenue is placing significant stress on state
Z.1, “Financial Accounts of the United States.” governments. Local governments, which rely
on more cyclically stable property taxes, will be
somewhat less directly affected. Nevertheless,
local governments rely on aid from their
state governments, particularly for primary
and secondary education, and the budget
strains at the state level will therefore likely be
passed down to localities. In April and May,
state and local governments shed more than
1½ million jobs as schools and universities
closed early and local governments reduced
their noneducation workforce. These state
and local budget strains will be partially offset
by grants from the federal government. (See
the box “Federal Fiscal Policy Response to
COVID-19” for further details.)
17. See Phillip L. Swagel (2020), “CBO’s Current
Projections of Output, Employment, and Interest Rates
and a Preliminary Look at Federal Deficits for 2020
and 2021,” CBO Blog, April 24, https://www.cbo.gov/
publication/56335.
MONETARY POLICY REPORT: JUNE 2020 23
Risks to the outlook are greater than usual
The path ahead is extraordinarily uncertain.
First and foremost, the pace of recovery will
ultimately depend on the evolution of the
COVID-19 outbreak in the United States
and abroad and the measures undertaken to
contain it. Importantly, some small businesses
and highly leveraged firms might have to shut
down permanently or declare bankruptcy,
which could have longer-lasting repercussions
on productive capacity. (For a more in-depth
discussion of the potential consequences of
the shutdowns on small businesses, see the
box “Small Businesses during the COVID-19
Crisis.”) In addition, there is uncertainty about
future labor demand and productivity as firms
shift their production processes to increase
worker safety, realign their supply chains,
or move services online. Furthermore, if
employees are not called back to their former
jobs, their period of unemployment could
increase, potentially leading to lower wages
when they do eventually find a job. Finally,
applications for employer identification
numbers, which are an early indicator of new
business formations, are tracking well below
levels from recent years and may suggest a
slower pace of future job creation through
this channel.
27. Market-implied federal funds rate path
Financial Developments
Quarterly Percent
The expected path of the federal funds
1.75
rate over the next several years has fallen January 1, 2020
1.50
to near zero
1.25
The expected path of the federal funds rate 1.00
over the next several years has declined since .75
early January and is now flat at the effective .50
lower bound for the next few years (figure 27). .25
June 9, 2020
+
Before the Federal Reserve lowered the 0
_
target range for the federal funds rate to 0 .25
to ¼ percent in March, policy expectations
dropped substantially in late February 2020 2021 2022 2023 2024
and early March as COVID-19 concerns NOTE: The federal funds rate path is implied by quotes on overnight
index swaps—a derivative contract tied to the effective federal funds rate.
intensified. Market-based measures suggest The implied path as of January 1, 2020, is compared with that as of June
9, 2020. The path is estimated with a spline approach, assuming a term
that the expected federal funds rate remains premium of 0 basis points. The January 1, 2020, path extends through
below 0.25 percent through mid-2023.18 January 2024 and the June 9, 2020, path through May 2024.
SOURCE: Bloomberg; Federal Reserve Board staff estimates.
18. These measures are based on a straight read of
market quotes and are not adjusted for term premiums.
24 Part 1: Recent Economic and Financial Developments
Small Businesses during the COVID-19 Crisis
Small businesses employ nearly half of U.S. private- Small businesses are particularly vulnerable to social
sector workers, play key roles in local communities, distancing for two main reasons. First, small businesses
and provide income to millions of business owners. are prevalent in sectors that have seen especially large
The COVID-19 pandemic poses acute risks to the declines in revenue due to social distancing; small
survival of many small businesses. Widespread failure businesses make up about 60 percent of employment
of small businesses would create economic insecurity in the “leisure and hospitality” sector and about
for millions of workers and business owners, slow 85 percent of employment in the “other services” sector
down the economic recovery, and alter the economic (which includes assorted neighborhood fixtures like
landscape of local communities. The Congress, the churches and beauty salons). Second, small firms tend
Federal Reserve, and other federal agencies are making to be more financially constrained than larger firms.
aggressive efforts to support small businesses. For example, bank account data suggest that roughly
More than 99 percent of U.S. firms have fewer than half of small businesses entered the COVID-19 crisis
500 employees, and almost 90 percent have fewer with cash reserves sufficient for fewer than 15 days of
than 20 employees. Altogether, businesses with fewer operations without revenue.4 Moreover, even under
than 500 employees account for almost half of private- normal circumstances, many small firms face financial
sector jobs.1 Small businesses and small nonprofit challenges and lack access to liquid financial markets,
organizations are particularly prevalent in service relying instead on bank loans, credit cards, and the
industries and include examples such as car dealers, personal resources of owners.5
restaurants, barber shops, medical offices, legal offices, A wide variety of data reveal an alarming picture
home repair contractors, and religious organizations. of small business health during the COVID-19 crisis.
These businesses and organizations are part of the Surveys of small businesses suggest that pessimism
economic and social landscape of local communities about business viability is prevalent.6 The majority of
and neighborhoods. Small businesses are also prevalent small businesses have seen revenue losses, and half of
in manufacturing supply chain industries.2 Moreover, (continued)
the businesses that spur innovation, contribute to
nationwide job and productivity growth, and turn into 4. See JPMorgan Chase & Co. Institute (2019), Place
large household names typically start out as small Matters: Small Business Financial Health in Urban
Communities (New york: JPMorgan Chase & Co., September),
businesses.3
https://institute.jpmorganchase.com/content/dam/jpmc/
jpmorgan-chase-and-co/institute/pdf/institute-place-matters.pdf.
5. See Federal Reserve System (2019), Small Business
Credit Survey: 2019 Report on Employer Firms (New
1. See U.S. Census Bureau (2020), 2017 SUSB Annual york: Federal Reserve Bank of New york), https://www.
Data Tables by Establishment Industry, https://www.census.gov/ fedsmallbusiness.org/medialibrary/fedsmallbusiness/files/2019/
data/tables/2017/econ/susb/2017-susb-annual.html. The data sbcs-employer-firms-report.pdf; and Michael Siemer (2019),
in this discussion refer to “employer” businesses—the roughly “Employment Effects of Financial Constraints during the Great
six million businesses with formal employees. There are also Recession,” Review of Economics and Statistics, vol. 101
roughly 26 million “nonemployer” businesses in the United (March), pp. 16–29.
States, such as freelance consultants or ride-sharing drivers. 6. See John Eric Humphries, Christopher Neilson, and
2. For example, small businesses constitute at least Gabriel Ulyssea (2020), “The Evolving Impacts of COVID-19
80 percent of employment in machine shops; precision turned on Small Businesses since the CARES Act,” Cowles Foundation
product manufacturing; miscellaneous fabricated metal Discussion Paper 2230 (New Haven, Conn.: Cowles
product manufacturing; commercial screen printing; and Foundation for Research in Economics, April), https://cowles.
electroplating, plating, polishing, anodizing, and coloring. yale.edu/sites/default/files/files/pub/d22/d2230.pdf; and
3. See Ryan Decker, John Haltiwanger, Ron Jarmin, and MetLife and U.S. Chamber of Commerce (2020), Special
Javier Miranda (2014), “The Role of Entrepreneurship in U.S. Report on Coronavirus and Small Business (Washington:
Job Creation and Economic Dynamism,” Journal of Economic Chamber of Commerce, April 3), https://www.uschamber.com/
Perspectives, vol. 28 (Summer), pp. 3–24. report/special-report-coronavirus-and-small-business.
MONETARY POLICY REPORT: JUNE 2020 25
small businesses do not expect to return to their usual A. Change in employment, by firm size
level of operations within the next six months.7
Employment declines have been deeper among Percent
small businesses than among larger businesses +
(figure A). Moreover, the share of total job losses 0_
accounted for by small businesses stopping paycheck 5
issuance entirely (that is, going inactive) is substantial
(light blue areas in figure A).8 Data from Homebase, a 10
provider of scheduling and time sheet services for small 15
local businesses, show that between 30 and 40 percent
of establishments in sectors deeply affected by social 20
distancing have gone inactive since February 15.9 Data 25
Continuing firms
from Womply, a provider of credit card transaction
Inactive firms 30
processing services, suggest that spending at small
restaurants was down 80 percent (versus a year earlier)
by early April and was still down 50 percent in early 1–9 10–19 20–49 50–99 100– 250– 500+
249 499
June.10 Taken together, these data suggest considerable Firm size range (employment)
risk of failure for a large number of small businesses.
NOTE: Employment declines are relative to February 15 and extend
The inflow of new businesses (which are typically through May 9, 2020. The key identifies bars in order from top to
small businesses) also plummeted, as shown in bottom.
SOURCE: Cajner and others (2020) (see box note 8); Federal Reserve
figure B. The Census Bureau reports that, in late March, Board staff calculations using ADP, LLC, microdata.
applications for new employer business tax identifiers
were down more than 40 percent relative to a year
(continued on next page)
B. New business applications
7. Data are from the U.S. Census Bureau’s Small Business Weekly Year-over-year percent change
Pulse Survey for the week ending May 30, 2020. Survey results
are available at https://portal.census.gov/pulse/data.
20
8. Figure A reports results from staff calculations on
administrative payroll data from ADP; see Tomaz Cajner, 2017–19 average 10
Leland Crane, Ryan Decker, John Grigsby, Adrian Hamins- +
Puertolas, Erik Hurst, Christopher Kurz, and Ahu yildirmaz _0
(2020), “The U.S. Labor Market during the Beginning of the 10
Pandemic Recession,” NBER Working Paper Series 27159
(Cambridge, Mass.: National Bureau of Economic Research, 20
May), https://www.nber.org/papers/w27159.
30
9. Homebase data initially included about 60,000 active
businesses. Business inactivity is defined as zero hours worked 40
during the week ending May 30 in the leisure and hospitality
2020 50
and the other services sectors. More information is available
on the Homebase website at https://joinhomebase.com/blog/
real-time-covid-19-data. Jan. Feb. Mar. Apr. May
10. For additional details, see Womply (2020), “Data 2020
Dashboard: How Coronavirus/COVID-19 Is Impacting Local
NOTE: The data extend through May 30, 2020. The data are derived
Business Revenue across the U.S.,” Womply Blog, May 28, from applications for employment identification numbers that list a
https://www.womply.com/blog/data-dashboard-how-coronavirus- planned date for initial wage payments.
covid-19-is-impacting-local-business-revenue-across-the-u-s. SOURCE: Census Bureau via Haver Analytics.
26 Part 1: Recent Economic and Financial Developments
Small Businesses during the COVID-19 Crisis (continued)
earlier; the series has only gradually recovered and The Federal Reserve is also supporting lending
was still just below last year’s pace as of late May. to small businesses through the Term Asset-Backed
Business entry is a key contributor to job creation; with Securities Loan Facility, which lends to holders of,
business exits and associated job destruction likely to among others, securities backed by loans guaranteed
be elevated during the COVID-19 episode, new firm by the Small Business Administration. In addition, the
creation is even more important than usual.11 Federal Reserve has established the Main Street Lending
The Congress, the Federal Reserve, and other federal Program (MSLP), which features a range of facilities
agencies have acted swiftly to help address the risk designed to provide support to small and medium-
of widespread small business failure. As part of the sized firms.13
CARES Act (Coronavirus Aid, Relief, and Economic Small businesses make vital contributions to labor
Security Act), the Congress created the Paycheck markets and their local communities, and a critical
Protection Program (PPP) to provide small businesses subset of small businesses are young, innovative firms
with funds to retain employees for roughly two months. with the potential to create many jobs and increase
The Federal Reserve is bolstering the effectiveness overall productivity. The nature of the economic
of the PPP through the Paycheck Protection Program recovery that follows the COVID-19 crisis will depend
Liquidity Facility, which extends credit to eligible in part on the survival of small businesses. Small
financial institutions to finance PPP loans. About business failures not only destroy jobs, but also erase
three-fourths of small businesses with employees have the productive knowledge within the firms, deplete
applied for PPP assistance, suggesting the program the assets of business owners, alter the character of
is extremely valuable and timely, and a large share communities and neighborhoods, and, in some cases,
of these applications have been approved; however, deprive the country of innovations. The Federal Reserve
some industries may face an ongoing need after the will continue to monitor the conditions of small
program expires.12 businesses and support this fundamental segment of
the economy.
11. Research suggests that a drop in new business
formation and the resulting “lost generation” of firms during
the Great Recession contributed to a slow recovery in output
and employment. See, for example, Petr Sedláček (2020), “Lost
Generations of Firms and Aggregate Labor Market Dynamics,”
Journal of Monetary Economics, vol. 111 (May), pp. 16–31. 13. A current description of the MSLP is available on
12. Data are from the U.S. Census Bureau’s Small Business the Board’s website at https://www.federalreserve.gov/
Pulse Survey; see box note 7. monetarypolicy/mainstreetlending.htm.
MONETARY POLICY REPORT: JUNE 2020 27
Survey-based measures of the expected path
of the policy rate also moved down from the
levels observed at the end of 2019. According
to the results of the Survey of Primary Dealers
and Survey of Market Participants, both
conducted by the Federal Reserve Bank of
New York in April, the median of respondents’
modal projections implies a flat trajectory for
the target range of the federal funds rate at the
effective lower bound for the next few years.19
The U.S. nominal Treasury yield curve has
shifted down sharply . . .
After moving lower over the second half of
2019, nominal Treasury yields fell sharply in 28. Yields on nominal Treasury securities
late February and early March as investors’ Daily Percent
concerns regarding the implications of
the COVID-19 outbreak for the economic 6
outlook led to both falling policy expectations 5
and flight-to-safety flows, with longer- 10-year
5-year 4
term Treasury security yields dropping to
historically low levels (figure 28). Longer- 3
term yields increased moderately and realized 2
volatility spiked for a period in March as
2-year 1
selling pressures grew, leading to dealer
0
balance sheet capacity constraints and
impaired trading conditions, before falling
2004 2006 2008 2010 2012 2014 2016 2018 2020
back again after the Federal Reserve’s actions
SOURCE: Department of the Treasury via Haver Analytics.
helped restore smooth market functioning.
(See the box “Federal Reserve Actions to
Ensure Smooth Functioning of Treasury and
MBS Markets” in Part 2 for a more detailed
description of the Treasury market during
March.) More recently, yields on longer-term
Treasury securities rose somewhat, linked at
least partially to the expected increase in the
issuance of longer-term Treasury securities
as well as some improvement in investor
sentiment. Options prices suggest that near-
term uncertainty about longer-dated Treasury
yields rose sharply in March to levels not
seen since the Global Financial Crisis before
retracing.
19. 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.
28 Part 1: Recent Economic and Financial Developments
29. Yield and spread on agency mortgage-backed . . . but spreads of other long-term debt
securities to Treasury securities rose
Percent Basis points
Yields on 30-year agency MBS—an important
7 300
determinant of mortgage interest rates—
decreased somewhat, on balance, though less
6 250
than the yields on nominal Treasury securities,
5 Spread 200 since the start of the year and remained very
4 150 low by historical standards (figure 29).
3 100
Yield
Early in the year, yields on both investment-
2 50 and speculative-grade corporate bonds as
1 0 well as primary- and secondary-market
municipal bonds were near record lows
2006 2008 2010 2012 2014 2016 2018 2020 (figure 30). Spreads on corporate bond yields
NOTE: Data are daily and extend through June 8. Yield shown is for over comparable-maturity Treasury yields
the Fannie Mae 30-year current coupon, the coupon rate at which new
mortgage-backed securities would be priced at par, or face, value. Spread were in the lower end of their historical
shown is to the average of the 5- and 10-year nominal Treasury yields.
SOURCE: Department of the Treasury; Barclays Live. distribution. Since mid-February, corporate
spreads have increased appreciably as market
functioning deteriorated and credit quality
declined. In March, spreads to comparable-
30. Corporate bond yields, by securities rating and
municipal bond yield maturity Treasury securities increased sharply
for corporate debt but remained below those
Daily Percentage points
observed during the 2008 Global Financial
20 Crisis. Spreads started to normalize following
18 the Federal Reserve announcements of
16
corporate bond facilities in late March,
High-yield corporate 14
particularly for investment-grade corporate
12
Investment-grade corporate 10
debt, but remain higher than at the end
8 of 2019. Similarly, yields and spreads for
6 municipal debt rose strikingly in March, with
4 spreads to comparable-maturity Treasury
2
Municipal securities spiking to their highest level since the
0
Global Financial Crisis as market functioning
2006 2008 2010 2012 2014 2016 2018 2020 declined and concerns about municipal
NOTE: Investment-grade corporate is the 10-year triple-B, which credit quality arose. Yields on municipal debt
reflects the effective yield of the ICE BofAML 7-to-10-year triple-B U.S.
Corporate Index (C4A4). High-yield corporate is the 10-year high yield partially recovered following Federal Reserve
and reflects the effective yield of the ICE BofAML 7-to-10-year U.S.
Cash Pay High Yield Index (J4A0). Municipal is the Municipal Market
announcements in late March and April of
Advisors 20-year yield. support to municipal debt markets through
SOURCE: ICE Data Indices, LLC; Municipal Market Advisors, used
with permission. liquidity facilities.
Liquidity in markets for Treasury
securities and mortgage-backed securities
deteriorated sharply before recovering
following various Federal Reserve actions
A number of indicators of Treasury market
functioning—including bid-ask spreads, bid
MONETARY POLICY REPORT: JUNE 2020 29
sizes, estimates of transaction costs, and
measures of market depth—deteriorated
significantly in late February and March, but
conditions improved considerably following
Federal Reserve asset purchases and the
creation of credit and liquidity facilities. (See
the box “Federal Reserve Actions to Ensure
Smooth Functioning of Treasury and MBS
Markets” in Part 2.) Bid-ask spreads remain
higher than those seen at the end of the year
in the off-the-run market and for the 30-year
bond in the on-the-run market, and market
depth remains low. MBS spreads have fallen
back markedly, but prepayment risk and
uncertainty about forbearance continue to put 31. Equity prices
upward pressure on spreads. Strains remain in Daily December 31, 2009 = 100
some less liquid parts of the market.
350
Broad equity prices dropped notably 300
amid the global spread of COVID-19 250
before rebounding S&P 500 index 200
Equity prices continued to increase early in the 150
year before tumbling in March, dropping as Dow Jones bank index 100
much as 34 percent from peak to trough. Prices 50
have mostly recovered against a background 0
of unprecedented, forceful, and rapid
monetary and fiscal policy responses as well 2006 2008 2010 2012 2014 2016 2018 2020
as recent tentative signs of economic revival SOURCE: S&P Dow Jones Indices LLC via Bloomberg. (For Dow
Jones Indices licensing information, see the note on the Contents page.)
associated with the easing of restrictions and
in the face of bleak forecasts for U.S. firms’
earnings in 2020 (figure 31). The decline in 32. S&P 500 volatility
stock prices was widespread across all sectors,
with the largest declines in the energy and Daily Percent
banking sectors. Measures of implied and 90
realized stock price volatility for the S&P 80
500 index—the VIX and the 20-day realized 70
volatility—spiked to levels that were most 60
VIX
recently observed during the financial crisis 50
(figure 32). They have since retraced much of 40
30
that increase but remain at elevated levels. (For
20
a discussion of financial stability issues, see
10
the box “Developments Related to Financial Realized volatility
0
Stability.”)
2006 2008 2010 2012 2014 2016 2018 2020
NOTE: 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. For realized volatility, 5-minute S&P 500 returns are used in an
exponentially weighted moving average with 75 percent of weight
distributed over the past 20 days.
SOURCE: Cboe Volatility Index® (VIX®) via Bloomberg; Federal
Reserve Board staff estimates.
30 Part 1: Recent Economic and Financial Developments
Developments Related to Financial Stability
The COVID-19 pandemic has abruptly halted large levels were high relative to either business assets
swaths of economic activity and led to swift financial or gross domestic product, with the riskiest firms
repercussions. Despite increased resilience from the accounting for most of the increase in debt in recent
financial and regulatory reforms adopted since 2008, years. Against this backdrop, the COVID-19 outbreak
financial system vulnerabilities—most notably those poses severe risks to businesses and millions of
associated with liquidity and maturity transformation households. For businesses, as economic activity
in the nonbank financial sector—have amplified some continues to contract, the related reduction in earnings
of the economic effects of the pandemic. Accordingly, and additional debt needed to bridge the downturn
financial-sector vulnerabilities are expected to be will increase the debt burden and default risk. For
significant in the near term. This discussion reviews households, the sudden and outsized increase in
vulnerabilities in the U.S. financial system at the unemployment and sharp decline in family incomes
onset of the pandemic and describes some of the may give rise to widespread delinquencies and defaults.
extraordinary measures taken by the Federal Reserve to In the financial sector, banks, as of the fourth quarter
mitigate the brunt of the shock. of 2019, were well capitalized relative to historical
At the onset of the pandemic, asset valuation levels, in part due to the regulatory reforms enacted
pressures in the United States were elevated. Spreads, after the GFC. To date, banks have been able to meet
risk premiums, and implied volatility were at the low surging demand for draws on credit lines while also
ends of their historical distributions among several building loan loss reserves to absorb higher expected
large asset categories, including domestic equities defaults. Leverage at broker-dealers changed little in
and corporate bonds. Beginning in late February, the second half of 2019 and remained at historically
expectations for global economic growth plummeted low levels. However, in March, constraints on dealers’
and uncertainty increased sharply, driving down intermediation capacity, including internal risk-
risky asset prices and putting downward pressure on management practices and regulatory constraints on
Treasury yields. Equity prices plunged as concern over the bank holding companies under which many dealers
the COVID-19 outbreak grew and volatility surged to operate, were cited as possible reasons for deteriorating
extreme levels. Trading conditions became impaired liquidity in even usually liquid markets. Leverage at
across several markets, posing significant challenges life insurance companies has reached post-2008 highs.
to price discovery and increasing trading costs. Moreover, the capitalization of the life insurance sector
yields on corporate bonds over comparable-maturity is likely to deteriorate in coming quarters because
Treasury securities widened to the highest levels since of lower-than-expected asset valuations and lower
the Global Financial Crisis (GFC). Leveraged loan long-term interest rates. Some measures suggest that
spreads also widened, especially for lower-rated loans. hedge fund leverage continued to expand through
Since late March, however, investors’ tolerance for the end of 2019. Higher leverage left hedge funds
risk increased somewhat following interventions by vulnerable to asset price declines and to the increase in
the Federal Reserve; subsequently, risky asset prices market volatility accompanying the COVID-19 shock.
partially retraced their course and market functioning The subsequent deleveraging by hedge funds likely
improved. While the data on real estate prices mostly contributed to market dislocations in February
predate the COVID-19 outbreak, commercial real and March.
estate markets, in particular, had elevated valuation Funding markets proved less fragile than during
pressures at the beginning of 2020, making them the 2007–09 episode in the face of the COVID-19
vulnerable to significant price declines stemming from outbreak and the associated financial market turmoil.
the unfolding effects of the pandemic. The subdued reliance of large bank holding companies
On the eve of the pandemic, vulnerabilities on short-term funding and their robust holdings of high-
associated with total private-sector debt stood at quality liquid assets have prevented any considerable
a moderate level relative to their historical norms. stress in the banking sector. Nonetheless, significant
However, this assessment masks differences across the strains emerged and emergency Federal Reserve
business and household sectors. Household borrowing actions were required to stabilize short-term funding
advanced more slowly than overall economic activity markets. Recent growth in prime money market mutual
and remained heavily concentrated among borrowers funds (MMFs) and large holdings of corporate debt
with high credit scores. By contrast, business debt (continued)
MONETARY POLICY REPORT: JUNE 2020 31
by other mutual funds increased the vulnerabilities in the Federal Reserve established the Money Market
the financial system. These vulnerabilities produced Mutual Fund Liquidity Facility (MMLF), for which the
considerable strains in March as asset prices fell and Treasury Department will provide up to $10 billion of
investors became more risk averse. Prime MMFs and credit protection. The Federal Reserve established a
bond mutual funds experienced significant outflows companion facility, the Primary Dealer Credit Facility,
in March, leading to severe strains in markets funded to provide loans against high-quality collateral to
by these institutions—notably, commercial paper (CP) primary dealers that are critical intermediaries in short-
and corporate bond markets. The tensions began to term funding markets. The announcement of these
ease only after the Federal Reserve took several actions facilities strongly affected the targeted markets. After
targeted at these markets, as will be discussed. an initial wave of borrowing from the facilities, market
The outlook for the pandemic and economic activity strains eased and the use of these facilities has abated.
is uncertain. In the near term, risks associated with To provide more direct support for credit across
the course of COVID-19 and its effects on the U.S. the economy, the Federal Reserve established a
and global economies remain high. In addition, there number of facilities in March and April. The Treasury’s
is potential for stresses to interact with preexisting equity investments in many of these facilities were
vulnerabilities stemming from financial system or fiscal authorized by the CARES Act (Coronavirus Aid, Relief,
weaknesses in Europe, China, and emerging market and Economic Security Act). Together, these facilities
economies. In turn, these risks have the potential will support the flow of up to $2.6 trillion of credit to
to interact with the vulnerabilities identified in this large employers, small and medium-sized businesses,
discussion and produce additional strains for the U.S. households, and state and local governments. The
financial system. Primary Market Corporate Credit Facility (PMCCF)
and the Secondary Market Corporate Credit Facility
(SMCCF) were established to support employment
Facilities to Support the Economy since the and spending of large, investment-grade businesses.
COVID-19 Outbreak Following the announcement of the PMCCF and the
The Federal Reserve, with the approval of the SMCCF, spreads of both investment- and speculative-
Secretary of the Treasury, established new credit and grade corporate bonds declined notably, and issuance
liquidity facilities under section 13(3) of the Federal of investment-grade corporate bonds strengthened. To
Reserve Act to alleviate severe dislocations that arose in support the longer-term, market-based financing that is
a number of financial markets and to support the flow critical to real economic activity, the Federal Reserve
of credit to households and businesses.1 These actions reestablished the Term Asset-Backed Securities Loan
fall into two categories: stabilizing short-term funding Facility to purchase securities backed by auto loans,
markets and providing more direct support for the equipment leases, credit card loans, and other lending.
extension of credit across the economy. The Municipal Liquidity Facility was set up to help
As investors moved rapidly toward cash and the U.S. state and local governments manage cash flow
most liquid assets, an acute liquidity squeeze emerged pressures by providing credit secured through their
in short-term funding markets in mid-March. In the short-term obligations. The Federal Reserve established
CP market, funding dried up even for companies in the Main Street Lending Program to provide up to
good financial standing. At the same time, investors $600 billion in four-year loans for small and medium-
contributed to the stress by starting to pull away from sized businesses that were in good financial standing
some prime MMFs, which typically hold CP and other before the pandemic. Finally, the Paycheck Protection
highly liquid, short-term debt instruments. In response, Program Liquidity Facility (PPPLF) was established to
the Federal Reserve set up the Commercial Paper bolster the effectiveness of the Paycheck Protection
Funding Facility, for which the Treasury Department has Program (PPP) of the Small Business Administration.
provided $10 billion of credit protection. In addition, The CARES Act created the PPP program to provide
loans that can help small businesses keep their workers
on payrolls. The PPPLF extends credit to eligible
1. A list of funding, credit, liquidity, and loan facilities
established by the Federal Reserve in response to COVID-19 is
financial institutions to finance PPP loans, taking the
available on the Board’s website at https://www.federalreserve. loans as collateral.
gov/funding-credit-liquidity-and-loan-facilities.htm. (continued on next page)
32 Part 1: Recent Economic and Financial Developments
Developments Related to Financial Stability (continued)
The Federal Reserve is deeply committed to Reserve’s dollar liquidity swap lines improve liquidity
transparency and recognizes that the need for conditions in dollar funding markets in the United
transparency is heightened when it is called upon States and abroad by providing foreign central banks
to use its emergency powers. Transparency helps with the capacity to deliver U.S. dollar funding to
promote the accountability of the Federal Reserve to institutions in their jurisdictions during times of market
the Congress and the public. Specifically, the Board stress. These swap lines provide U.S. dollars to a foreign
of Governors will report substantial amounts of central bank in exchange for the equivalent amount
information on a monthly basis for the liquidity and of funds in that central bank’s currency based on the
lending facilities using CARES Act funding as well market exchange rate at the time of the transaction. The
as for the PPPLF, including the names and details of Federal Reserve and each participating foreign central
participants in each facility; amounts borrowed and bank agree to swap back the same quantities of their
interest rate charged; and overall costs, revenues, and two currencies at a specified date in the future. During
fees for each facility. For the few programs that are the week of March 15, 2020, the network of swap lines
targeting financial market functioning, the Federal was expanded and enhanced by adding additional
Reserve will provide a full accounting of transactions central bank counterparties, lowering the price on the
in these facilities. Real-time disclosure would risk lines, and increasing the frequency and maturity of
stigmatizing participation in these facilities and dollar operations.
undermining the Federal Reserve’s ability to provide In addition to the swap line enhancements, on
assurance that these systemically important markets March 31, the Federal Reserve announced a new
will continue their critical function in times of severe program to support dollar funding markets, the
market stress. The delay in disclosure will be no longer temporary FIMA (Foreign and International Monetary
than necessary to ensure that participants do not Authorities) Repo Facility. This facility should help
hesitate to participate. While the facilities are operating, support the smooth functioning of the U.S. Treasury
the Federal Reserve will disclose extensive and regular market by providing a temporary source of U.S. dollars
aggregate information on total borrowing, collateral to a broad range of countries, many of which do not
and fees, and interest income. have swap line arrangements with the Federal Reserve.
Under this facility, FIMA account holders can enter
into overnight repurchase agreements (repos) with the
Tools to Lessen Strains in Dollar Federal Reserve, temporarily exchanging U.S. Treasury
Funding Markets securities they hold at the Federal Reserve for U.S.
The Federal Reserve has taken actions to help dollars. The repos are overnight but can be rolled over
maintain the flow of credit to U.S. households and as needed. The facility reduces the need for central
businesses by reducing financial stresses abroad, which banks to sell their Treasury securities outright, thus
can spill over into U.S. credit markets. The Federal (continued)
MONETARY POLICY REPORT: JUNE 2020 33
helping to avoid disruptions to the Treasury market and risk derivatives contracts; reducing reserve requirement
upward pressure on yields. Since its inception, take-up ratios to zero; and amending Regulation D (Reserve
at the facility has been modest. Requirements of Depository Institutions) to delete the
six-per-month limit on convenience transfers from
the “savings deposit” definition. The second category
Regulatory and Supervisory Actions to includes allowing certain banking organizations
Support the Economy since the COVID-19 additional time to delay the effects of the Current
Outbreak Expected Credit Losses accounting standard in their
The Federal Reserve has also made several regulatory capital and extending the initial compliance
adjustments to its regulatory and supervisory regime with the Single-Counterparty Credit Limit rule by
to facilitate market functioning and reduce regulatory 18 months. The third category includes excluding
impediments to banks supporting households, Treasury securities and reserves from the supplementary
businesses, and municipal customers affected by leverage ratio denominator; modifying the liquidity
COVID-19. These actions fall into the following four and capital rules to allow banking organizations to
categories: neutralize the regulatory effects of participating in the
1. acceleration of previously planned, permanent PPPLF and MMLF programs; introducing a change to
adjustments to certain regulatory requirements support the favorable treatment of term primary credit
to address specific impediments to market loans from the discount window under the liquidity
functioning rules; providing temporary waivers to banks for limits
on transactions with nonbank affiliates that offer
2. provision of additional time for banking
credit and intermediation; temporarily lowering the
organizations to phase in new regulatory
community bank leverage ratio to 8 percent; giving
requirements
banks flexibility in the timing of regulatory reports; and
3. temporary relaxation of certain regulatory
granting mortgage servicers flexibility to work with
requirements or requirements imposing
struggling consumers affected by COVID-19. Finally,
supervisory burden
the fourth category includes encouraging banks to use
4. supervisory statements encouraging banks to their capital and liquidity buffers to work constructively
support those affected by COVID-19 with borrowers and to make short-term loan
The first category includes changing the definition modifications on a good faith basis, as well as
of eligible retained income to ensure capital and total encouraging lenders to offer responsible small-dollar
loss-absorbing capacity buffers function as intended; loans to consumers and small businesses and to support
allowing early adoption of a new method for certain low- and moderate-income borrowers through loans
banking organizations to measure counterparty credit and banking fee waivers.
34 Part 1: Recent Economic and Financial Developments
While overnight money market rates
generally moved down in line with
decreases in the Federal Open Market
Committee’s target range, short-term
funding markets experienced strains
before the announcement and launch of
Federal Reserve facilities
Decreases in the Federal Open Market
33. Selected money market rates
Committee’s (FOMC) target range for the
Daily Percent federal funds rate in March transmitted
effectively through overnight money markets,
SOFR 2.0 with yields on a broad set of money market
instruments moving lower in response to
CP 1.5 the FOMC’s policy actions. Over the first
Target federal funds half of the year, the effective federal funds
rate 1.0
rate (EFFR) remained within the target
Effective federal funds rate
.5 range (figure 33). After printing at the top
of the target range for a few days following
0 the March 15 rate cut, the EFFR softened
considerably to trade near the bottom of the
Jan. Feb. Mar. Apr. May June range amid substantial increases in reserves.
2020
Though upward pressures on interest rates
NOTE: The Secured Overnight Financing Rate (SOFR) is a broad
measure of rates on overnight Treasury general collateral repurchase
in overnight money markets were generally
agreement (repo) transactions and bilateral Treasury repo transactions. well contained during March, short-term
CP refers to overnight double-A nonfinancial commercial paper.
SOURCE: Federal Reserve Bank of New York; Federal Reserve Board. funding markets experienced a liquidity
squeeze. Certain other short-term interest
rates, including those pertaining to commercial
paper and negotiable certificates of deposit,
moved up markedly. However, since the
announcement and launch of the Federal
Reserve liquidity facilities directed toward
these markets, short-term funding rates have
declined significantly.
34. Commercial and industrial loan growth
Monthly Percent Bank credit continued to expand, while
bank profitability declined
30
Aggregate credit provided by commercial
20
banks trended up through the first half of
10 2020, driven largely by soaring C&I credit-
+
0
_
line drawdowns since early March and by
10
loans originated under the PPP since April
(figure 34). While commercial real estate loan
20
growth remained strong, growth in residential
30 real estate loans on banks’ balance sheets has
slowed since the beginning of the year, and
2006 2008 2010 2012 2014 2016 2018 2020
outstanding consumer loans contracted in
NOTE: Data are calculated as monthly year-over-year growth rates
and extend through April 2020.
SOURCE: Federal Reserve Board, Statistical Release H.8, “Assets and
Liabilities of Commercial Banks in the United States.”
MONETARY POLICY REPORT: JUNE 2020 35
April. First-quarter earnings reports of larger
banks indicate that bank profitability declined
considerably in the first quarter of 2020
because of narrower net interest margins and
notable increases in loan loss provisions.20 35. Foreign real gross domestic product and composite
output purchasing managers index
International Developments Index Percent change, annual rate
Economic activity abroad plunged in the 65 Foreign GDP 12
first half of the year 60 8
55 4
+
The spread of COVID-19 throughout the 50 0
_
world and the measures taken to contain it 45 4
have produced devastating effects on the global 40
Foreign composite output PMI
8
economy. Many countries closed nonessential 35 12
businesses and restricted people’s movement 30 16
during the first months of the year, leading 25 20
to a sharp global economic contraction. 20 24
Foreign GDP declined at about a 13 percent 2006 2008 2010 2012 2014 2016 2018 2020
annualized rate in the first quarter, and recent NOTE: For the foreign composite output purchasing managers index
indicators point to an even larger contraction (PMI), values greater than (less than) 50 indicate better (worse) business
conditions, on average, for the participants surveyed relative to
in the second quarter (figure 35). Available conditions at the time of the previous survey. The data for PMI are
monthly and extend through May 2020. The data for foreign GDP are
data suggest that the decline in foreign activity quarterly and extend through 2020:Q1.
in the first half of the year has been greater SOURCE: For PMI, IHS Markit, Purchasing Managers Index (PMI)
Global; for real GDP, Federal Reserve Bank of Dallas, Real Gross
than during the Global Financial Crisis. Domestic Product.
The collapse in economic activity across
countries followed the progression of the
36. Real gross domestic product in selected foreign
virus. In China, where regions underwent economies
strict lockdowns as early as January, GDP
in the first quarter dropped at a stunning Percent change, annual rate
36 percent annualized rate (figure 36). As the +
0
_
virus spread to Europe, many countries in 5
the region imposed strict social-distancing 10
restrictions; euro-area GDP contracted nearly 15
14 percent in the first quarter of 2020. The 20
substantial decline in commodity prices also 25
depressed activity of commodity exporters 30
such as Canada and several Latin American
35
countries. Recent data indicate that Chinese
40
production began to revive in the spring,
as infection rates fell and restrictions were Euro area Canada China Mexico
NOTE: The data are for 2020:Q1.
SOURCE: For the euro area, Eurostat; for Canada, Statistics Canada;
for China, National Bureau of Statistics of China; for Mexico, Instituto
20. Official measures of first-quarter profitability for Nacional de Estadística y Geografía; all via Haver Analytics.
the entire banking sector have been delayed to give banks
more time to file their regulatory reports in response to
the COVID-19 pandemic.
36 Part 1: Recent Economic and Financial Developments
37. Manufacturing output purchasing managers index in gradually lifted (figure 37). Indicators of
selected foreign economies Chinese consumption, however, remain weak.
Monthly Index
A number of advanced foreign economies
Euro area
(AFEs) began to relax social-distancing
65
60
restraints in recent weeks.
Canada
China
55
50 Labor market conditions deteriorated and
45 inflation fell . . .
Mexico 40
35 Amid widespread business closures and
30 collapsing demand, labor market conditions
25 abroad have deteriorated sharply in recent
20
15
months, albeit with differences across
countries. Several European and Asian
2016 2017 2018 2019 2020
countries have thus far experienced sizable
NOTE: For the foreign manufacturing output purchasing managers
index (PMI), values greater than (less than) 50 indicate better (worse)
declines in hours worked but relatively small
business conditions, on average, for the participants surveyed relative to increases in unemployment given the size
conditions at the time of the previous survey.
SOURCE: IHS Markit, Purchasing Managers Index (PMI) Global. of the drop in economic activity, partly
reflecting direct wage subsidies provided by the
governments to keep workers on firms’ payrolls
(figure 38). In other countries, unemployment
38. Unemployment rate in selected advanced economies rates increased markedly.
Monthly Percent
Although the shutdowns across the world
16 have reduced the global supply of goods and
14 services, the depressive effects on demand of
United States
12 lower income, social distancing, and increased
Euro area
10 uncertainty have predominated, driving down
8 inflation in the foreign economies. In several
Canada
6
AFEs, recent inflation readings have been well
below central bank targets, reflecting large
4
declines in energy prices as well as subdued
United Kingdom Japan 2
core inflation (figure 39).
2006 2008 2010 2012 2014 2016 2018 2020
NOTE: The data for the United Kingdom extend through February
. . . prompting swift and substantial
2020 and are centered three-month averages of monthly data. The data policy responses
for the euro area and Japan extend through April 2020.
SOURCE: For the United Kingdom, Office for National Statistics; for
Japan, Ministry of Health, Labour, and Welfare; for the euro area, Foreign fiscal authorities have aimed to fill
Statistical Office of the European Communities; for Canada, Statistics
Canada; for the United States, Bureau of Labor Statistics; all via Haver
income gaps resulting from businesses closing
Analytics. and workers staying home. Many national
governments acted decisively to support firms’
balance sheets through tax deferrals, loans,
and loan guarantees; to encourage firms to
retain workers through wage subsidies; and to
support household spending through enhanced
unemployment benefits and cash transfers.
In addition, many foreign central banks
reduced their policy rates, initiated or
enhanced credit facilities, and relaxed
MONETARY POLICY REPORT: JUNE 2020 37
capital requirements for financial institutions. 39. Consumer price inflation in selected advanced
Several AFE central banks also ramped foreign economies
up asset purchase programs to alleviate Monthly 12-month percent change
liquidity strains in their domestic capital
markets. Some emerging market economy 4
(EME) central banks followed suit. See United Kingdom
3
the box “Policy Response to COVID-19 in
Foreign Economies” for a more detailed Canada 2
discussion of fiscal and monetary policies
1
implemented abroad. Japan +
0
_
Downside risks remain high Euro area 1
Despite aggressive fiscal and monetary
policy actions, risks abroad are skewed to 2016 2017 2018 2019 2020
the downside. The future progression of the NOTE: The data go through April 2020, except for the euro area, which
incorporates the flash estimate for May 2020.
pandemic remains highly uncertain, with SOURCE: For the United Kingdom, Office for National Statistics; for
resurgence of the outbreak a substantial Japan, Ministry of Internal Affairs and Communications; for the euro
area, Statistical Office of the European Communities; for Canada,
risk. In addition, the economic damage of Statistics Canada; all via Haver Analytics.
the recession may be quite persistent. The
collapse in demand may ultimately bankrupt
many businesses, thereby reducing business
dynamism and innovation. Unlike past
recessions, services activity has dropped
more sharply than manufacturing—with
restrictions on movement severely curtailing
expenditures on travel, tourism, restaurants,
and recreation—and social-distancing
requirements and attitudes may further weigh
on the recovery in these sectors. Disruptions
to global trade may also result in a costly
reconfiguration of global supply chains.
Persistently weak consumer and firm demand
may push medium- and longer-term inflation
expectations well below central bank targets,
particularly in regions with already low
inflation at the onset of the recession. Finally,
additional expansionary fiscal policies—
possibly in response to future large-scale
outbreaks of COVID-19—could significantly
increase government debt and add to sovereign
risk, especially for countries with already
limited fiscal space.
Financial conditions abroad tightened,
especially in some emerging market
economies
The precipitous spread of COVID-19 in the
first months of the year weighed heavily on
38 Part 1: Recent Economic and Financial Developments
Policy Response to COVID-19 in Foreign Economies
Authorities in foreign economies have announced a A. Cumulative policy rate cuts by selected central banks
wide array of fiscal, monetary, and regulatory measures
to mitigate disruptions caused by the COVID-19 Percentage points since January 31, 2020
pandemic.
+
Many foreign governments have enacted sizable 0_
fiscal packages to address the sudden loss of income by
firms and households, with a special focus on the most CN
.5
AU
vulnerable groups, such as low-income individuals, the UK
KRTH
unemployed, and small and medium-sized enterprises. 1.0
The size of the support is, on average, considerably IN
CL
larger in advanced foreign economies (AFEs) than in 1.5
US CA BR CO HK
emerging market economies (EMEs), as many EME
MX
governments have more limited fiscal space. 2.0
The measures targeted at firms aim to keep them
afloat in the near term, with the hope of preserving
businesses until demand returns. Such measures NOTE: Advanced foreign economies are in dark red; emerging market
include loans at favorable terms and loan guarantees; economies are in blue. From left to right, economies are the United
States (US), Canada (CA), the United Kingdom (UK), Australia (AU),
deferrals of taxes and social security contributions; Mexico (MX), Brazil (BR), Colombia (CO), Hong Kong (HK), Chile
tax breaks and cash transfers, especially for small (CL), India (IN), South Korea (KR), Thailand (TH), and China (CN).
The data extend through June 9, 2020.
and medium-sized enterprises; and targeted SOURCE: For the United States, Federal Reserve Board; for Canada,
sectoral support. For households, the measures aim Bank of Canada; for the United Kingdom, Bank of England; for
Australia, Reserve Bank of Australia; for Mexico, Banco de México; for
to provide income to those in need and alleviate Brazil, Banco Central do Brasil; for Colombia, Banco de la República;
payment difficulties. These policies include increased for Chile, Banco Central de Chile; for Hong Kong, Bank for
International Settlements; for India, Reserve Bank of India; for South
unemployment and pension payments, mortgage Korea, Bank of Korea; for Thailand, Bank of Thailand; for China,
deferrals, accelerated transfer payments, and direct People’s Bank of China; all via Haver Analytics.
cash payments. In addition, several AFEs and some
Asian emerging economies have adopted large direct few AFE central banks worried about the potential harm
wage subsidies to keep workers on firms’ payrolls. to banks’ financial health.
Such measures may help limit dislocations in the labor Several AFE central banks have purchased
markets of these countries by subsidizing a significant government debt in response to the crisis. These
reduction in hours worked. The hope of these programs purchases have been primarily aimed at restoring
is that workers’ continued attachment to their firms will market functioning and providing liquidity, but the
preserve human capital and make it readily available to purchases have also eased financial conditions by
the firms during the recovery that follows the crisis. lowering long-term yields. The Bank of England
Many central banks have reduced their policy (BOE) restarted its purchases of gilts, and the Swedish
rates (figure A)—often to or near their effective lower Riksbank increased the pace of its existing program.
bounds—and have taken substantial actions to start The European Central Bank (ECB) and the Reserve
or expand asset purchases and to support the flow of Bank of New Zealand introduced and expanded asset
credit. Although central banks acted quickly to lower purchase programs. The Reserve Bank of Australia
interest rates, some policymakers in the EMEs expressed (RBA) began bond purchases to target the three-year
concerns about intensifying capital outflows, while a (continued)
MONETARY POLICY REPORT: JUNE 2020 39
government bond yield at 0.25 percent, the same as its B. Central bank assets for selected advanced economies
overnight rate. Some central banks, such as the Bank
Percent of nominal GDP Percent of nominal GDP
of Canada (BOC) and the RBA, have started purchases
of provincial and state bonds to support liquidity in 55
115
those markets. To ensure the smooth transmission of Japan 50
110
its monetary actions, the ECB has used its flexibility 45
to weight its purchases more heavily toward bonds of 105 Euro area 40
euro-area member states that face higher yields. 100 35
Monetary authorities have also adopted policies 95 United Kingdom 30
to sustain the provision of credit to businesses and 90 25
households during the pandemic. Central banks have 20
85
purchased a variety of private assets, thus directly United States 15
80
addressing distress in funding markets and helping Canada
10
ease financial conditions for firms. These assets include 75 5
corporate bonds purchased by the BOE, ECB, and Bank
Jan. Feb. Mar. Apr. May
of Japan (BOJ); commercial paper bought by the BOC, 2020
BOE, BOJ, and Riksbank; and exchange-traded funds NOTE: Assets are calculated as a percentage of 2019 nominal gross
and real estate investment trusts purchased by the BOJ. domestic product (GDP). U.K. assets are calculated as the sum of
These actions have significantly expanded the balance sterling-denominated corporate bond and U.K. government bond
holdings, foreign currency reserve assets, and term funding schemes. The
sheets of major foreign central banks (figure B). Some data are monthly.
central banks in EMEs have also begun purchasing SOURCE: For U.S. GDP, Bureau of Economic Analysis; for euro-area
GDP, Statistical Office of the European Communities; for U.K. GDP,
private assets, with the central banks of Chile and Office for National Statistics; for Canada GDP, Statistics Canada; for
Colombia buying bank bonds. Japan GDP, Cabinet Office of Japan; for U.S. assets, Federal Reserve
Board; for euro-area assets, European Central Bank; for U.K. assets,
Several central banks have also activated funding- Bank of England; for Canada assets, Bank of Canada; for Japan assets,
for-lending facilities to provide relatively inexpensive Bank of Japan; all via Haver Analytics.
funding to banks as long as they maintain defined
lending benchmarks, in some cases with extra
incentives to lend to small and medium-sized
enterprises. The BOE, BOJ, ECB, RBA, Riksbank, and (for example, in France, Germany, and the United
Bank of Korea currently have such programs. Kingdom); and giving banks and their supervisors
Regulators in a number of foreign economies more flexibility in dealing with nonperforming loans
have introduced various measures that provide relief (for example, the ECB). In addition, some regulators
for banks to help sustain their capacity to absorb have temporarily excluded central bank reserves and
pandemic-related losses while continuing to lend to certain safe assets from the calculation of leverage
the economy. These measures include temporarily exposures. Some foreign regulators are considering the
easing capital requirements, such as the reduction— reduction or even elimination of risk weights on new
and, in some cases, elimination—of conservation loans guaranteed by the government. Regulators also
and countercyclical capital buffers; deferring emphasize that banks should continue to apply sound
the implementation of new, stricter Basel capital underwriting standards and conduct solid capital and
requirements; temporarily easing liquidity requirements liquidity planning and robust risk management.
40 Part 1: Recent Economic and Financial Developments
40. Equity indexes for selected advanced economies global risk sentiment, and many financial
Weekly Week ending January 6, 2016 = 100
markets suffered from severe illiquidity.
Aggressive fiscal and monetary policy
170 responses in the United States and abroad,
160
however, helped boost sentiment and improve
United States 150
market functioning, contributing to a partial
140
retracement. On net, financial conditions
130
United Kingdom abroad remain tighter than at the beginning of
120
110
the year, especially in some EMEs.
100
Euro area 90
Financial conditions in the AFEs largely
Japan 80 tracked financial market developments in the
United States. Major AFE equity indexes
2016 2017 2018 2019 2020
dropped substantially as news about the spread
NOTE: The data are weekly averages of daily data. The weekly data
begin on Thursdays and extend through June 3, 2020. of COVID-19 and the associated measures
SOURCE: For euro area, DJ Euro Stoxx Index; for Japan, TOPIX to contain it were reported, but those indexes
Stock Index; for United Kingdom, FTSE 100 Stock Index; for United
States, S&P 500 Index; all via Bloomberg. rebounded following the announcement of
extraordinary monetary and fiscal policy
41. Nominal 10-year government bond yields in
selected advanced economies
actions and, more recently, tentative signs
of economic stabilization (figure 40).
Weekly Percent Notwithstanding temporary increases due to
6
poor market functioning, long-term sovereign
yields in major advanced economies fell, on
United Kingdom 5
net, as flight-to-safety demand surged, policy
4
United States rates reached their effective lower bounds in
Germany 3 several countries, and expectations of future
2 policy rates declined markedly (figure 41).
Japan 1 Sovereign interest rates for economies in the
+
0
_
euro-area periphery were sensitive to news
1
about the size and form of European-wide
fiscal support for the recovery and, on net,
2006 2008 2010 2012 2014 2016 2018 2020 remain a bit higher than at the beginning of
NOTE: The data are weekly averages of daily benchmark yields. The the year (figure 42). In recent months, Fitch
weekly data begin on Thursdays and extend through June 3, 2020.
SOURCE: Bloomberg. and DBRS Morningstar downgraded Italy’s
long-term debt ratings.
42. Nominal 10-year government bond yields in
selected euro-area economies
Financial conditions in some EMEs tightened,
Weekly Percent especially in Latin American countries. Equity
indexes suffered widespread losses early in
8
7
the year, and rebounds since then have been
Spain 6
uneven across countries. While equity indexes
5 in emerging Asia partially recovered, Mexican
Italy 4 and Brazilian equity indexes underperformed
3 other EME equities (figure 43). In March,
2 borrowing rates for corporations increased
France
1
+
to levels not seen since the Global Financial
0
_ Crisis, although they have subsequently
1 declined somewhat. In the first half of the
2006 2008 2010 2012 2014 2016 2018 2020 year, funds dedicated to investing in EMEs
NOTE: The data are weekly averages of daily benchmark yields. The
weekly data begin on Thursdays and extend through June 3, 2020.
SOURCE: Bloomberg.
MONETARY POLICY REPORT: JUNE 2020 41
43. Equity indexes for selected emerging market 44. Emerging market mutual fund flows and spreads
economies
Basis points Billions of dollars
Weekly Week ending January 6, 2016 = 100
Equity fund flows (right scale)
1,000 100
280 Bond fund flows (right scale)
260 800 EMBI+ (left scale) 75
240 600 50
Brazil 220 400 25
200 +
200 0_
180 +
160 0
_ 25
140 200 50
South Korea
120
400 75
100
80 600 100
China Mexico
60
2008 2010 2012 2014 2016 2018 2020
2016 2017 2018 2019 2020 NOTE: The bond and equity fund flows data are semiannual sums of
NOTE: The data are weekly averages of daily data. The weekly data weekly data from December 28, 2006, to May 27, 2020. Weekly data span
begin on Thursdays and extend through June 3, 2020. Thursday through Wednesday, and the 2020:H1 values are sums over
SOURCE: For China, Shanghai Composite Index; for Brazil, Bovespa weekly data for weeks ending in January 2020 through May 2020. The
Index; for South Korea, Korean Composite Index; for Mexico, IPC fund flows data exclude funds located in China. The J.P. Morgan
Index; all via Bloomberg. Emerging Markets Bond Index Plus (EMBI+) data are weekly averages
of daily data. The weekly data begin on Thursdays and extend through
June 3, 2020. The EMBI+ data exclude Venezuela.
SOURCE: For bond and equity fund flows, EPFR Global; for EMBI+,
J.P. Morgan Emerging Markets Bond Index Plus via Bloomberg.
experienced outflows, and sovereign borrowing
spreads increased sharply before moving down
more recently (figure 44). The tightening in
some EME financial conditions appears to 45. U.S. dollar exchange rate indexes
reflect investors’ preference for safe and liquid Weekly Week ending January 6, 2016 = 100
assets; a reduced confidence in the ability
of some governments to contain the health Dollar appreciation 150
crisis; and heightened uncertainty about the 140
prospects for EME public finances, commodity Mexican peso
Chinese renminbi
130
prices, and global trade. 120
110
The dollar appreciated 100
Euro 90
The foreign exchange value of the dollar
80
increased nearly 5 percent since the start of Broad dollar
Brazilian real 70
the year, as the boost from safe-haven demand
outweighed the effects of lower U.S. interest 2016 2017 2018 2019 2020
rates (figure 45). On a trade-weighted basis, NOTE: The data, which are in foreign currency units per dollar, are
the dollar increased about 1.5 percent against weekly averages of daily data. The weekly data begin on Thursdays and
extend through June 3, 2020. As indicated by the leftmost arrow,
AFE currencies and 7 percent against EME increases in the data represent U.S. dollar appreciation and decreases
represent U.S. dollar depreciation.
currencies. The Mexican peso and Brazilian SOURCE: Federal Reserve Board, Statistical Release H.10, “Foreign
real depreciated about 16 percent and Exchange Rates.”
30 percent, respectively, partly in response to
lower commodity prices. The Chinese renminbi
fluctuated largely in response to news about
the outbreak and policy actions of Chinese
authorities and, on net, depreciated slightly
since the beginning of the year.
43
Part 2
Monetary Policy
The Federal Open Market Committee has weathered recent events and is on track to
quickly reduced the federal funds rate to achieve its maximum-employment and price-
the effective lower bound . . . stability goals. In connection with the changes
in the target range, the Federal Reserve
In light of the effects of COVID-19 on the
reduced the interest paid on reserve balances
economy and on risks to the outlook, the
and decreased the interest rate offered on
Federal Open Market Committee (FOMC)
overnight reverse repurchase agreements at the
lowered the target range for the federal funds
two March meetings.
rate by a total of 1½ percentage points—from
a range of 1½ to 1¾ percent to one of 0 to . . . and the FOMC increased the holdings
¼ percent—over two meetings in early and of Treasury securities and agency
mid-March (figure 46).21 Specifically, in early mortgage-backed securities in the System
March, the Committee lowered the target Open Market Account
range for the federal funds rate ½ percentage
point, to 1 to 1¼ percent. In mid-March, the At its mid-March meeting, along with its
Committee further lowered the target range decision to lower the target range for the
1 percentage point, to 0 to ¼ percent. The federal funds rate, the FOMC emphasized
Committee expects to maintain this target that it is prepared to use its full range of tools
range until it is confident that the economy to support the flow of credit to households
and businesses, thereby promoting its
maximum-employment and price-stability
21. See the FOMC statements issued after the goals. To support the smooth functioning of
March meetings, which are available (along with other markets for Treasury securities and agency
postmeeting statements) on the Monetary Policy portion
of the Board’s website at https://www.federalreserve.gov/
mortgage-backed securities (MBS)—markets
monetarypolicy.htm. central to the flow of credit to households
46. Selected interest rates
Daily Percent
5
10-year Treasury rate
4
3
2
2-year Treasury rate
1
0
Target federal funds rate
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
NOTE: The 2-year and 10-year Treasury rates are the constant-maturity yields based on the most actively traded securities.
SOURCE: Department of the Treasury; Federal Reserve Board.
44 Part 2: Monetary Policy
47. Federal Reserve open market operations and businesses—the Committee announced
Daily Billions of dollars
that it would increase its holdings of
Treasury securities by at least $500 billion
Overnight repos
Outstanding term repos 3,000
and its holdings of agency MBS by at least
Cumulative MBS purchases $200 billion over coming months (figure 47).
Cumulative coupon purchases
Cumulative bill purchases
2,500 (See the box “Federal Reserve Actions to
2,000 Ensure Smooth Functioning of Treasury
and MBS Markets.”) Later in March,
1,500
the Committee announced that it would
1,000 continue to purchase Treasury securities
and agency MBS in the amounts needed to
500
support smooth market functioning and the
Jan. Feb. Mar. Apr. May June
effective transmission of monetary policy to
2020 broader financial conditions (figure 48). The
NOTE: The data are at a business-day frequency, excluding the Committee also included agency commercial
holidays on January 20, February 17, and May 25. The data begin
January 2, 2020. Repo is repurchase agreement. MBS is mortgage-backed MBS in its purchases for the first time. In
security. June, the Committee announced that, over
SOURCE: Federal Reserve Bank of New York; Federal Reserve Board
staff calculations. coming months, the Federal Reserve will
increase its holdings of Treasury securities
and agency residential and commercial MBS
at least at the current pace to sustain smooth
market functioning, thereby fostering effective
transmission of monetary policy to broader
financial conditions.
The Federal Reserve has continued rolling
over at auction all principal payments from its
holdings of Treasury securities. Before
48. Federal Reserve assets and liabilities
Weekly Trillions of dollars
8
7
Other assets
6
5
Assets 4
Agency debt and mortgage-backed securities holdings 3
Credit and liquidity 2
facilities Treasury securities held outright 1
Federal Reserve notes in circulation
0
-1
Deposits of depository institutions
-2
-3
Liabilities and capital -4
-5
Capital and other liabilities
-6
-7
-8
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
NOTE: “Agency debt and mortgage-backed securities holdings” includes agency residential mortgage-backed securities and agency commercial
mortgage-backed securities. “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. “Other assets” includes repurchase agreements, FIMA repurchase agreements, and
unamortized premiums and discounts on securities held outright. “Capital and other liabilities” includes reverse repurchase agreements, the U.S. Treasury
General Account, and the U.S. Treasury Supplementary Financing Account. The data extend through June 3, 2020.
SOURCE: Federal Reserve Board, Statistical Release H.4.1, “Factors Affecting Reserve Balances.”
MONETARY POLICY REPORT: JUNE 2020 45
Federal Reserve Actions to Ensure Smooth Functioning of
Treasury and MBS Markets
Deterioration in Market Functioning in securities, including off-the-run Treasury securities
February and March and agency MBS, onto their balance sheets. At
the same time, mortgage refinancing picked up,
Between late February and early March, functioning prompting substantial turnover in the MBS market.
in U.S. Treasury securities and agency mortgage- By early March, some dealers had reportedly run
backed securities (MBS) markets became increasingly into balance sheet constraints that hampered their
strained. Amid growing concerns about the economic ability to purchase additional securities, leading to a
implications of COVID-19, investors sought to sell large deterioration in the functioning of a number of dealer-
volumes of long-maturity Treasury securities and MBS intermediated markets.
and reallocate their portfolios into shorter-term, more In the market for Treasury securities, liquidity
liquid assets. While the yields on long-maturity Treasury conditions were particularly poor for more seasoned, or
securities initially dropped sharply, in mid-March they “off the run,” securities. However, the most liquid parts
started to increase in the face of these strong selling of the market, where newly issued, or “on the run,”
pressures (figure A). Around the same time as the securities are traded electronically, saw unprecedented
increase in long-maturity Treasury yields, the spreads strains: The volume of posted quotes, or “market
between yields on MBS and Treasury securities of depth,” dropped sharply, while intraday bid-ask spreads
comparable duration widened sharply. Indications of were exceptionally volatile, particularly for the longest-
severe dislocations in both markets were also present. maturity securities. These strains in the most liquid part
For example, bid-ask spreads for Treasury securities of the market suggest that principal trading firms—
and agency MBS widened significantly (figure B shows market participants who specialize in high-frequency
indicative Treasury bid-ask spreads). and automated intermediation—were significantly less
One factor that may explain these market active than usual.
dislocations is the effect of widespread selling of
Treasury securities and MBS to primary dealers, who
intermediate a large proportion of trading in these Federal Reserve Policy Actions
markets. As a wide range of domestic and foreign The disruptions to the functioning of the Treasury
investors (including foreign official investors) rushed and MBS markets were notable in view of the status
to raise cash or rebalance their portfolios by selling
(continued on next page)
assets, dealers took large amounts of less liquid
B. Federal Reserve Treasury purchases and
A. Nominal Treasury yields indicative Treasury bid-ask spreads
Daily Percent Cents per $100 Billions of dollars
2,000
First off-the-run (left scale)
2.5 50 1,800
30-year
1,600
40
2.0 1,400
Cumulative Fed UST purchases 1,200
30
1.5 since March 1 (right scale)
1,000
20 800
1.0
600
10 Second off-the-run (left scale) 400
10-year .5
0 200
On-the-run (left scale) 0
Jan. Feb. Mar. Apr. May June
2020 Mar. Apr. May June
2020
NOTE: Yields are taken from a smoothed curve fitted to off-the-run
securities. NOTE: The data are daily. UST is U.S. Treasury. Indicative bid-ask
SOURCE: Federal Reserve Bank of New York; Federal Reserve Board spreads are for 10-year Treasury notes. The data for cumulative Fed UST
staff calculations. purchases extend through June 8, 2020.
SOURCE: Federal Reserve Bank of New York, New Price Quote
System.
46 Part 2: Monetary Policy
Federal Reserve Actions to Ensure Smooth Functioning of Markets (continued)
of these markets as cornerstones for the operation Despite the much larger volume of repo operations
of the U.S. and global financial systems and for the during the week of March 9, strains in Treasury and
transmission of monetary policy. The Federal Reserve agency MBS markets continued to build. Beginning in
therefore took a series of policy measures designed mid-March, therefore, the FOMC directed the Desk to
to ensure the smooth functioning of these markets. purchase Treasury securities and agency MBS in order
These measures included the expansion of repurchase to support smooth market functioning. On March 15,
operations, an increase in purchases of Treasury and the FOMC directed the Desk to increase its holdings
agency MBS securities, the expansion of financing of Treasury securities by at least $500 billion and of
arrangements for primary dealers, and a temporary agency MBS by at least $200 billion, with purchases
change to the regulatory capital requirements of bank to take place across maturities.6 To provide greater
holding companies and depository institutions. flexibility in addressing the strains, on March 23,
Beginning March 9, 2020, following a directive the FOMC authorized purchases of these securities
from the Federal Open Market Committee (FOMC), the in the amounts needed to support smooth market
Federal Reserve Bank of New york’s Open Market Desk functioning and effective transmission of monetary
increased the size of overnight and term repurchase policy to broader financial conditions. The securities
operations in order to ensure that the supply of reserves targeted for purchase were also expanded to include
remained ample and to support the smooth functioning agency commercial MBS. Since mid-March, the
of the markets in which primary dealers obtain a Desk has purchased approximately $1.6 trillion and
substantial proportion of their short-term funding.1 $719 billion of Treasury securities and agency MBS,
These changes expanded the supply of short-term respectively.7 The daily amounts of purchases peaked at
funding available to primary dealers to finance their approximately $75 billion and $41 billion for Treasury
increased holdings of Treasury securities and agency securities and agency MBS, respectively, in late March
MBS at a time when funding costs from other sources before being reduced in stages to the current average
were increasing. Further, on March 12, the Desk daily amounts of around $4.0 billion for Treasury
introduced new weekly recurring one- and three-month securities and $4.5 billion for agency MBS (including
term repurchase agreement (repo) operations of up reinvestments). These purchases helped reduce
to $500 billion to address the disruption in Treasury financial market volatility by providing a predictable
financing markets.2 Finally, on March 16, the Desk source of demand for these securities and by taking up
introduced a second daily overnight repo operation and some of the inventories from dealers’ balance sheets.
increased the amount offered in each to $500 billion.3 On March 17, the Board, with the approval of the
Usage of Federal Reserve repo operations peaked on U.S. Treasury Secretary, established the Primary Dealer
March 17, with overnight and term repo outstanding Credit Facility (PDCF) to provide primary dealers
of $496 billion, and has since fallen to $167 billion with access to term funding against a broad range of
as funding strains have eased. In light of more stable collateral.8 The PDCF helped alleviate funding pressures
repo market conditions, on May 4, the Desk returned faced by primary dealers by allowing them to source
to once daily overnight repo operations.4 Further, on financing more easily for their increased securities
May 14, the Desk discontinued its three-month term holdings. The amount of PDCF loans outstanding
repo operations.5 peaked at around $35 billion in mid-April but has since
declined to around $6 billion.
On March 31, the Federal Reserve announced the
1. See Federal Reserve Bank of New york (2020), “Statement
establishment of the temporary FIMA (Foreign and
Regarding Repurchase Operations,” March 9, https://www. (continued)
newyorkfed.org/markets/opolicy/operating_policy_200309.
2. See Federal Reserve Bank of New york (2020), “Statement
Regarding Treasury Reserve Management Purchases and 6. See the FOMC statement issued after the March 15
Repurchase Operations,” March 12, https://www.newyorkfed. meeting, which is available (along with other postmeeting
org/markets/opolicy/operating_policy_200312a. statements) on the Monetary Policy portion of the Board’s
3. See Federal Reserve Bank of New york (2020), “Statement website at https://www.federalreserve.gov/monetarypolicy.htm.
Regarding Repurchase Operations,” March 16, https://www. 7. The MBS purchase amount includes purchases that have
newyorkfed.org/markets/opolicy/operating_policy_200316. yet to settle.
4. See Federal Reserve Bank of New york (2020), “Statement 8. See Board of Governors of the Federal Reserve System
Regarding Repurchase Operations,” April 13, https://www. (2020), “Federal Reserve Board Announces Establishment
newyorkfed.org/markets/opolicy/operating_policy_200413. of a Primary Dealer Credit Facility (PDCF) to Support the
5. See Federal Reserve Bank of New york (2020), “Statement Credit Needs of Households and Businesses,” press release,
Regarding Repurchase Operations,” May 13, https://www. March 17, https://www.federalreserve.gov/newsevents/
newyorkfed.org/markets/opolicy/operating_policy_200513. pressreleases/monetary20200317b.htm.
MONETARY POLICY REPORT: JUNE 2020 47
International Monetary Authorities) Repo Facility to Improvements in Market Functioning
allow FIMA account holders, which consist of central
banks and other international monetary authorities Since the announcement of these policy actions,
with accounts at the Federal Reserve Bank of New trading conditions in the markets for Treasury securities
york, to exchange their Treasury securities for U.S. and MBS have improved steadily. The purchases of
dollars.9 This facility allows foreign official institutions Treasury securities and agency MBS contributed to
to raise U.S. dollars, if needed, without having to sell the subsequent decline in primary dealers’ inventories
Treasury securities in the open market during periods (figure C). Bid-ask spreads have narrowed, particularly
of heightened volatility or impaired market functioning. in the case of on-the-run Treasury securities, while MBS
Since its inception, take-up of the facility has been spreads have also come down from their peaks in mid-
modest, as stresses in the U.S. Treasury market have March. In addition to the Federal Reserve’s actions, the
declined. passage of the CARES Act (Coronavirus Aid, Relief, and
On April 1, the Federal Reserve released an interim Economic Security Act), together with an improvement
final rule indicating that holdings of U.S. Treasury in sentiment among investors regarding the economic
securities and deposits at Federal Reserve Banks by implications of COVID-19, likely contributed to the
bank holding companies would be excluded from the improvement in market functioning. In late May, these
calculation of the supplementary leverage ratio (SLR) inventories temporarily increased to levels previously
until March 31, 2021.10 Further, on May 15, 2020, seen in March, largely because of increased dealer
the federal bank regulatory agencies (the Board of holdings of Treasury bills. However, Treasury markets
Governors, Federal Deposit Insurance Corporation, did not exhibit a recurrence of the notable strains in
and Office of the Comptroller of the Currency) released trading conditions witnessed earlier this year.
an interim final rule allowing depository institutions Although trading conditions have improved
that are subject to the SLR the option to similarly substantially since mid-March, bid-ask spreads for
exclude U.S. Treasury securities and deposits at Federal longer-maturity and off-the-run Treasury securities
Reserve Banks from their SLR calculations through remain wider than in mid-February. Market depth
March 31, 2021.11 These temporary exemptions are for on-the-run securities remains low, particularly for
expected to ease liquidity pressures for primary dealers longer-maturity securities. MBS market functioning and
and depository institutions subject to these leverage liquidity have largely returned to pre-February norms,
ratios by providing them with greater flexibility to though strains remain in some less liquid parts of
intermediate trades with clients in the presence of the market.
temporarily larger inventories of Treasury securities.
C. Net dealer inventories and indicative bid-ask spreads
Cents per $100 Billions of dollars
First off-the-run(left scale) 280
9. See Board of Governors of the Federal Reserve System 50
(2020), “Federal Reserve Announces Establishment of a 260
Temporary FIMA Repo Facility to Help Support the Smooth 40
Functioning of Financial Markets,” press release, March 31, Treasury inventory
(right scale) Second off-the-run 240
https://www.federalreserve.gov/newsevents/pressreleases/ 30 (left scale)
monetary20200331a.htm. 220
10. See Board of Governors of the Federal Reserve System 20
(2020), “Federal Reserve Board Announces Temporary Change 200
to Its Supplementary Leverage Ratio Rule to Ease Strains 10
180
in the Treasury Market Resulting from the Coronavirus and
Increase Banking Organizations’ Ability to Provide Credit 0 160
On-the-run (left scale)
to Households and Businesses,” press release, April 1,
https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20200401a.htm. Jan. Feb. Mar. Apr. May June
11. See Board of Governors of the Federal Reserve System, 2020
Federal Deposit Insurance Corporation, and Office of the NOTE: The data are daily and extend through June 5, 2020, for the
Comptroller of the Currency (2020), “Regulators Temporarily Treasury inventory and June 9, 2020, for the on-the-run and off-the-run
Change the Supplementary Leverage Ratio to Increase Banking spreads. Indicative bid-ask spreads are for 10-year Treasury notes. The
Organizations’ Ability to Support Credit to Households and volume of dealers’ non-rehypothecated Treasury repurchase agreements
serves as a proxy for the total dealer securities inventory.
Businesses in Light of the Coronavirus Response,” joint press SOURCE: Federal Reserve Bank of New York, New Price Quote
release, March 15, https://www.federalreserve.gov/newsevents/ System; Federal Reserve Board, Form FR 2052a, Complex Institution
pressreleases/bcreg20200515a.htm. Liquidity Monitoring Report.
48 Part 2: Monetary Policy
mid-March, to allow for a gradual runoff amount of primary credit loans declined to
of agency securities, the Federal Reserve about $10 billion by early June.
reinvested principal payments from agency
debt and agency MBS of up to $20 billion per . . . and undertook actions with other
month in Treasury securities; agency MBS central banks to support U.S. dollar
principal payments in excess of $20 billion funding markets
each month were reinvested in agency MBS. The Federal Reserve announced coordinated
Beginning in mid-March, the Committee actions with other central banks to enhance
announced it would reinvest all principal the provision of liquidity via the standing U.S.
payments from the Federal Reserve’s holdings dollar liquidity swap line arrangements and
of agency debt and agency MBS back into the establishment of temporary U.S. dollar
agency MBS. (The box “Developments on the liquidity arrangements (swap lines) with
Federal Reserve’s Balance Sheet” discusses nine additional central banks. (See the box
changes in the size and composition of the “Developments Related to Financial Stability”
Federal Reserve’s balance sheet over the in Part 1 for a more detailed discussion of
past year.) the swap lines.) The size of the swap lines
increased from close to zero in mid-March to
The Federal Reserve eased lending terms almost $450 billion by the end of April. The
for primary credit borrowing . . . Federal Reserve also established a temporary
Primary credit is the Federal Reserve lending repo facility for foreign and international
program available to depository institutions monetary authorities.
in generally sound financial condition. Amid
increasing stress in funding markets in mid- The FOMC is committed to using its tools
March, the Federal Reserve announced to promote maximum employment and
several changes to the primary credit program. price stability
Importantly, the primary credit rate was set at The ongoing public health crisis will weigh
the top of the target range for the federal funds heavily on economic activity, employment,
rate rather than 50 basis points above the top and inflation in the near term and pose
of the range. The term of primary credit loans, considerable risks to the economic outlook
which had previously been mainly overnight over the medium term. The FOMC is
advances, was extended to allow depository committed to using its full range of tools to
institutions to borrow for up to 90 days. support the U.S. economy in this challenging
Federal Reserve communication encouraged time, thereby promoting its maximum-
the use of the discount window to help meet employment and price-stability goals. The
the demand for credit from households and Committee will continue to monitor the
businesses. implications of incoming information for the
economic outlook, including information
Discount window borrowing under the related to public health, as well as global
primary credit program increased significantly developments and muted inflation pressures,
following these developments. Primary and it will use its tools and act as appropriate
credit outstanding reached a peak of around to support the economy.
$50 billion in late March 2020—its highest
level since the financial crisis and well above The Federal Reserve has continued
the typical level of around $10 million that to review its strategic framework for
prevailed in 2019. Use of primary credit was monetary policy
fairly widespread, with discount window loans
being extended to institutions across a range In 2019, the Federal Reserve began a broad
of size categories. Overall, the outstanding review of the monetary policy strategy,
MONETARY POLICY REPORT: JUNE 2020 49
tools, and communication practices it uses to from the Fed Listens initiative were never more
pursue its statutory dual-mandate goals of important than they are today as Americans
maximum employment and price stability. A navigate through these challenging times.
key component of the review was a series of The Federal Reserve expects to complete
public Fed Listens events. The Federal Reserve the review of its monetary policy strategy,
held 14 events around the country in 2019 to tools, and communication practices later this
consult with a range of organizations on the year. The Federal Reserve remains focused
effects that labor market conditions, inflation, on the attainment of its goals of maximum
and interest rates have on them and their employment and price stability, including
communities. In light of the rapidly changing laying the foundation for the return to a strong
public health and economic environments due labor market.
to COVID-19, the Federal Reserve convened
another event in May 2020 to get an update.
The Federal Reserve has released a report on
its Fed Listens initiative.22 The lessons learned
22. The report is available on the Board’s website
at https://www.federalreserve.gov/publications/files/
fedlistens-report-20200612.pdf.
50 Part 2: Monetary Policy
Developments on the Federal Reserve’s Balance Sheet
The Size of the Federal Reserve’s Balance A. Balance sheet comparison
(Billions of dollars)
Sheet Has Increased Considerably
6/3/2020 1/1/2020 Change
In response to the financial and economic
Assets
disruptions caused by the COVID-19 pandemic, the
Total securities
Federal Reserve has eased the stance of monetary
policy and has deployed various tools to promote Treasury securities 4,134 2,329 1,805
smooth functioning of financial markets and the flow Agency debt and MBS* 1,838 1,411 427
of credit to households and businesses. This discussion Net unamortized premiums 300 111 188
reviews the implications of these actions for the Federal
Repurchase agreements 212 256 -44
Reserve’s balance sheet.
Loans 102 0 102
To support the smooth functioning of those
credit markets that are critical for the economy, the Central bank liquidity swaps 447 4 443
Federal Reserve purchased Treasury securities and Other assets 133 63 70
agency residential and commercial mortgage-backed Total assets 7,165 4,174 2,992
securities (MBS), expanded repurchase agreement
Liabilities and capital
(repo) operations, and introduced several credit and
Federal Reserve notes 1,904 1,759 144
liquidity facilities. As a result of these actions, the size
of the Federal Reserve’s balance sheet increased from Reserves held by
depository institutions 3,257 1,549 1,709
$4.2 trillion at the beginning of 2020, approximately
19 percent of U.S. nominal gross domestic product U.S. Treasury
General Account 1,431 404 1,028
(GDP), to $7.2 trillion in June 2020, approximately
Other deposits 172 79 93
33 percent of U.S. nominal GDP.1 The $3 trillion increase
in the size of the balance sheet was driven by asset Other liabilities and capital 401 382 19
purchases and other extraordinary actions (figure A).2 Total liabilities and capital 7,165 4,174 2,992
* Includes only settled holdings in par values; the purchases of agency
mortgage-backed securities (MBS) not yet settled was approximately $130 billion
Open Market Operations, the Discount on June 3, 2020.
Source: Federal Reserve Board, Statistical Release H.4.1, “Factors Affecting
Window, and U.S. Dollar Liquidity Swap Lines Reserve Balances.”
Since the beginning of 2020, System Open Market
Account holdings of Treasury securities and agency MBS increased by $1,805 billion and $427 billion,
respectively.3 The markets for both Treasury securities
and agency MBS play a critical role in the U.S.
1. Data based on the “second” estimate of first-quarter economy, and the Federal Reserve’s purchases have
2020 current-dollar GDP of $21.5 trillion released by the
Bureau of Economic Analysis; see Bureau of Economic
fostered a substantial improvement in the functioning of
Analysis (2020), “Gross Domestic Product, 1st Quarter these markets and the conditions prevailing in them.4
2020 (Second Estimate); Corporate Profits, 1st Quarter 2020 (continued)
(Preliminary Estimate),” press release, May 28, https://www.
bea.gov/news/2020/gross-domestic-product-1st-quarter-2020-
second-estimate-corporate-profits-1st-quarter. 3. The increase in MBS holdings on the balance sheet is less
2. In September 2019, the Federal Reserve started than the total MBS purchase amounts because the purchases
purchasing Treasury bills and conducting term and overnight include reinvestments of principal received and some of the
repo operations to ensure the supply of reserves would remain purchases have not settled yet.
ample and help forestall the possibility of money market 4. The daily purchase amounts peaked at approximately
pressures that could adversely affect policy implementation. In $75 billion and $41 billion for Treasury securities and agency
January and February 2020, the Open Market Desk primarily MBS, respectively, in late March. Subsequently, given the
purchased Treasury bills to provide liquidity and supply of improvements in market functioning and liquidity conditions,
reserves. Beginning in mid-March, the Desk started purchasing the pace of purchases was significantly reduced to the average
Treasury securities across a range of maturities and agency daily amounts of $4.0 billion for Treasury securities and
MBS in order to support smooth market functioning. For more $4.5 billion for agency MBS in June. For more information,
information, see the box “Federal Reserve Actions to Ensure see the box “Federal Reserve Actions to Ensure Smooth
Smooth Functioning of Treasury and MBS Markets.” Functioning of Treasury and MBS Markets.”
MONETARY POLICY REPORT: JUNE 2020 51
Furthermore, to address strains in short-term U.S. B. Federal Reserve assets
dollar funding markets, the Federal Reserve Bank of
Weekly Trillions of dollars
New york’s Open Market Desk expanded its offerings
of overnight and term repo operations. The amount Other assets
Loans 8
of repos outstanding reached a peak of $442 billion
Central bank liquidity swaps 7
in mid-March. Subsequently, given the improvement Repurchase agreements
in funding market conditions, the Desk announced Agency debt and mortgage-backed securities 6
several reductions in the frequency of repo operations. holdings (including CMBS)
Treasury securities held outright 5
As of June 3, all repos outstanding had declined to
4
$212 billion, lower than the amount outstanding early
in the year, amid substantial increases in reserves and 3
improved funding market conditions. 2
On March 15, the Federal Reserve announced
1
changes to the discount window and encouraged
depository institutions to use the discount window to Feb. Apr. June Aug. Oct. Dec. Feb. Apr. June
meet unexpected funding needs and support the flow 2019 2020
of credit to households and businesses.5 The changes NOTE: “Other assets” include unamortized premiums and discounts on
securities held outright, the Commercial Paper Funding Facility, the
include lowering the primary credit rate by 150 basis Secondary Market Corporate Credit Facility, and the Municipal Liquidity
points to 0.25 percent and extending borrowing terms Facility. “Loans” consist of primary, secondary, and seasonal credit as well
as other credit and liquidity facilities, including the Primary Dealer Credit
for up to 90 days. The total outstanding discount Facility, the Money Market Liquidity Facility, and the Paycheck
window primary credit borrowing peaked at around Protection Program Liquidity Facility. Key identifies areas in order from
top to bottom. CMBS is commercial mortgage-backed security. The data
$51 billion in late March and has since declined extend through June 3, 2020.
to $11 billion in June. Furthermore, the Federal SOURCE: Federal Reserve Board, Statistical Release H.4.1, “Factors
Affecting Reserve Balances.”
Reserve maintains standing dollar liquidity swap line
agreements with the central banks of several countries
and instituted temporary agreements with the central
banks of additional countries. After initially ramping up The combined size of the Money Market Mutual
to $439 billion in March and April, the total agreements Fund Liquidity Facility and the Primary Dealer Credit
outstanding stayed mostly flat in May to reach Facility increased to $86 billion in April, but the size
$447 billion as of June 3 (figure B). of the facilities declined to $36 billion by June 3. The
combined size of other facilities, such as the Paycheck
Protection Program Lending Facility, the Commercial
Lending Programs and Liquidity Facilities Paper Funding Facility, the Secondary Market Corporate
under Section 13(3) of the Federal Reserve Act Credit Facility, and the Municipal Liquidity Facility,
In addition to the open market operations and has been steadily rising and reached $65 billion as of
initiatives described earlier, the Federal Reserve further June 3 (figure C).7
expanded measures to enhance liquidity and the flow (continued on next page)
of credit to U.S. households and businesses. Under the
authority of section 13(3) of the Federal Reserve Act, 7. Figures exclude the 85 percent of the Treasury’s equity
with the approval of the Secretary of the Treasury, the contributions invested in nonmarketable Treasury securities
for the net portfolio holdings of Commercial Paper Funding
Federal Reserve Board implemented various measures Facility II LLC, Corporate Credit Facilities LLC , and Municipal
in response to intensified stresses in several markets.6 Liquidity Facility LLC.
Note that all of these programs require approval from the
Secretary of the Treasury and are subject to high standards
for transparency, including CARES Act (Coronavirus Aid,
5. A list of regulatory and supervisory actions by the Relief, and Economic Security Act) reporting for some
Federal Reserve related to COVID-19 is available on the facilities. For more information, see Board of Governors of
Board’s website at https://www.federalreserve.gov/supervisory- the Federal Reserve System (2020), Financial Stability Report
regulatory-action-response-covid-19.htm. (Washington: Board of Governors, May), pp. 9–18, https://
6. For more information, see the box “Developments www.federalreserve.gov/publications/files/financial-stability-
Related to Financial Stability” in Part 1. report-20200515.pdf.
52 Part 2: Monetary Policy
Developments on the Federal Reserve’s Balance Sheet (continued)
C. Liquidity and credit market facilities D. Federal Reserve liabilities
Utilization
Maximum Weekly Trillions of dollars
Name Target as of
size 6/3/2020
Deposits of depository institutions
Primary Dealer Credit Broker-dealer U.S. Treasury General Account 8
Unlimited $6 billion
Facility liquidity Other deposits 7
Capital and other liabilities
Money Market Mutual Federal Reserve notes in circulation
MMF liquidity Unlimited $30 billion 6
Fund Liquidity Facility
Paycheck Protection Funding of 5
Unlimited $55 billion
Program Lending Facility PPP loans 4
Issuer max
Commercial Paper Newly 3
outstanding $4 billion
Funding Facility* issued CP
limit 2
Primary Market Newly issued
$0 billion 1
Corporate Credit Facility corporate debt
Combined
Secondary Market Secondary $750 billion Feb. Apr. June Aug. Oct. Dec. Feb. Apr. June
Corporate Credit market $4 billion 2019 2020
Facility* corporate debt NOTE: “Capital and other liabilities” include reverse repurchase
Main Street New Loan agreements and Treasury contributions. Key identifies areas in order from
Facility top to bottom. The data extend through June 3, 2020.
Small and SOURCE: Federal Reserve Board, Statistical Release H.4.1, “Factors
Main Street Expanded medium- Combined Affecting Reserve Balances.”
$0 billion
Loan Facility sized $600 billion
businesses
Main Street Priority Loan
Facility actions resulted in reserve balances of $3.3 trillion, an
States and
increase of $1.7 trillion from the beginning of the year.
Municipal Liquidity Additionally, several nonreserve liabilities increased.
municipal $500 billion $1 billion
Facility*
governments In March and April, Federal Reserve notes grew faster
Term Asset-Backed Newly
$100 billion $0 billion
than normal, partially in response to the COVID-19
Securities Loan Facility issued ABS pandemic, and reached $1.9 trillion, an increase of
Note: CP is commercial paper, MMF is money market fund, ABS is asset-backed $144 billion from the beginning of the year.
securities, and PPP is Paycheck Protection Program.
* Excludes assets purchased pursuant to terms of the credit facility and amounts Furthermore, the U.S. Treasury’s General Account
related to Treasury contributions to the facility. (TGA) at the Federal Reserve, which the Treasury uses
Source: Federal Reserve Board, Statistical Release H.4.1, “Factors Affecting
Reserve Balances.” to receive taxes and proceeds of Treasury auctions
and to process the government’s outlays, increased
substantially. At the beginning of 2020, the TGA
The Expansion of Total Assets Led to Higher balance was approximately $400 billion. In preparation
Reserve Balances Held by Depository for the fiscal spending related to the CARES Act
(Coronavirus Aid, Relief, and Economic Security Act)
Institutions
and other stimulus measures, the TGA balance reached
The increase in the Federal Reserve’s assets led to a high of $1.4 trillion on June 3 (figure D).8
a commensurate increase in the size of liabilities on
the Federal Reserve’s balance sheet. The expansion 8. By statute, the Federal Reserve serves a special role as
of total assets from the outright purchases and other fiscal agent or banker for the federal government.
53
Part 3
Summary of Economic Projections
In conjunction with the Federal Open The median of projections for the
Market Committee (FOMC) meeting held unemployment rate in the fourth quarter
on June 9–10, 2020, meeting participants of 2020 was 9.3 percent, with individual
submitted their projections of the most likely projections ranging from 7.0 to 14.0 percent.
outcomes for real gross domestic product The median of projections for the
(GDP) growth, the unemployment rate, and unemployment rate was 6.5 percent and
inflation for each year from 2020 through 2022 5.5 percent in the fourth quarter of 2021 and
and over the longer run. Each participant’s 2022, respectively. These values are above the
projections were based on information median assessment of the longer-run normal
available at the time of the meeting, together unemployment rate, 4.1 percent, which was
with his or her assessment of appropriate unchanged from December.
monetary policy and assumptions about other
factors likely to affect economic outcomes. The median of projections for inflation, as
The longer-run projections represent each measured by changes in the price index for
participant’s assessment of the value to which personal consumption expenditures (PCE),
each variable would be expected to converge, was 0.8 percent for 2020, 1.6 percent for
over time, under appropriate monetary policy 2021, and 1.7 percent for 2022. Almost all
and in the absence of further shocks to the participants expected inflation to run below
economy.23 “Appropriate monetary policy” the Committee’s longer-run objective of
is defined as the future path of policy 2 percent through 2022. The medians of
that each participant deems most likely to projections for core PCE inflation were
foster outcomes for economic activity 1.0 percent for this year, 1.5 percent for 2021,
and inflation that best satisfy his or her and 1.7 percent for 2022.
individual interpretation of the Federal
With regard to participants’ projections
Reserve’s congressionally mandated goals of
of appropriate monetary policy, almost
promoting maximum employment and
all participants expected to maintain the
price stability.
target range for the federal funds rate at
All participants judged that the uncertainty 0 to ¼ percent through at least the end of
attending their projections was higher than 2022 (figure 2). These projections represent
the average of the past 20 years. The median participants’ individual assessments of
of participants’ projections for real GDP appropriate policy consistent with their
growth was negative 6.5 percent for 2020, projections of economic growth, employment,
with individual projections ranging from inflation, and other factors. However, the
negative 10.0 to negative 4.2 percent (table 1 economic outlook is inherently uncertain; thus,
and figure 1). The median of projections for each participant’s assessment of appropriate
real GDP growth was 5.0 percent for 2021 and policy is also necessarily uncertain and will
3.5 percent for 2022. The median assessment change in response to changes to the economic
of real GDP growth in the longer run was outlook and associated risks. The median
1.8 percent, down 0.1 percentage point since estimate of the longer-run level for the federal
the December 2019 projections included in the funds rate, 2.5 percent, was unchanged from
February 2020 Monetary Policy Report. December.
A more complete description of the Summary of
23. One participant did not submit longer-run Economic Projections will be released with the
projections in conjunction with the June 2020 minutes of the June 9–10, 2020, FOMC meeting
FOMC meeting. on July 1.
54 Part 3: Summary of Economic Projections
Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their
individual assumptions of projected appropriate monetary policy, June 2020
Percent
Median1 Central tendency2 Range3
Variable
Longer Longer Longer
2020 2021 2022 2020 2021 2022 2020 2021 2022
run run run
Change in real GDP . . . . -6.5 5.0 3.5 1.8 -7.6– -5.5 4.5–6.0 3.0–4.5 1.7–2.0 -10.0– -4.2 -1.0–7.0 2.0–6.0 1.6–2.2
December projection. . 2.0 1.9 1.8 1.9 2.0–2.2 1.8–2.0 1.8–2.0 1.8–2.0 1.8–2.3 1.7–2.2 1.5–2.2 1.7–2.2
Unemployment rate. . . . . 9.3 6.5 5.5 4.1 9.0–10.0 5.9–7.5 4.8–6.1 4.0–4.3 7.0–14.0 4.5–12.0 4.0–8.0 3.5–4.7
December projection. . 3.5 3.6 3.7 4.1 3.5–3.7 3.5–3.9 3.5–4.0 3.9–4.3 3.3–3.8 3.3–4.0 3.3–4.1 3.5–4.5
PCE inflation. . . . . . . . . . 0.8 1.6 1.7 2.0 0.6–1.0 1.4–1.7 1.6–1.8 2.0 0.5–1.2 1.1–2.0 1.4–2.2 2.0
December projection. . 1.9 2.0 2.0 2.0 1.8–1.9 2.0–2.1 2.0–2.2 2.0 1.7–2.1 1.8–2.3 1.8–2.2 2.0
Core PCE inflation4. . . . . 1.0 1.5 1.7 0.9–1.1 1.4–1.7 1.6–1.8 0.7–1.3 1.2–2.0 1.2–2.2
December projection. . 1.9 2.0 2.0 1.9–2.0 2.0–2.1 2.0–2.2 1.7–2.1 1.8–2.3 1.8–2.2
Memo: Projected
appropriate policy path
Federal funds rate. . . . . . 0.1 0.1 0.1 2.5 0.1 0.1 0.1 2.3–2.5 0.1 0.1 0.1–1.1 2.0–3.0
December projection. . 1.6 1.9 2.1 2.5 1.6–1.9 1.6–2.1 1.9–2.6 2.4–2.8 1.6–1.9 1.6–2.4 1.6–2.9 2.0–3.3
Note: Projections of change in real gross domestic product (GDP) and projections for both measures of inflation are percent changes from the fourth quarter of the previous
year to the fourth quarter of the year indicated. PCE inflation and core PCE inflation 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 specified calendar year or over the longer run. The December projections were made in conjunction with the meeting of
the Federal Open Market Committee on December 10–11, 2019. 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 December 10–11, 2019, meeting, and one participant did not submit such projections in conjunction with the June 9–10, 2020,
meeting. No projections were submitted in conjunction with the March 2020 FOMC 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 inflation are not collected.
MONETARY POLICY REPORT: JUNE 2020 55
Figure 1. Medians, central tendencies, and ranges of economic projections, 2020–22 and over the longer run
Percent
Change in real GDP
8
6
4
2
Actual 0
−2
−4
Median of projections −6
Central tendency of projections
−8
Range of projections
−10
2015 2016 2017 2018 2019 2020 2021 2022 Longer
run
Percent
Unemployment rate
16
14
12
10
8
6
4
2
2015 2016 2017 2018 2019 2020 2021 2022 Longer
run
Percent
PCE inflation
3
2
1
0
2015 2016 2017 2018 2019 2020 2021 2022 Longer
run
Note: Definitions of variables and other explanations are in the notes to table 1. The data for the actual values of the
variables are annual.
56 Part 3: Summary of Economic Projections
Figure 2. FOMC participants’ assessments of appropriate monetary policy: Midpoint of target range or target
level for the federal funds rate
Percent
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2020 2021 2022 Longer run
Note: Each shaded circle indicates the value (rounded to the nearest 1/8 percentage point) of an individual participant’s
judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the
federal funds rate at the end of the specified calendar year or over the longer run. One participant did not submit longer-run
projections for the federal funds rate.
57
Abbreviations
AFE advanced foreign economy
BLS Bureau of Labor Statistics
BOC Bank of Canada
BOE Bank of England
BOJ Bank of Japan
CARES Act Coronavirus Aid, Relief, and Economic Security Act
CBO Congressional Budget Office
C&I commercial and industrial
COVID-19 coronavirus disease 2019
CP commercial paper
CPI consumer price index
DPI disposable personal income
ECB European Central Bank
ECI employment cost index
EFFR effective federal funds rate
EME emerging market economy
FIMA Foreign and International Monetary Authorities
FOMC Federal Open Market Committee; also, the Committee
GDP gross domestic product
GFC Global Financial Crisis
LFPR labor force participation rate
MBS mortgage-backed securities
MMF money market fund
MMLF Money Market Mutual Fund Liquidity Facility
MSLP Main Street Lending Program
OPEC Organization of the Petroleum Exporting Countries
PCE personal consumption expenditures
PDCF Primary Dealer Credit Facility
PMCCF Primary Market Corporate Credit Facility
PPP Paycheck Protection Program
PPPLF Paycheck Protection Program Liquidity Facility
RBA Reserve Bank of Australia
58 Abbreviations
R&D research and development
repo repurchase agreement
SBA Small Business Administration
SLOOS Senior Loan Officer Opinion Survey on Bank Lending Practices
SLR supplementary leverage ratio
SMCCF Secondary Market Corporate Credit Facility
TGA Treasury General Account
TIPS Treasury Inflation-Protected Securities
UI unemployment insurance
VIX implied volatility for the S&P 500 index
WTI West Texas Intermediate
For use at 11:00 a.m. EDT
June 12, 2020
Monetary Policy Report
June 12, 2020
Board of Governors of the Federal Reserve System
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