SUMMARY Economic activity increased at a solid pace objective of 2 percent. The price index for over the second half of 2017. and the labor personal consumption expenditures increased market continued to strengthen measured 1. 7 percent over the 12 months ending in on a 12-month basis. inflation has remained December 2017. about the same as in 2016 below the Federal Open Market Committee's The 12-month measure of inflation that (FOMC) longer-run objective of 2 percent. excludes food and energy items(so-called The FOMC raised the target range for the core inflation), which historically has been federal funds rate twice in the first half of a better indicator of where overall inflation 2017, resulting in a range of l to 1 4 percent will be in the future than the headline figure, by the end of its June meeting. With the was 1.5 percent in December-0 4 percentage federal funds rate rising toward more normal point lower than it had been one year earlier levels, at its September meeting, the FOMC However, monthly readings on core infation decided to initiate a program of gradually were somewhat higher during the last few and predictably reducing the size of its months of 2017 than earlier in the year balance sheet. At its meeting in December. Measures of longer-run inflation expectations the Committee judged that current and have, on balance, been generally stable, prospective economic conditions called for although some measures remain low by a further increase in the target range for the historical standards federal funds rate, to 14 to 12 percent Economic growth. Real gross domestic product Economic and financial (GDP)is reported to have increased at an Developments annual rate of nearly 3 percent in the second half of 2017 after rising slightly more than The labor market. The labor market has 2 percent in the first half. Consumer spending continued to strengthen since the middle of expanded at a solid rate in the second half, last year. Payroll employment has posted solid supported by job gains, rising household gains, averaging 182,000 per month in the wealth and favorable consumer sentiment seven months starting in July 2017, about the Business investment growth was robust, and same as the average pace in the first half of indicators of business sentiment have been 2017. Although net job creation last year was strong. The housing market has continued slightly slower than in 2016, it has remained to improve slowly. Foreign activity remained considerably faster than what is needed solid and the dollar depreciated further in the on average to absorb new entrants into the second half, but net exports subtracted from labor force. The unemployment rate declined real U.S. GDP growth as imports of consumer from 4.3 percent in June to 4.1 percent in and capital goods surged late in the year. January-somewhat below the median of FOMC participants' estimates of its longer Financial conditions. Financial conditions run normal level. Other measures of labor for businesses and households have utilization also suggest that the labor market eased on balance since the middle of has tightened since last summer. nonetheless 017 amid an improving global growth wage growth has been moderate, likely held outlook. Notwithstanding financial market down in part by the weak pace of productivity developments in recent weeks, broad measures growth in recent years of equity prices are higher, and spreads of yields on corporate bonds over those of Inflation. Consumer price inflation has comparable-maturity Treasury securities have remained below the fomc's longer-run narrowed. Most types of consumer loans
1 Summary Economic activity increased at a solid pace over the second half of 2017, and the labor market continued to strengthen. Measured on a 12-month basis, inflation has remained below the Federal Open Market Committee’s (FOMC) longer-run objective of 2 percent. The FOMC raised the target range for the federal funds rate twice in the first half of 2017, resulting in a range of 1 to 1¼ percent by the end of its June meeting. With the federal funds rate rising toward more normal levels, at its September meeting, the FOMC decided to initiate a program of gradually and predictably reducing the size of its balance sheet. At its meeting in December, the Committee judged that current and prospective economic conditions called for a further increase in the target range for the federal funds rate, to 1¼ to 1½ percent. Economic and Financial Developments The labor market. The labor market has continued to strengthen since the middle of last year. Payroll employment has posted solid gains, averaging 182,000 per month in the seven months starting in July 2017, about the same as the average pace in the first half of 2017. Although net job creation last year was slightly slower than in 2016, it has remained considerably faster than what is needed, on average, to absorb new entrants into the labor force. The unemployment rate declined from 4.3 percent in June to 4.1 percent in January—somewhat below the median of FOMC participants’ estimates of its longerrun normal level. Other measures of labor utilization also suggest that the labor market has tightened since last summer. Nonetheless, wage growth has been moderate, likely held down in part by the weak pace of productivity growth in recent years. Inflation. Consumer price inflation has remained below the FOMC’s longer-run objective of 2 percent. The price index for personal consumption expenditures increased 1.7 percent over the 12 months ending in December 2017, about the same as in 2016. The 12-month measure of inflation that excludes food and energy items (so-called core inflation), which historically has been a better indicator of where overall inflation will be in the future than the headline figure, was 1.5 percent in December—0.4 percentage point lower than it had been one year earlier. However, monthly readings on core inflation were somewhat higher during the last few months of 2017 than earlier in the year. Measures of longer-run inflation expectations have, on balance, been generally stable, although some measures remain low by historical standards. Economic growth. Real gross domestic product (GDP) is reported to have increased at an annual rate of nearly 3 percent in the second half of 2017 after rising slightly more than 2 percent in the first half. Consumer spending expanded at a solid rate in the second half, supported by job gains, rising household wealth, and favorable consumer sentiment. Business investment growth was robust, and indicators of business sentiment have been strong. The housing market has continued to improve slowly. Foreign activity remained solid and the dollar depreciated further in the second half, but net exports subtracted from real U.S. GDP growth as imports of consumer and capital goods surged late in the year. Financial conditions. Financial conditions for businesses and households have eased on balance since the middle of 2017 amid an improving global growth outlook. Notwithstanding financial market developments in recent weeks, broad measures of equity prices are higher, and spreads of yields on corporate bonds over those of comparable-maturity Treasury securities have narrowed. Most types of consumer loans
2 SUMMARY remained widely available, though credit The FOMC expects that, with further gradual was still difficult to access in credit card and djustments in the stance of monetary policy, mortgage markets for borrowers with low economic activity will expand at a moderate credit scores or harder-to-document incomes pace and labor market conditions will remain Longer-term nominal Treasury yields and strong. Inflation on a 12-month basis is mortgage rates have moved up on net. The expected to move up this year and to stabilize dollar depreciated, on average, against the around the Committee's 2 percent objective currencies of our trading partners. In foreign over the next few years. The federal funds financial markets, equity prices generally rate is likely to remain, for some time, below increased in the second half of 2017. and most levels that are expected to prevail in the longer of those indexes remain higher, on net, despite run. Consistent with this outlook. in the most recent declines. Most longer-term yields rose recent Summary of Economic Projections noticeably. (SEP), which was compiled at the time of the December FOMC meeting, the median of Financial stability. vulnerabilities in the U.S participants' assessments for the appropriate financial system are judged to be moderate on level of the federal funds rate through the end balance Valuation pressures continue to be of 2019 remains below the median projection elevated across a range of asset classes eve for its longer-run level. (The December SEP is after taking into account the current level presented in Part 3 of this report. However of Treasury yields and the expectation that as the Committee has continued to emphasize the reduction in corporate tax rates should the actual path of the federal funds rate will generate an increase in after-tax earnings depend on the economic outlook as informed Leverage in the nonfinancial business sector by incoming data. In particular, with inflation has remained high, and net issuance of risky having persistently run below the 2 perce debt has climbed in recent months. In contrast longer-run objective, the Committee will leverage in the household sector has remained carefully monitor actual and expected inflation at a relatively low level, and household debt developments relative to its symmetric in recent years has expanded only about in infation goal. line with nominal income. moreover US banks are well capitalized and have significant Balance sheet policy. In the second half of liquidity buffers 2017. the Committee initiated the balance sheet normalization program that is described Monetary Policy the addendum to the policy Principles and Plans the Committee issued in Interest rate policy. The FOMC continued June.Specifically, since October, the Federal to gradually increase the target range for the Reserve has been gradually reducing its federal funds rate. After having raised it twice holdings of Treasury and agency securities the first half of 2017. the Committee raised by decreasing the reinvestment of principal he target range for the federal funds rate payments it receives from these securities. again in December, bringing it to the current range of 1 /4 to 1/ percent. The decision elan TOpICS to increase the target range for the federal funds rate reflected the solid performance of How tight is the labor market Although he economy. Even with this rate increase, there is no way to know with precision, the the stance of monetary policy remains accommodative, thereby supporting strong 1. The June addendum is available on the boards labor market conditions and a sustained return websiteathttps://www.federalreservegov/monetarypolicy/ to 2 percent inflation fles/FOMC_ Policy Normalization. 20170613. pdf
2 Summary remained widely available, though credit was still difficult to access in credit card and mortgage markets for borrowers with low credit scores or harder-to-document incomes. Longer-term nominal Treasury yields and mortgage rates have moved up on net. The dollar depreciated, on average, against the currencies of our trading partners. In foreign financial markets, equity prices generally increased in the second half of 2017, and most of those indexes remain higher, on net, despite recent declines. Most longer-term yields rose noticeably. Financial stability. Vulnerabilities in the U.S. financial system are judged to be moderate on balance. Valuation pressures continue to be elevated across a range of asset classes even after taking into account the current level of Treasury yields and the expectation that the reduction in corporate tax rates should generate an increase in after-tax earnings. Leverage in the nonfinancial business sector has remained high, and net issuance of risky debt has climbed in recent months. In contrast, leverage in the household sector has remained at a relatively low level, and household debt in recent years has expanded only about in line with nominal income. Moreover, U.S. banks are well capitalized and have significant liquidity buffers. Monetary Policy Interest rate policy. The FOMC continued to gradually increase the target range for the federal funds rate. After having raised it twice in the first half of 2017, the Committee raised the target range for the federal funds rate again in December, bringing it to the current range of 1¼ to 1½ percent. The decision to increase the target range for the federal funds rate reflected the solid performance of the economy. Even with this rate increase, the stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation. The FOMC expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong. Inflation on a 12-month basis is expected to move up this year and to stabilize around the Committee’s 2 percent objective over the next few years. The federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. Consistent with this outlook, in the most recent Summary of Economic Projections (SEP), which was compiled at the time of the December FOMC meeting, the median of participants’ assessments for the appropriate level of the federal funds rate through the end of 2019 remains below the median projection for its longer-run level. (The December SEP is presented in Part 3 of this report.) However, as the Committee has continued to emphasize, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data. In particular, with inflation having persistently run below the 2 percent longer-run objective, the Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. Balance sheet policy. In the second half of 2017, the Committee initiated the balance sheet normalization program that is described in the Addendum to the Policy Normalization Principles and Plans the Committee issued in June.1 Specifically, since October, the Federal Reserve has been gradually reducing its holdings of Treasury and agency securities by decreasing the reinvestment of principal payments it receives from these securities. Special Topics How tight is the labor market? Although there is no way to know with precision, the 1. The June addendum is available on the Board’s website at https://www.federalreserve.gov/monetarypolicy/ files/FOMC_PolicyNormalization.20170613.pdf
MONETARY POLICY REPORT: FEBRUARY 2018 3 abor market appears to be near or a little such as global economic slack or the beyond full employment at present. The integration of emerging economies into the unemployment rate is somewhat below most world economy-as contributing to lower estimates of its longer-run normal rate and inflation. Policymakers remain attentive the labor force participation rate is relatively to the possibility of such forces leading to close to many estimates of its trend. Although continued low inflation; they also are watchful employers report having more difficulties regarding the opposite risk of inflation moving nding qualified workers, hiring continues undesirably high. (See the box "Low Inflation apace, and serious labor shortages would likely in the Advanced Economies"in Part 1.) have brought about larger wage increases than have been evident to date. ( See the box"How Monetary policy rules. Monetary policymakers Tight Is the Labor Market? "in Part 1.) consider a wide range of information on current economic conditions and the outlook Low global inflation. Inflation has generally before deciding on a policy stance they deem come in below central banks targets in the most likely to foster the FOMC's statutory advanced economies for several years now. mandate of maximum employment and stable Resource slack and commodity pricesas prices. They also routinely consult monetary well as, for the United States, movements in policy rules that connect prescriptions for the he U.S. dollar-appear to explain inflations policy interest rate with variables associated behavior fairly well. But our understanding is with the dual mandate The use of such rules fect, and other, possibly more persistent requires careful judgments about the choice factors may be at work. Resource slack at and measurement of the inputs into these home and abroad might be greater than it rules as well as the implications of the many appears to be, or inflation expectations could considerations these rules do not take into be lower than suggested by the available account.( See the box"Monetary Policy Rules indicators. Moreover. some observers have and Their Role in the Federal Reserves Policy pointed to increased competition from online Process"in Part 2.) retailers or international developments-
MONETARY POLICY REPORT: FEBRUARY 2018 3 labor market appears to be near or a little beyond full employment at present. The unemployment rate is somewhat below most estimates of its longer-run normal rate, and the labor force participation rate is relatively close to many estimates of its trend. Although employers report having more difficulties finding qualified workers, hiring continues apace, and serious labor shortages would likely have brought about larger wage increases than have been evident to date. (See the box “How Tight Is the Labor Market?” in Part 1.) Low global inflation. Inflation has generally come in below central banks’ targets in the advanced economies for several years now. Resource slack and commodity prices—as well as, for the United States, movements in the U.S. dollar—appear to explain inflation’s behavior fairly well. But our understanding is imperfect, and other, possibly more persistent, factors may be at work. Resource slack at home and abroad might be greater than it appears to be, or inflation expectations could be lower than suggested by the available indicators. Moreover, some observers have pointed to increased competition from online retailers or international developments— such as global economic slack or the integration of emerging economies into the world economy—as contributing to lower inflation. Policymakers remain attentive to the possibility of such forces leading to continued low inflation; they also are watchful regarding the opposite risk of inflation moving undesirably high. (See the box “Low Inflation in the Advanced Economies” in Part 1.) Monetary policy rules. Monetary policymakers consider a wide range of information on current economic conditions and the outlook before deciding on a policy stance they deem most likely to foster the FOMC’s statutory mandate of maximum employment and stable prices. They also routinely consult monetary policy rules that connect prescriptions for the policy interest rate with variables associated with the dual mandate. The use of such rules requires careful judgments about the choice and measurement of the inputs into these rules as well as the implications of the many considerations these rules do not take into account. (See the box “Monetary Policy Rules and Their Role in the Federal Reserve’s Policy Process” in Part 2.)
