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Prefatory Note The attached document represents the most complete and accurate version available based on original files from the FOMC Secretariat at the Board of Governors of the Federal Reserve System. Please note that some material may have been redacted from this document if that material was received on a confidential basis. Redacted material is indicated by occasional gaps in the text or by gray boxes around non-text content. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. Content last modified 01/08/2021. Authorized for Public Release Class II FOMC – Restricted (FR) Report to the FOMC on Economic Conditions and Monetary Policy Book A Economic and Financial Conditions: Current Situation and Outlook June 10, 2015 Prepared for the Federal Open Market Committee by the staff of the Board of Governors of the Federal Reserve System Authorized for Public Release (This page is intentionally blank.) Class II FOMC - Restricted (FR) June 10, 2015 Domestic Economic Developments and Outlook The economic expansion appears to have downshifted modestly: After increasing 2½ percent last year, real GDP looks to be on track to rise at an annual rate of only 1 percent over the first half of this year, even assuming—as we do—that some of the factors that weighed on spending early in the year have already unwound. Over the second half, we expect real GDP growth will step up to a 2 percent annual rate. Such a pace would exceed our assumption for the economy’s potential growth rate by ½ percentage point, but it would also be a few tenths slower than we anticipated in the April Tealbook, as we have become more guarded in our assessment of the outlook for household spending. One reason we have not reacted more strongly to the recent slowdown in spending is that conditions in the labor market have continued to improve. After slowing some in the first quarter, payroll employment posted stronger gains in April and May. Meanwhile, the employment-to-population ratio has continued to converge toward our estimate of its trend at the same pace that we anticipated in the April projection. Beyond the near term, we expect that real GDP growth will be 2½ percent in 2016 before edging down to 2¼ percent in 2017. All told, the growth that we anticipate is sufficient to close the output gap by the end of 2017, much as in the April Tealbook. The unemployment rate is expected to edge down from 5.5 percent in the second quarter of this year to 5.2 percent in the fourth quarter of 2016—in line with our estimate of its natural rate—and to remain there through the end of the medium term. As in previous forecasts, we continue to expect that an unwinding of the current unusual weakness in labor force participation will attenuate the speed at which the jobless rate declines going forward. Our outlook for inflation is little revised. As in the April Tealbook, we have core inflation gradually moving up from 1¼ percent this year to 1¾ percent in 2017 as import prices turn back up, resource utilization tightens, and the effects of earlier sharp declines in energy prices wane. Over most of the medium term, we expect total PCE inflation to run roughly in line with core inflation. The recent data provide some evidence that compensation is accelerating; smoothing through the quarterly volatility, we continue to expect that compensation growth, as measured by the employment cost index (ECI), will Page 1 of 96 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Revisions to the Staff Projection since the Previous SEP The FOMC most recently published its Summary of Economic Projections, or SEP, following the March FOMC meeting. The table below compares the staff’s current economic projection with the one we presented in the March Tealbook. Since the March projection, we have revised down our forecast for real GDP growth this year, primarily reflecting the weaker‐than‐expected incoming data on aggregate spending. Our forecast for real GDP growth in 2016 and 2017 is slightly higher than in March, mostly because our projected path for the foreign exchange value of the dollar is lower. Altogether, these revisions leave our projection for the GDP gap next year and in 2017 weaker than in the March forecast. The unemployment rate has declined a little less than we expected in March and is projected to average 5.3 percent in the fourth quarter of this year. Reflecting both the recent labor data and our lower projected path for aggregate output, the unemployment rate is revised up a little at the end of 2017 to 5.2 percent, equal to the staff’s estimate of its natural rate. The staff’s projection for headline PCE inflation has been revised up somewhat in the first half of this year, mostly reflecting recent higher‐than‐expected readings for consumer energy prices, and projected core PCE inflation is essentially unchanged. Given our assumptions that longer‐run inflation expectations will remain stable over the medium term, the earlier declines in energy prices were transitory, and core import prices will start to rise after this year, our forecasts for headline and core inflation in 2016 and 2017 are little changed. We continue to project that inflation will run somewhat below the Committee’s 2 percent objective through 2017. Staff Economic Projections Compared with the March Tealbook 2015 Variable 2014 H1 H2 2015 2016 2017 Longer run Real GDP1 March Tealbook 2.4 2.4 1.0 2.2 2.1 2.3 1.6 2.2 2.4 2.3 2.2 2.0 1.9 1.9 Unemployment rate2 March Tealbook 5.7 5.7 5.5 5.3 5.3 5.2 5.3 5.2 5.2 5.1 5.2 5.0 5.2 5.2 PCE inflation1 March Tealbook 1.1 1.1 -.1 -.3 1.3 1.6 .6 .6 1.6 1.7 1.8 1.9 2.0 2.0 Core PCE inflation1 March Tealbook 1.4 1.4 1.2 1.1 1.4 1.5 1.3 1.3 1.6 1.6 1.8 1.8 n.a. n.a. Federal funds rate2 March Tealbook .10 .10 .13 .16 .35 .66 .35 .66 1.26 1.75 2.12 2.67 3.50 3.50 Memo: Federal funds rate, end of period March Tealbook .13 .13 .13 .20 .44 .76 .44 .76 1.33 1.84 2.19 2.73 3.50 3.50 GDP gap2,3 March Tealbook -1.0 -1.0 -1.3 -.7 -1.0 -.4 -1.0 -.4 -.4 .2 .1 .5 n.a. n.a. 1. Percent change from final quarter of preceding period to final quarter of period indicated. 2. Percent, final quarter of period indicated. 3. Percent difference between actual and potential. A negative number indicates that the economy is operating below potential. n.a. Not available. Page 2 of 96 Class II FOMC - Restricted (FR) June 10, 2015 Since the March Tealbook, our assumption for the date of liftoff of the federal funds rate from its effective lower bound was changed from the second quarter to the third quarter of this year. Reflecting both the later assumed liftoff date and the softer GDP gap in the current forecast, the projected path for the federal funds rate is around ½ percentage point lower at the end of next year and in 2017 than in March. Because FOMC participants are providing additional information about their expectations of the economic conditions that will exist at the time they anticipate it will first become appropriate to increase the target range for the federal funds rate, we include the table below providing quarterly information from the staff projection. In the third quarter of this year—the quarter when our baseline projection assumes liftoff of the federal funds rate will occur—we forecast the unemployment rate to average 5.4 percent and the trailing four‐quarter change in real GDP to be 1.5 percent. We project the trailing four‐ quarter change in core PCE inflation to be 1.2 percent, and the four‐quarter change in headline PCE prices to be only 0.2 percent because of earlier decreases in energy prices. (We do not anticipate that these energy price declines will fall out of the four‐quarter change in headline inflation until early next year.) Of course, even the preliminary versions of these readings on economic performance will not become available until after the close of the quarter in question. Staff Economic Projections Compared with the March Tealbook, Quarterly 2015 2016 Variable Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2.8 3.3 2.3 2.8 1.5 2.2 1.6 2.2 2.2 2.4 2.2 2.3 2.4 2.3 2.4 2.3 PCE inflation March Tealbook .3 .3 .2 .0 .2 .1 .6 .6 1.5 1.5 1.4 1.6 1.5 1.6 1.6 1.7 Core PCE inflation March Tealbook 1.3 1.3 1.2 1.1 1.2 1.2 1.3 1.3 1.5 1.5 1.5 1.5 1.5 1.6 1.6 1.6 Percent Unemployment rate March Tealbook 5.6 5.5 5.5 5.3 5.4 5.2 5.3 5.2 5.3 5.1 5.3 5.1 5.3 5.1 5.2 5.1 Federal funds rate March Tealbook .11 .13 .13 .16 .15 .40 .35 .66 .59 .95 .82 1.23 1.04 1.50 1.26 1.75 Memo Federal funds rate, end of period March Tealbook .11 .13 .13 .20 .19 .49 .44 .76 .67 1.05 .89 1.33 1.11 1.59 1.33 1.84 Four-quarter percent change Real GDP March Tealbook Page 3 of 96 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Comparing the Staff Projection with Other Forecasts The staff’s projection for real GDP growth is, on balance, a little lower than the most recent Blue Chip Consensus outlook and the Survey of Professional Forecasters (SPF) median projection (note that the latter survey dates from mid-May). The staff’s forecast of the unemployment rate is a little higher than those of the outside forecasters; the staff’s inflation projection is a bit lower. Comparison of Tealbook and Outside Forecasts 2015 2016 GDP (Q4/Q4 percent change) June Tealbook Blue Chip (6/10/15) SPF median (5/15/15) 1.6 2.0 2.2 2.4 2.7 n.a. Unemployment rate (Q4 level) June Tealbook Blue Chip (6/10/15) SPF median (5/15/15) 5.3 5.1 5.2 5.2 4.8 n.a. Consumer price inflation (Q4/Q4 percent change) June Tealbook Blue Chip (6/10/15) SPF median (5/15/15) .7 .8 .7 2.0 2.3 2.1 PCE price inflation (Q4/Q4 percent change) June Tealbook SPF median (5/15/15) .6 .8 1.6 1.9 1.3 1.4 1.6 1.7 Core PCE price inflation (Q4/Q4 percent change) June Tealbook SPF median (5/15/15) Note: SPF is the Survey of Professional Forecasters. Blue Chip does not provide results for PCE price inflation. The Blue Chip Consensus contains about 50 panelists, and the SPF about 40. Roughly 20 panelists contribute to both surveys. n.a. Not available. Source: Blue Chip Economic Indicators; Federal Reserve Bank of Philadelphia. Page 4 of 96 Class II FOMC - Restricted (FR) June 10, 2015 Tealbook Forecast Compared with Blue Chip (Blue Chip survey released June 10, 2015) Industrial Production Real GDP Percent change, annual rate Blue Chip consensus Staff forecast 2008 2010 2012 2014 2016 Note: The shaded area represents the area between the Blue Chip top 10 and bottom 10 averages. Percent change, annual rate 8 12 6 8 4 4 2 0 0 -4 -2 -8 -4 -12 -6 -16 -8 -20 -10 Unemployment Rate 2008 2010 2012 2014 2016 -24 Consumer Price Index Percent Percent change, annual rate 11 8 6 10 4 9 2 8 0 7 -2 -4 6 -6 5 2008 2010 2012 2014 2016 -8 4 2008 Treasury Bill Rate 2010 2012 2014 2016 -10 10-Year Treasury Yield Percent Percent 4 5.5 5.0 3 4.5 4.0 2 3.5 3.0 1 2.5 2.0 0 1.5 2008 2010 2012 2014 2016 -1 2008 2010 2012 2014 2016 Note: The yield is for on-the-run Treasury securities. Over the forecast period, the staff’s projected yield is assumed to be 15 basis points below the off-the-run yield. Page 5 of 96 1.0 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Key Background Factors underlying the Baseline Staff Projection Federal Funds Rate Long-Term Interest Rates Percent Percent 6 Quarterly average Quarterly average 10 9 Current Tealbook Previous Tealbook 5 8 Triple-B corporate yield 4 7 6 3 5 Conforming mortgage rate 2 4 10-year Treasury yield 1 3 2 2007 2009 2011 2013 2015 2017 0 2007 Equity Prices 2009 2011 2013 2015 2017 House Prices Ratio scale, 2007:Q1 = 100 Quarter-end Dow Jones U.S. Total Stock Market Index Ratio scale, 2007:Q1 = 100 200 185 170 155 140 100 95 90 125 110 CoreLogic index 85 80 80 75 65 70 50 2009 2011 2013 2015 105 Quarterly 95 2007 1 65 2017 2007 Crude Oil Prices 2009 2011 2013 2015 2017 Broad Real Dollar Dollars per barrel 2007:Q1 = 100 140 110 Quarterly average Quarterly average Imported oil 105 120 100 100 West Texas Intermediate 95 90 80 85 60 80 40 2007 2009 2011 2013 2015 2017 75 20 2007 Page 6 of 96 2009 2011 2013 2015 2017 70 Class II FOMC - Restricted (FR) June 10, 2015 move up from last year’s pace of 2¼ percent to 2¾ percent this year and 3 percent next year. KEY BACKGROUND FACTORS Monetary Policy We continue to assume that the federal funds rate will lift off from its effective lower bound after the September meeting. As in our previous projections, the post-liftoff trajectory of the federal funds rate is assumed to be governed by an inertial version of the Taylor (1999) policy rule. The projected path of the federal funds rate is a touch lower than in the April Tealbook—mainly because the output gap is slightly weaker in this forecast— and reaches an average of 2.1 percent in the fourth quarter of 2017. Other Interest Rates Our forecast continues to call for the 10-year Treasury yield to rise significantly. The projected increase in the Treasury yield reflects the movement of the 10-year valuation window through the period of extremely low short-term interest rates, as well as an increase in term premiums that is partly attributable to the waning of the effects of the FOMC’s balance sheet policies. Compared with the April Tealbook, the 10-year Treasury yield is a little higher over the next couple of quarters due to the recent increases in market rates, but it is a touch lower thereafter. Our forecasts for corporate bond yields and mortgage rates in the medium term have been revised essentially in line with the changes to the path for the Treasury yield. Equity Prices and Home Prices Equity prices are projected to rise 4½ percent per year over the forecast period, a somewhat slower pace than in the April Tealbook. We continue to expect a notable decline in the equity risk premium; however, at the end of 2017 the level of the premium is somewhat higher than what we had assumed in April, which better aligns it with historical norms. Incoming data on house prices for the first quarter led us to boost our forecast for house price appreciation in 2015 to 5 percent, compared with 3¾ percent Page 7 of 96 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 in the April Tealbook. We continue to expect house prices to decelerate to an average pace of 3 percent per year in 2016 and 2017. Fiscal Policy We have made no changes to our fiscal policy assumptions in this forecast. We continue to anticipate that, after having been a small drag on real GDP growth in 2014, fiscal policy actions at all levels of government will provide a small stimulus in 2015 and over the remainder of the medium term. Foreign Economic Activity and the Dollar Foreign real GDP growth slowed a little more than expected in the first quarter, to a 1½ percent annual rate, and—at 2¼ percent—is projected to be a bit weaker in the current quarter than in our previous forecast. For 2015 as a whole, projected foreign growth is down a little from the April Tealbook, reflecting the softer-than-expected tone of recent data, the lower path for U.S. GDP, and—in the advanced economies—some restraint from recent increases in long-term interest rates. We continue to expect foreign GDP growth to rise to 3 percent by early next year, supported by accommodative monetary policy abroad, depreciated currencies, and still-low oil prices, and to remain at that pace through 2017. The broad nominal dollar is down a touch relative to the April Tealbook. We project that the dollar will appreciate 2 percent through the remainder of 2015 as investors intensify their focus on the divergence between monetary policies in the United States and abroad. Thereafter, as foreign monetary policy begins to normalize and as tail risks for the euro-area economy diminish, the dollar is projected to weaken. Our forecast leaves the level of the broad real dollar at the end of the medium term slightly lower than in the previous Tealbook. Oil Prices The spot price of Brent crude oil is up nearly $3 per barrel since the time of the April Tealbook; however, prices for futures contracts with delivery at the end of 2017 are unchanged, continuing the trend of flattening futures curves. We expect the price of imported oil to move up from $57 per barrel this quarter to about $62 per barrel by the end of the forecast period. Relative to Page 8 of 96 Class II FOMC - Restricted (FR) June 10, 2015 the April Tealbook, the projection is about unchanged this year and is down about $1 per barrel at the end of 2017. THE OUTLOOK FOR REAL GDP As we discuss in the box “Special Factors Contributing to Weakness in GDP in the First Quarter,” we believe that a portion of the weakness in first-quarter aggregate demand reflects a variety of identifiable temporary factors whose effects will be largely reversed in coming quarters.1 But early indications are that second-quarter real GDP will only rise enough to leave average growth over the first half of this year in the neighborhood of 1 percent. As in previous Tealbooks, we attribute much of the first-half slowdown in GDP to the stronger dollar and the drag on drilling and mining investment from sharply lower oil prices. Relative to the April Tealbook, the slightly more subdued GDP picture for the first half is more than accounted for by weaker-than-anticipated indicators of household spending and net exports.2 We continue to expect, however, that the economy will expand at a moderate pace over the projection period. In particular, despite the generally disappointing news on consumer spending, we still view the fundamentals underpinning household demand as sufficient to support an acceleration in real PCE going forward. Likewise, we expect drilling and mining investment to bottom out relatively soon as the effects of the declines in oil prices recede. In total, we expect real GDP growth to average about 2 percent in the second half of this year, ¼ percentage point lower than our April projection. As noted, the recent data on real PCE have been weaker than we expected overall despite a surge in light motor vehicle sales in May. As a result, we have lowered our projection for second-quarter real PCE growth 1½ percentage points relative to our previous forecast, to 2¾ percent.3 Moreover, the recent disappointment extends a tendency during each of the past several years for consumer spending to come in on the low side of our expectations. Hence, while we still anticipate a near-term acceleration in real 1 Note that real gross domestic income (GDI), which aims to measure the same economic concept as real GDP, is reported to have increased at a 1½ percent annual rate in the first quarter. 2 The table “Federal Reserve System Nowcasts of 2015:Q2 Real GDP Growth” provides forecasts of second-quarter output growth from other near-term forecasting approaches used within the System. 3 The Quarterly Services Survey for the first quarter of 2015, released as the Tealbook projection was closing, was not incorporated in our estimate of first-quarter real PCE growth. In addition, the May retail sales report is scheduled to be released on June 11, 2015, the day after the Tealbook is published. Page 9 of 96 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Special Factors Contributing to Weakness in GDP in the First Quarter A number of transitory factors appear to have restrained aggregate spending in the first quarter, and the unwinding of their effects is expected to provide a boost to spending this quarter. The staff’s estimates of the effects of these factors on real GDP are shown in the table below. While we discuss point estimates here, there is, of course, considerable uncertainty around the magnitude of these estimates, and other analysts—including from within the Federal Reserve System—have judged some of these effects to be larger than the staff’s estimates. Residual seasonality is estimated to have subtracted 0.8 percentage point from the change in real GDP last quarter (line 2). Residual seasonality appears evident in real spending for exports, state and local government construction, and private‐sector nonresidential construction, along with the change in inventory investment. The staff assumes that much of the first‐quarter residual seasonality will be unwound in the second quarter, with the rest showing up in the second half. Unusually severe winter weather is estimated to have subtracted 0.2 percentage point from the change in real GDP in the first quarter, as PCE and construction spending were held down temporarily (line 3). The bounceback in spending from this weather effect is assumed to raise second‐quarter real GDP growth by a similar amount. Numerous reports suggested that the West Coast port labor dispute restrained international trade and disrupted some manufacturing supply chains. The staff estimates that the port labor dispute shaved 0.2 percentage point off the change in real GDP in the first quarter and assumes that a comparable amount will be added to second‐quarter real GDP growth as activity returns to normal (line 4). Finally, the large declines in retail gasoline prices early this year likely caused some measurement error in the BEA’s translation to real PCE of nominal retail sales by some big‐box stores that also sell gasoline (line 5). The staff estimates that this measurement error reduced real GDP growth 0.2 percentage point in the first quarter but that it is unlikely to reverse in the near term, as gasoline prices are not projected to return to their earlier levels. In total, these identifiable transitory factors are judged to have reduced the change in real GDP 1.4 percentage points last quarter (line 6). The corresponding bounceback in spending as these factors disappate is projected to boost real GDP growth 1 percentage point this quarter. Estimated Effects of Transitory Special Factors on Real GDP (Percent change from previous period at an annual rate) 2015:Q1 2015:Q2 ‐.5 1. Change in real GDP 2.5 Contribution from special factors: ‐.8 2. Residual seasonality .6 ‐.2 3. Weather .2 ‐.2 4. West Coast port labor dispute .2 ‐.2 5. Measurement error (retail sales) .0 ‐1.4 6. Total effect of special factors 1.0 7. Change in real GDP (line 1) excluding special factors (line 6) .9 1.5 Note: Staff estimates. Page 10 of 96 Class II FOMC - Restricted (FR) June 10, 2015 Federal Reserve System Nowcasts of 2015:Q2 Real GDP Growth (Percent change at annual rate from previous quarter) Type of model Nowcast as of June 8, 2015 Factor-augmented autoregressions Factor-augmented autoregressions (financials only) 1.6 2.3 Bayesian regressions with stochastic volatility Tracking model 2.2 2.8 Federal Reserve entity Federal Reserve Bank New York Cleveland Atlanta Tracking model combined with Bayesian vector autoregressions (VARs), dynamic factor models, and factor-augmented autoregressions (known as GDPNow) 1.5 Chicago Dynamic factor models Bayesian VARs 1.4 2.5 Dynamic factor models News index model Let-the-data-decide regressions 2.8 4.7 2.3 Minneapolis Bayesian VARs 1.6 Kansas City Judgmental tracking model 1.9 Board staff’s forecast (judgmental tracking model)1 Dynamic factor models 2.5 .7 St. Louis Board of Governors Memo: Median of Federal Reserve System nowcasts 2.3 1. The June Tealbook forecast, which incorporates data received after June 8, is also 2.5 percent. Page 11 of 96 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Summary of the Near-Term Outlook (Percent change at annual rate except as noted) 2015:Q1 2015:Q2 2015:H2 Measure Previous Tealbook Current Tealbook Previous Tealbook Current Tealbook Previous Tealbook Current Tealbook Real GDP Private domestic final purchases Personal consumption expenditures Residential investment Nonres. private fixed investment Government purchases Contributions to change in real GDP Inventory investment1 Net exports1 Unemployment rate2 PCE chain price index Ex. food and energy .1 .9 1.9 1.8 -4.3 -2.3 -.5 1.3 1.8 6.3 -2.8 -.6 2.4 3.1 4.2 1.1 -1.9 1.3 2.5 2.8 2.8 11.3 1.0 1.3 2.4 4.1 4.1 11.2 2.3 .3 2.1 3.5 3.4 6.5 2.8 .4 .4 -.6 5.6 -2.0 .8 .4 -1.8 5.6 -2.0 .8 .2 -.6 5.4 1.5 1.6 .1 -.2 5.5 1.9 1.6 -.3 -.8 5.3 1.5 1.4 -.2 -.7 5.3 1.3 1.4 1. Percentage points. 2. Percent. Recent Nonfinancial Developments (1) Real GDP and GDI Manufacturing IP ex. Motor Vehicles and Parts 4-quarter percent change Gross domestic product Gross domestic income 3-month percent change, annual rate 8 10 6 Q1 15 Apr. 4 5 0 2 -5 0 -10 -15 -2 -20 -4 2003 2005 2007 2009 2011 2013 2015 Source: U.S. Dept. of Commerce, Bureau of Economic Analysis. -6 -25 2003 2005 2007 2009 2011 2013 2015 Source: Federal Reserve Board, G.17 Statistical Release, "Industrial Production and Capacity Utilization." Sales and Production of Light Motor Vehicles -30 Real PCE Goods ex. Motor Vehicles Millions of units, annual rate Billions of chained (2009) dollars 22 3600 Apr. May 3400 18 3200 Sales 14 3000 10 Production 2800 Apr. 6 2003 2005 2007 2009 2011 2013 2015 Source: Ward’s Communications, Chrysler, General Motors; adjusted using FRB seasonals. 2 2600 2003 2005 2007 2009 2011 2013 2015 Source: U.S. Dept. of Commerce, Bureau of Economic Analysis. Page 12 of 96 2400 Class II FOMC - Restricted (FR) June 10, 2015 Recent Nonfinancial Developments (2) Single-Family Housing Starts and Permits Millions of units, annual rate Adjusted permits Starts Home Sales 2.1 1.8 7.5 Millions of units (annual rate) Millions of units (annual rate) 1.5 6.0 1.2 5.5 1.5 Existing homes (left scale) 6.5 1.2 0.9 5.0 Apr. 0.9 0.6 4.5 New single-family homes (right scale) 4.0 Apr. 3.5 0.3 2003 2005 2007 2009 2011 2013 2015 0.0 0.6 0.3 3.0 2.5 2003 2005 2007 2009 2011 2013 2015 0.0 Source: For existing, National Association of Realtors; for new, U.S. Census Bureau. Note: Adjusted permits equal permit issuance plus total starts outside of permit-issuing areas. Source: U.S. Census Bureau. Nondefense Capital Goods ex. Aircraft Billions of dollars 1.8 7.0 Nonresidential Construction Put in Place Billions of chained (2009) dollars 75 450 3-month moving average 70 400 Apr. 65 Orders Apr. 350 60 Shipments 300 55 250 50 200 45 2003 2005 2007 2009 Source: U.S. Census Bureau. 2011 2013 2015 40 2003 2005 2007 2009 2011 2013 2015 Note: Nominal CPIP deflated by BEA prices through 2014:Q4 and by the staff’s estimated deflator thereafter. Source: U.S. Census Bureau. Inventory Ratios ex. Motor Vehicles 150 Exports and Non-oil Imports Months Billions of dollars 1.8 Staff flow-of-goods system 220 1.7 Apr. 200 1.6 Non-oil imports 180 Apr. 1.5 160 140 1.4 Census book-value data 240 120 1.3 100 Mar. 2003 2005 2007 2009 2011 2013 2015 Exports 1.2 1.1 Note: Flow-of-goods system inventories include manufacturing and mining industries except motor vehicles and parts and are relative to consumption. Census data cover manufacturing and trade ex. motor vehicles and parts, and inventories are relative to sales. Source: U.S. Census Bureau; staff calculations. 80 2003 2005 2007 2009 2011 2013 Source: U.S. Dept. of Commerce, Bureau of Economic Analysis; U.S. Census Bureau. Page 13 of 96 2015 60 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 consumer spending supported by robust gains in real disposable income, previous increases in household wealth, and upbeat consumer sentiment, we have taken our forecast for second-half real PCE growth down about ¾ percentage point relative to April, to an average annual rate of 3½ percent. The decline in oil prices over the past year has resulted in a sharp drop in drilling and mining investment that subtracted ½ percentage point from firstquarter real GDP growth and looks set to take a similar amount off of growth in the current quarter. We expect the declines in drilling and mining investment to slow markedly over the second half of the year, and, indeed, we think we see early signs of such a bottoming out in the weekly data on rig counts. Housing starts rebounded strongly in April from the weak readings seen in February and March, while permits edged up. We interpret the April strength in starts as largely reflecting payback from the earlier weakness and so have left our forecast for starts essentially unrevised going forward. This contour of starts leaves our estimate for the level of residential investment somewhat higher in the current quarter relative to our previous forecast but not much different at the end of 2015. We now estimate that net exports subtracted nearly 2 percentage points from real GDP growth in the first quarter, a considerably larger drag than we had projected in the April Tealbook. The revision is almost entirely due to import data for March coming in much stronger than we had anticipated, as inbound shipments snapped back following the resolution of the labor disputes at West Coast ports. For the first quarter as a whole, the port disputes seem to have had little net effect on imports, which rose at an above-average 6¾ percent pace. In contrast, exports declined sharply in the first quarter; we attribute a sizable portion of this weakness to the port disruptions and to residual seasonality in the export data. We expect some payback in the growth rate of exports in the current quarter—an expectation that is supported by the April trade data—and now have the external sector making a less negative secondquarter contribution to real GDP growth than in the April Tealbook. Reflecting the continued drag from past dollar appreciations, net exports are expected to subtract ¾ percentage point from real GDP growth in the second half of 2015, nearly unchanged from the April Tealbook. Page 14 of 96 Class II FOMC - Restricted (FR) June 10, 2015 Total industrial production continued to decline through April, and the available indicators, including manufacturing production-worker hours, point to a further decline in May. As with first-quarter GDP, we think that a combination of transitory factors (such as supply-chain disruptions arising from the labor disputes at West Coast ports) and longer-lived influences (such as the stronger dollar) have weighed on manufacturing output; similarly, production at both factories and mines has been affected by the sharp declines in drilling activity noted previously. We expect manufacturing production to rise at a subdued pace over the remainder of the near term, as the stronger dollar and the upstream effects of lower oil and gas prices continue to damp demand for factory output. The mixed tenor of the national and regional manufacturing surveys seems consistent with such an outcome. With conditioning factors that are broadly unrevised relative to April, projected real GDP growth over the medium term is quite close to our previous forecast: In 2016, we expect real GDP to rise 2½ percent before edging down to a 2¼ percent pace in 2017. Actual GDP growth is expected to outpace our estimate of potential growth in coming years, resulting in a steady narrowing of the output gap. We expect above-trend growth in aggregate demand to be led by gains in consumer spending. As labor market conditions continue to improve, real personal income should rise faster than potential output; in addition, over much of the medium term, high wealth-to-income ratios and increasing confidence about the durability of the expansion should lead spending growth to modestly exceed income growth. (For a discussion of risks stemming from a consumer-led expansion, see the box “Alternative View: The Risk of Significant Macroeconomic Imbalances over the Medium Term.”) In broad terms, the relatively flat contour of real GDP growth over the medium term reflects the interplay of two forces. First, the ongoing normalization of monetary policy is expected to weigh more heavily on aggregate demand growth going forward. However, as the effects of previous increases in the exchange value of the dollar wane—and with the dollar expected to begin depreciating later in the forecast period—we anticipate that Page 15 of 96 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Alternative View: The Risk of Significant Macroeconomic Imbalances over the Medium Term The U.S. economy is approaching a state in which inflation and unemployment are about as close to the FOMC’s current objectives as has been true at virtually any point over the past halfcentury. Despite these conditions, the risk of growing macroeconomic imbalances in the U.S. and global economy is substantial. In particular, the relatively stronger growth outlook and higher interest rates in the United States may spur domestic asset prices and contribute to a global recovery that is overly reliant on U.S. consumption. Such developments would imply low national saving and a large U.S. current account deficit despite inflation and unemployment running reasonably close to their objectives over the next couple of years. A state of affairs in which the global economy is overly reliant on U.S. household demand would echo aspects of the economic conditions in the mid-2000s, when the combination of low U.S. savings and large current account imbalances contributed to the financial excesses that precipitated the crisis. Although overreliance on U.S. household demand may be a concern even along the path envisioned in the staff projection, a starker illustration of the risks can be seen by considering an alternative projection. In this alternative, strong demand for U.S. assets, in part due to low global interest rates, leads the low level of term premiums on U.S. Treasury securities to persist for several more years. Low interest rates contribute to more rapid growth in equity and house prices than in the staff projection. Moreover, the gains in U.S. asset prices and the higher level of U.S. interest rates (relative to those in Europe and Japan) draw capital to the United States and cause the dollar to appreciate roughly 20 percent from its level early this year, bringing its value back to the level of the early 2000s.1 While the higher level of equity and house prices and lower term premiums boost aggregate demand, the strong dollar offsets this boost, and the unemployment rate remains close to its natural rate over the next couple of years. However, core inflation remains stuck near 1¼ percent over this period, reflecting the effects of dollar appreciation, and short-term interest rates are lower than in the staff projection, with the federal funds rate remaining below 1 percent until early 2017 (according to the inertial Taylor (1999) rule). Domestic and global imbalances are substantial in this alternative view. The higher level of household wealth contributes to a more rapid increase in personal consumption expenditures than expected in the staff outlook, and the personal saving rate falls to 2½ percent later this decade (figure 1). Global imbalances reemerge on a scale similar to that seen in the mid-2000s, with the U.S. current account deficit falling to 5½ percent of nominal GDP (figure 2). Note: This alternative view was prepared by Michael Kiley. 1 Although this alternative view uses an FRB/US model simulation to illustrate the effects of shocks to term premiums, house prices, and the dollar, the key elements of this alternative view are not tied to the FRB/US model’s structure or the precise quantitative results from such a simulation. Page 16 of 96 Class II FOMC - Restricted (FR) June 10, 2015 These large domestic and international imbalances could create several challenges for the U.S. and global economy. First, the stretched position of U.S. households leads them, over time, to attempt to rebuild their savings, placing a drag on both consumption and investment and hence upward pressure on unemployment by 2017. A weak rate of investment and elevated borrowing from abroad lower U.S. potential output and national income, placing a persistent drag on U.S. living standards. And the limited savings buffer of U.S. households and the elevated level of U.S. asset prices imply some risk of a painful retrenchment, as households may have limited ability to weather adverse shocks and elevated domestic asset prices could collapse when unexpected adverse developments materialize. Monetary policy is not well suited to address these challenges: A more accommodative monetary policy stance would only marginally boost inflation (given the flat Phillips curve) and would likely further depress household saving, borrowing from future aggregate demand and leaving households even more vulnerable to adverse shocks. In principle, fiscal policy adjustments that boost domestic saving while supporting domestic productive investment would alleviate these imbalances. More direct tools to alleviate global imbalances would consist of coordinated international adjustments in fiscal and monetary policy (and related structural reforms), including increases in spending in countries with current account surpluses. While the unsustainable pace of U.S. consumption in the scenario above is importantly due to an alternative perspective on the possible effect of low global interest rates on U.S. asset prices over the next couple of years, these forces are only one set that could lead to similar macroeconomic imbalances. For example, some staff models project that the household saving rate will decline more rapidly than in the staff projection, or the appreciation of the dollar that has already occurred may lead to a wider U.S. current account deficit than anticipated. Alternatively, the global economy would be even more reliant on U.S. household demand if growth among foreign economies were to fall substantially short of expectations, which could also contribute to a stronger dollar and lower U.S. interest rates. Page 17 of 96 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 the contribution of net exports to overall output growth will become noticeably less negative by the end of the projection period.4 THE OUTLOOK FOR THE LABOR MARKET Taken together, the two employment reports that we have received since the April Tealbook indicate that conditions in the labor market have improved in recent months— albeit at a slower pace than last year—and were close to our expectations in the April forecast. Thus, we have made only small revisions to our near-term outlook for the labor market. Payroll employment growth averaged 250,000 per month in April and May, about 30,000 more than our previous projection. The unemployment rate was 5.5 percent in May, 0.1 percentage point higher than expected. However, the labor force participation rate also came in 0.1 percentage point higher than expected last month, leaving the employment-to-population ratio in line with our previous forecast. For the first five months of this year, payroll gains have averaged 217,000 per month, down from 260,000 per month in 2014; in addition, the pace of decline in the unemployment rate has slowed this year. The staff’s labor market conditions index also indicates that the pace of improvement in labor market conditions has slowed relative to 2014. We expect payroll employment to rise 215,000 in June and to increase at a similar average monthly pace over the second half of this year—about the same as in the April Tealbook. We expect the unemployment rate to average 5.5 percent in the current quarter (0.1 percentage point above our April forecast) before declining to 5.3 percent in the fourth quarter (unrevised relative to April). 4 As noted, the expected depreciation in the dollar—which occurs even as U.S. monetary policy continues to tighten—reflects both a reversal of earlier safe-haven flows and the eventual move to a less accommodative policy stance on the part of foreign monetary authorities. Page 18 of 96 Class II FOMC - Restricted (FR) June 10, 2015 The medium-term outlook for the labor market is also little changed relative to our previous forecast, consistent with the relatively small revisions we have made to the projected path of output. We expect monthly payroll gains to slow to 175,000 in 2016 and 140,000 in 2017 as productivity moves back up toward its trend. The unemployment rate is projected to edge down from 5.3 percent in the fourth quarter of this year to 5.2 percent by the end of 2016 and then to remain at that level throughout 2017. As in previous Tealbooks, we think that the unemployment rate gap currently understates the amount of slack remaining in the labor market because the labor force participation rate is unusually low and the level of involuntary part-time employment is unusually high. As the economy improves further, we expect additional individuals to be drawn into the labor market and the rate of involuntary part-time employment to move down. As a result, the decline in the unemployment rate is slower than it would otherwise be, yielding a projected path for the unemployment rate that is basically flat over much of the medium term despite output continuing to rise moderately faster than potential. As shown in the exhibit “Alternative Measures of Slack,” output gaps from the Philadelphia Fed’s PRISM model and—to a lesser degree—the New York Fed’s DSGE model currently suggest more slack than the staff’s unemployment rate gap. The National Federation of Independent Business measure of jobs that are hard to fill and the JOLTS job openings rate suggest somewhat tighter labor market conditions.5 THE OUTLOOK FOR INFLATION After declining at an annual rate of 2 percent in the first quarter, headline PCE prices are expected to rise 2 percent in the second quarter. The turnaround is attributable to a large swing in energy prices and a pickup in core PCE inflation from ¾ percent in the 5 For more discussion of the slack measures shown in the exhibit, see the December 5, 2014, memorandum to the FOMC, “How Much Slack Remains in Resource Utilization? Comparing the Staff’s Unemployment Rate Gap with Alternative Measures,” by Hess Chung, Charles Fleischman, Chris Nekarda, and David Ratner. Page 19 of 96 Domestic Econ Devel & Outlook Authorized for Public Release Authorized for Public Release Domestic Econ Devel & Outlook Class II FOMC - Restricted (FR) June 10, 2015 Alternative Measures of Slack The red line in each panel is the staff’s measure of the unemployment rate gap (right axis). Output gaps* Manufacturing capacity utilization gap* Percentage points FRB/US EDO** production function gap FRBNY PRISM 6 30.6 4 20.4 2 10.2 0 0.0 Percentage points Percentage points 6 4 May 2 Q1 0 Apr. 1997 2000 2003 2006 2009 2012 2015 ** EDO is Estimated, Dynamic, Optimization-based model. Source: Federal Reserve Board; PRISM: Federal Reserve Board Bank of Philadelphia, PRISM Model Documentation (June 2011); FRBNY: Federal Reserve Bank of New York Staff Report 618 (May 2013, revised April 2014). Jobs hard to fill gap* 27 Percentage points Percentage points 18 May 9 -2 -10.2 -2 -4 -20.4 -4 -6 -30.6 6 1.98 1997 2000 2003 2006 Source: Federal Reserve Board. 2009 Job openings gap* 4 1.32 2 0.66 Percentage points 2012 2015 Percentage points Help-wanted advertisements rate Private job openings rate -6 6 4 2 May 0 0 0.00 0 May -9 -2 -0.66 -18 -4 -1.32 -27 -6 1997 2000 2003 2006 2009 2012 2015 Note: Percent of small businesses surveyed with at least one "hard to fill" job opening. Seasonally adjusted by Federal Reserve Board Staff. Source: National Federation of Independent Business, Small Business Economic Trends Survey. -1.98 Job availability gap* 105.6 Percentage points Percentage points -2 Apr. 1997 2000 2003 2006 2009 2012 2015 Note: Job openings rate is the number of job openings divided by employment plus job openings. Source: Job Openings and Labor Turnover Survey; U.S. Department of Labor, Bureau of Labor Statistics, Current Employment Statistics. -4 -6 Involuntary part-time employment gap Percentage points Percentage points 6 5.76 4 3.84 2 1.92 0.0 0 -0.00 0 -35.2 -2 -1.92 -2 -70.4 -4 -3.84 -4 -6 -5.76 70.4 35.2 6 4 May 2 May -105.6 1997 2000 2003 2006 2009 2012 2015 Note: Percent of households believing jobs are plentiful minus the percent believing jobs are hard to get. Source: Conference Board. 1997 2000 2003 2006 2009 2012 2015 Note: Percent of employment. Source: U.S. Department of Labor, Bureau of Labor Statistics, Current Population Survey. * Plots the negative of the gap to have the same sign as the unemployment rate gap. Note: The shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research. Output gaps are multiplied by -0.44 to facilitate comparison with the unemployment rate gap. Manufacturing capacity utilization gap is constructed by subtracting its average rate from 1972 to 2013. Other gaps were constructed by subtracting each series’ average in 2004:Q4 and 2005:Q1. Page 20 of 96 -6 Class II FOMC - Restricted (FR) June 10, 2015 first quarter to 1½ percent in the second. During the second half of the year, both total and core PCE inflation are expected to step down slightly from the second quarter, reflecting a deceleration in energy prices and a continuation of the pattern in which residual seasonality in core prices tends to boost inflation in the second quarter and reduce it in the second half. Our forecast for second-quarter total PCE inflation is ½ percentage point higher than our April projection. The revision is largely attributable to an upward surprise to gasoline prices that we expect to be unwound in coming quarters as margins return to a more normal level. Consumer food prices have come in a little lower than expected (to date, we have seen little evidence that drought conditions in California are materially affecting retail food prices). We expect consumer food prices to accelerate over the near term to a pace that is roughly in line with core PCE inflation. The most recent readings on core PCE inflation have come in a little below our April Tealbook projection: The nonmarket component of the index was distinctly weaker than we had expected, with this surprise only partly offset by a stronger reading on market-based core PCE prices. As usual, we have taken little signal from the miss on nonmarket inflation, which tends to be quite erratic. For market-based inflation, the miss was concentrated in categories that we believe are particularly affected by residual seasonality. In response, we slightly revised up our estimate of the contribution that residual seasonality will make to market-based inflation over the next couple of months, and made a corresponding downward revision to our inflation projection later in the year. In total, our forecast for overall core PCE inflation in the second quarter and over the remainder of the year averages 1½ percent at an annual rate, unchanged relative to April. We continue to project that core PCE price inflation will rise from 1¼ percent this year to 1¾ percent in 2017, as import prices turn back up, the effects on core inflation of previous large declines in energy prices dissipate, and resource utilization tightens further in an environment of well-anchored inflation expectations. With consumer food and energy prices projected to rise roughly in line with core prices after this year, we expect total PCE inflation to run at about the same pace as core inflation throughout most of the medium term. Page 21 of 96 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Core import prices are expected to decline at an average annual rate of 4 percent in the first half of this year, reflecting the appreciation of the dollar during the past year, net declines in nonfuel commodity prices, and low foreign inflation. With our projection that the dollar will peak early next year and that foreign CPI inflation will pick up, core import price inflation is expected to turn positive by the start of 2016 and to move up to 1½ percent in 2017. Readings on longer-term inflation expectations have remained stable. The final May estimate of expected inflation over the next 5 to 10 years from the Michigan survey was 2.8 percent, close to the middle of the range within which this measure has fluctuated in recent years. In the second quarter, expected PCE price inflation over the next 10 years from the Survey of Professional Forecasters remained essentially unchanged at 2 percent for the 10th quarter in a row. Finally, TIPS-based measures of longer-term inflation compensation are little changed, on balance, since the April Tealbook, though they remain below levels that prevailed until last summer. The recent data provide some evidence that labor compensation is accelerating, as we have expected for some time. The employment cost index for private industry workers rose at an annual rate of 3 percent over the first quarter; over the past 12 months, the ECI increased 2¾ percent, noticeably above the 2 percent average pace seen over the past few years. Business-sector hourly compensation from the Productivity and Costs release rose at an annual rate of 3 percent in the first quarter; in addition, the fourth-quarter growth rate was revised up 1½ percentage points, to 3 percent. As labor markets tighten further over the forecast period, we expect an additional slight acceleration in hourly compensation, with the 12-month change in the ECI reaching 3 percent in 2016. Page 22 of 96 Class II FOMC - Restricted (FR) June 10, 2015 THE LONG-TERM OUTLOOK The federal funds rate continues to be set according to the prescriptions of an inertial version of the Taylor (1999) rule. This policy rule assumes a long-run equilibrium level of the nominal federal funds rate of 3½ percent. The Federal Reserve’s holdings of securities will continue to put downward pressure on longer-term interest rates, albeit to a diminishing extent. The process of returning the SOMA portfolio to a normal size is expected to be completed by 2021. The natural rate of unemployment is 5.2 percent, and potential GDP rises at a rate of about 1.8 percent per year, on average, from 2018 to 2020. As monetary accommodation continues to be withdrawn, real GDP growth eases to 1.9 percent in 2018. Thereafter, real GDP rises at a pace just below the growth rate of potential output. The unemployment rate declines slightly below 5.2 percent in 2018 and 2019 before edging up to its natural rate. PCE price inflation remains below the long-run objective of the Committee at the end of 2017 but gradually moves up to 2 percent by 2019. Page 23 of 96 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 (This page is intentionally blank.) Page 24 of 96 Authorized for Public Release June 10, 2015 Domestic Econ Devel & Outlook Class II FOMC - Restricted (FR) Projections of Real GDP and Related Components (Percent change at annual rate from final quarter of preceding period except as noted) 2015 Measure 2014 2015 H1 Real GDP Previous Tealbook 2016 2017 H2 2.4 2.4 1.6 1.8 1.0 1.2 2.1 2.4 2.4 2.4 2.2 2.1 2.4 2.4 1.5 1.8 .8 1.0 2.3 2.7 2.6 2.4 2.6 2.3 Personal consumption expenditures Previous Tealbook 2.9 2.9 2.9 3.6 2.3 3.0 3.4 4.1 3.3 3.3 2.7 2.5 Residential investment Previous Tealbook 2.5 2.5 7.6 6.2 8.8 1.4 6.5 11.2 12.0 11.5 8.0 7.8 Nonresidential structures Previous Tealbook 6.5 6.5 -7.3 -11.5 -13.8 -19.5 -.3 -2.8 .2 .3 .3 .5 Equipment and intangibles Previous Tealbook 6.1 6.1 3.4 2.8 3.0 2.1 3.7 3.6 4.6 4.0 3.6 2.6 .2 .2 -1.1 -2.3 -.8 -2.9 -1.4 -1.7 -1.2 -1.3 -.8 -.9 State and local purchases Previous Tealbook 1.2 1.2 1.3 1.2 1.0 1.0 1.5 1.5 2.0 2.0 2.2 2.2 Exports Previous Tealbook 2.4 2.4 -.1 -1.2 -1.5 -2.7 1.3 .4 1.3 1.1 3.2 3.1 Imports Previous Tealbook 5.6 5.6 5.5 3.8 5.2 1.8 5.8 5.9 5.7 5.8 3.7 3.9 Final sales Previous Tealbook Federal purchases Previous Tealbook Contributions to change in real GDP (percentage points) Inventory change Previous Tealbook .0 .0 .0 .0 .2 .3 -.2 -.3 -.1 .0 -.3 -.1 Net exports Previous Tealbook -.6 -.6 -.9 -.8 -1.0 -.6 -.7 -.8 -.8 -.8 -.2 -.2 Real GDP 4-quarter percent change Current Tealbook Previous Tealbook 10 8 6 4 2 0 -2 -4 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Note: The gray shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research. Source: U.S. Department of Commerce, Bureau of Economic Analysis. Page 25 of 96 2015 2017 -6 Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Components of Final Demand Personal Consumption Expenditures 4-quarter percent change Residential Investment 4-quarter percent change 5 Current Tealbook Previous Tealbook 20 15 4 10 3 5 2 0 1 2010 2011 2012 2013 2014 2015 2016 2017 -5 0 2010 Equipment and Intangibles 2011 2012 2013 2014 2015 2016 2017 Nonresidential Structures 4-quarter percent change 4-quarter percent change 14 12 10 8 6 4 2 2010 2011 2012 2013 2014 2015 -10 2016 2017 0 2010 Government Consumption & Investment 2011 2012 2013 2014 2015 2016 2017 25 20 15 10 5 0 -5 -10 -15 -20 -25 -30 -35 Exports and Imports 4-quarter percent change 4-quarter percent change 2 20 1 15 0 10 -1 Exports -2 5 -3 0 -4 2010 2011 2012 2013 2014 2015 2016 2017 Imports -5 2010 Source: U.S. Department of Commerce, Bureau of Economic Analysis. Page 26 of 96 2011 2012 2013 2014 2015 2016 2017 -5 Class II FOMC - Restricted (FR) June 10, 2015 Aspects of the Medium-Term Projection Personal Saving Rate Wealth-to-Income Ratio Percent Current Tealbook Previous Tealbook Ratio 9 8 6.8 6.4 7 6.0 6 5.6 5 4 5.2 3 4.8 2 1997 2002 2007 2012 2017 Source: U.S. Dept. of Commerce, Bureau of Economic Analysis. 1 1997 2002 2007 2012 2017 Note: Ratio of household net worth to disposable personal income. Source: For net worth, Federal Reserve Board, Financial Accounts of the United States; for income, U.S. Dept. of Commerce, Bureau of Economic Analysis. Single-Family Housing Starts 4.4 Equipment and Intangibles Spending Millions of units Share of nominal GDP 2.00 12 1.75 11 1.50 1.25 10 1.00 9 0.75 0.50 8 0.25 1997 2002 2007 Source: U.S. Census Bureau. 2012 2017 0.00 1997 2002 2007 2012 2017 Source: U.S. Dept. of Commerce, Bureau of Economic Analysis. Federal Surplus/Deficit 7 Current Account Surplus/Deficit Share of nominal GDP Share of nominal GDP 6 1 4-quarter moving average 4 0 2 -1 0 -2 -2 -3 -4 -4 -6 1997 2002 2007 Source: Monthly Treasury Statement. 2012 2017 -8 -5 -10 -6 -12 1997 2002 2007 2012 2017 Source: U.S. Dept. of Commerce, Bureau of Economic Analysis. Note: The gray shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research. Page 27 of 96 -7 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Decomposition of Potential GDP (Percent change, Q4 to Q4, except as noted) Measure 19962000 1974-95 Potential real GDP Previous Tealbook Selected contributions1 Structural labor productivity2 Previous Tealbook Capital deepening Multifactor productivity Structural hours Previous Tealbook Labor force participation Previous Tealbook Memo: GDP gap3 Previous Tealbook 2001-07 2008-10 2011-13 2014 2015 2016 2017 3.1 3.1 3.4 3.4 2.6 2.6 1.7 1.7 1.6 1.6 .5 .5 1.6 1.6 1.7 1.7 1.7 1.7 1.6 1.6 .7 .7 1.5 1.5 .4 .4 2.9 2.9 1.5 1.1 1.0 1.0 .0 .0 2.8 2.8 .9 1.6 .7 .7 -.3 -.3 1.5 1.5 .5 .9 .2 .2 -.4 -.4 1.2 1.2 .4 .7 .7 .7 -.5 -.5 .5 .5 .6 -.2 .7 .7 -.5 -.5 1.5 1.5 .7 .7 .3 .3 -.5 -.5 1.6 1.6 .8 .7 .3 .3 -.5 -.5 1.6 1.6 .8 .7 .3 .3 -.5 -.5 -1.8 -1.8 2.5 2.5 .9 .9 -4.4 -4.4 -2.8 -2.8 -1.0 -1.0 -1.0 -.8 -.4 -.1 .1 .3 Note: For multiyear periods, the percent change is the annual average from Q4 of the year preceding the first year shown to Q4 of the last year shown. 1. Percentage points. 2. Total business sector. 3. Percent difference between actual and potential GDP in the final quarter of the period indicated. A negative number indicates that the economy is operating below potential. GDP Gap Unemployment Rate Percent Current Tealbook Previous Tealbook Percent 8 Unemployment rate Previous Tealbook Natural rate of unemployment 6 4 14 12 10 2 0 8 -2 6 -4 4 -6 1997 2002 2007 2012 2017 Note: The GDP gap is the percent difference between actual and potential GDP; a negative number indicates that the economy is operating below potential. Source: U.S. Department of Commerce, Bureau of Economic Analysis; staff assumptions. -8 2 1997 2002 2007 2012 2017 Source: U.S. Department of Labor, Bureau of Labor Statistics; staff assumptions. Structural and Actual Labor Productivity Manufacturing Capacity Utilization Rate Percent (Business sector) 90 85 Average rate from 1972 to 2014 Chained (2009) dollars per hour Actual Structural 80 75 50 48 46 65 60 66 64 62 60 58 56 54 52 70 1997 2002 2007 2012 2017 Source: Federal Reserve Board, G.17 Statistical Release, "Industrial Production and Capacity Utilization." 68 2002 2005 2008 2011 2014 2017 Source: U.S. Department of Labor, Bureau of Labor Statistics; U.S. Department of Commerce, Bureau of Economic Analysis; staff assumptions. Note: The gray shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research. Page 28 of 96 Class II FOMC - Restricted (FR) June 10, 2015 The Outlook for the Labor Market 2015 Measure 2014 2015 H1 Output per hour, business1 Previous Tealbook 2016 2017 H2 -.4 -.4 1.1 1.4 -.3 .4 2.6 2.5 1.9 1.8 1.9 1.8 Nonfarm private employment2 Previous Tealbook 254 254 206 202 210 204 202 200 160 165 122 125 Labor force participation rate3 Previous Tealbook 62.8 62.8 62.7 62.7 62.8 62.8 62.7 62.7 62.6 62.6 62.4 62.4 Civilian unemployment rate3 Previous Tealbook 5.7 5.7 5.3 5.3 5.5 5.4 5.3 5.3 5.2 5.2 5.2 5.1 1. Percent change from final quarter of preceding period at annual rate. 2. Thousands, average monthly changes. 3. Percent, average for the final quarter in the period. Source: U.S. Department of Labor, Bureau of Labor Statistics; staff assumptions. Inflation Projections (Percent change at annual rate from final quarter of preceding period) 2015 Measure PCE chain-weighted price index Previous Tealbook 2014 2015 H1 H2 2016 2017 1.1 1.1 .6 .6 -.1 -.2 1.3 1.5 1.6 1.6 1.8 1.8 Food and beverages Previous Tealbook 2.8 2.8 .3 .6 -.6 -.2 1.1 1.4 1.6 1.6 1.9 1.9 Energy Previous Tealbook -6.1 -6.1 -11.3 -11.4 -19.9 -24.4 -1.7 3.8 2.3 2.6 1.3 1.6 Excluding food and energy Previous Tealbook 1.4 1.4 1.3 1.3 1.2 1.2 1.4 1.4 1.6 1.6 1.8 1.8 Prices of core goods imports1 Previous Tealbook .6 .6 -2.3 -2.3 -4.2 -4.0 -.4 -.5 1.0 .9 1.5 1.6 1. Core goods imports exclude computers, semiconductors, oil, and natural gas. Source: U.S. Department of Commerce, Bureau of Economic Analysis. Page 29 of 96 Domestic Econ Devel & Outlook Authorized for Public Release Authorized for Public Release Domestic Econ Devel & Outlook Class II FOMC - Restricted (FR) June 10, 2015 Labor Market Developments and Outlook (1) Measures of Labor Underutilization Percent U-5* Unemployment rate Part time for economic reasons** Percent 13 Unemployment rate Previous Tealbook Natural rate of unemployment with EEB adjustment 12 11 10 9 8 9 May 10 8 7 7 6 6 5 4 5 3 20022003200420052006200720082009201020112012201320142015 2 2012 2013 2014 2015 2016 2017 4 * U-5 measures total unemployed persons plus all marginally attached to the labor force, as a percent of the labor force plus persons marginally attached to the labor force. ** Percent of Current Population Survey employment. EEB Extended and emergency unemployment benefits. Source: U.S. Department of Labor, Bureau of Labor Statistics. Level of Payroll Employment* 125 Millions Millions Total (right axis) Private (left axis) Millions 145 Total Previous Tealbook May 120 150 148 146 140 144 142 115 135 140 138 110 130 136 134 105 125 20022003200420052006200720082009201020112012201320142015 * 3-month moving averages. Source: U.S. Department of Labor, Bureau of Labor Statistics. 2012 2013 2014 2015 2016 2017 132 Change in Payroll Employment* Thousands Thousands 400 350 200 May 400 300 0 250 -200 200 -400 150 -600 Total Private 20022003200420052006200720082009201020112012201320142015 Total Previous Tealbook -800 -1000 50 2012 2013 2014 2015 2016 * 3-month moving averages. Source: U.S. Department of Labor, Bureau of Labor Statistics. Note: The gray shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research. Page 30 of 96 100 2017 0 Class II FOMC - Restricted (FR) June 10, 2015 Labor Market Developments and Outlook (2) Labor Force Participation Rate* Percent Labor force participation rate Estimated trend** May 20022003200420052006200720082009201020112012201320142015 Percent 68.0 67.5 67.0 66.5 66.0 65.5 65.0 64.5 64.0 63.5 63.0 62.5 62.0 Labor force participation rate Previous Tealbook Estimated trend** 65.0 64.5 64.0 63.5 63.0 62.5 2012 2013 2014 2015 2016 2017 62.0 * Published data adjusted by staff to account for changes in population weights. ** Includes staff estimate of the effect of extended and emergency unemployment benefits. Source: U.S. Department of Labor, Bureau of Labor Statistics; staff assumptions. Initial Unemployment Insurance Claims* Thousands Private Hires, Quits, and Job Openings Percent 700 Hires* Openings** Quits* 650 600 550 4.0 3.0 450 Apr. 400 2.5 350 2.0 300 1.5 250 20022003200420052006200720082009201020112012201320142015 * 4-week moving average. Source: U.S. Department of Labor, Employment and Training Administration. 4.5 3.5 500 May 30 5.0 200 20022003200420052006200720082009201020112012201320142015 1.0 * Percent of private nonfarm payroll employment, 3-month moving average. ** Percent of private nonfarm payroll employment plus unfilled jobs, 3-month moving average. Source: Job Openings and Labor Turnover Survey. Average Monthly Change in Labor Market Conditions Index Index points 15 10 Q2* 5 0 -5 -10 -15 -20 -25 2003 2004 2005 2006 2007 2008 * Value shown for Q2 is an average of May and April data. Note: Labor market conditions index estimated by staff. 2009 2010 2011 2012 2013 Note: The gray shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research. Page 31 of 96 2014 2015 -30 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Inflation Developments and Outlook (1) (Percent change from year-earlier period) Headline Consumer Price Inflation Percent CPI PCE Percent 6 PCE - Current Tealbook PCE - Previous Tealbook 5 5 4 4 3 3 2 2 1 Apr. 1 0 -1 0 -2 -3 -1 2002 200320042005 2006200720082009 201020112012 2013201420152016 2017 2012 2013 2014 2015 2016 2017 Source: For CPI, U.S. Department of Labor, Bureau of Labor Statistics; for PCE, U.S. Department of Commerce, Bureau of Economic Analysis. Measures of Underlying PCE Price Inflation Percent Trimmed mean PCE Market-based PCE excluding food and energy PCE excluding food and energy Percent 4.0 Core PCE - Current Tealbook Core PCE - Previous Tealbook 3.5 3.5 3.0 3.0 2.5 2.5 2.0 2.0 Apr. 1.5 1.5 1.0 1.0 0.5 0.5 0.0 200320042005 2013201420152016 2017 2012 2013 2014 2015 2016 2017 2002 2006200720082009 201020112012 Source: For trimmed mean PCE, Federal Reserve Bank of Dallas; otherwise, U.S. Department of Commerce, Bureau of Economic Analysis. 0.0 Labor Cost Growth Percent Percent 6 Compensation per hour - Current Tealbook Compensation per hour - Previous Tealbook 5 Mar. May Employment cost index Average hourly earnings Compensation per hour 6 5 4 4 3 3 2 2 1 1 0 0 Q1 200320042005 2013201420152016 2017 2002 2006200720082009 201020112012 -1 2012 2013 2014 2015 2016 2017 Note: Compensation per hour is for the business sector. Average hourly earnings are for the private nonfarm sector. The employment cost index is for the private sector. Source: U.S. Department of Labor, Bureau of Labor Statistics. Note: The gray shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research. Page 32 of 96 -1 Class II FOMC - Restricted (FR) June 10, 2015 Inflation Developments and Outlook (2) (Percent change from year-earlier period, except as noted) Commodity and Oil Price Levels 2200 Dollars per barrel 1967 = 100 Brent crude oil history/futures (right axis) CRB spot commodity price index (left axis) 1680 1420 1200 1000 800 600 400 200 220 168 142 120 100 80 1600 1400 60 800 40 June 9 2000 1967 = 100 Dollars per barrel Brent crude oil history/futures (right axis) CRB spot commodity price index (left axis) 200 1200 160 140 120 1000 100 80 June 9 600 60 20 400 40 2002 2004 2006 2008 2010 2012 2014 2016 2013 2014 2015 2003 2005 2007 2009 2011 2013 2015 2017 Note: Futures prices (dotted lines) are the latest observations on monthly futures contracts. Source: For oil prices, U.S. Department of Energy, Energy Information Agency; for commodity prices, Commodity Research Bureau (CRB). Energy and Import Price Inflation 18 Percent Percent PCE energy prices (right axis) Core import prices (left axis) 15 60 10 Percent Percent PCE energy prices (right axis) Core import prices (left axis) 25 50 8 40 6 9 30 4 10 6 20 2 5 3 10 0 0 0 0 -2 -5 12 -3 20 15 -10 -4 -6 -20 -6 -15 -9 -30 -8 -20 -12 -40 -10 Apr. 2003 2005 2007 2009 2011 2013 2015 2017 -10 Apr. 2013 2014 -25 2015 Source: For core import prices, U.S. Dept. of Labor, Bureau of Labor Statistics; for PCE, U.S. Dept. of Commerce, Bureau of Economic Analysis. Long-Term Inflation Expectations Percent 5-to-10-year-ahead TIPS Michigan median next 5 to 10 years SPF PCE median next 10 years Percent 4.5 4.0 5-to-10-year-ahead TIPS Michigan median next 5 to 10 years SPF PCE median next 10 years 4.0 3.5 May 3.0 3.5 May 2.5 May Q2 4.5 3.0 2.5 May 2.0 Q2 2.0 1.5 1.5 2003 2005 2007 2009 2011 2013 2015 2017 2013 2014 2015 Note: Based on a comparison of an estimated TIPS (Treasury Inflation-Protected Securities) yield curve with an estimated nominal off-the-run Treasury yield curve, with an adjustment for the indexation-lag effect. SPF Survey of Professional Forecasters. Source: For Michigan, University of Michigan Surveys of Consumers; for SPF, the Federal Reserve Bank of Philadelphia; for TIPS, Federal Reserve Board staff calculations. Note: The gray shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research. Page 33 of 96 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 The Long-Term Outlook (Percent change, Q4 to Q4, except as noted) Measure 2015 2016 2017 2018 2019 Longer run Real GDP Previous Tealbook 1.6 1.8 2.4 2.4 2.2 2.1 1.9 1.8 1.7 1.7 1.9 1.9 Civilian unemployment rate1 Previous Tealbook 5.3 5.3 5.2 5.2 5.2 5.1 5.1 5.0 5.1 5.1 5.2 5.2 PCE prices, total Previous Tealbook .6 .6 1.6 1.6 1.8 1.8 1.9 1.9 2.0 2.0 2.0 2.0 Core PCE prices Previous Tealbook 1.3 1.3 1.6 1.6 1.8 1.8 1.9 1.9 2.0 2.0 2.0 2.0 Federal funds rate1 Previous Tealbook .4 .4 1.3 1.4 2.1 2.3 2.8 2.9 3.2 3.2 3.5 3.5 2.6 2.6 3.1 3.3 3.6 3.7 3.9 4.0 4.1 4.1 4.3 4.3 10-year Treasury yield1 Previous Tealbook 1. Percent, average for the final quarter of the period. Real GDP Unemployment Rate 4-quarter percent change Potential GDP Real GDP 2004 2008 2012 2016 Percent 5 4 3 2 1 0 −1 −2 −3 −4 −5 10 Unemployment rate 8 Natural rate with EEB adjustment 7 6 5 Natural rate 4 2020 2004 PCE Prices 9 2008 2012 2016 2020 Interest Rates 4-quarter percent change Percent 4 Total PCE prices 10-year Treasury 3 Triple-B corporate 2 PCE prices excluding food and energy 1 0 Federal funds rate −1 2004 2008 2012 2016 2020 2004 2008 2012 2016 2020 Note: In each panel, shading represents the projection period, and dashed lines are the previous Tealbook. Page 34 of 96 10 9 8 7 6 5 4 3 2 1 0 Class II FOMC - Restricted (FR) June 10, 2015 Evolution of the Staff Forecast Change in Real GDP Percent, Q4/Q4 4 2015 2016 3 2014 2017 2 1 9/5 10/17 12/5 2012 1/23 3/13 4/24 6/12 7/24 9/11 10/23 2013 12/11 1/22 3/12 4/23 6/11 7/23 9/10 10/22 2014 12/10 1/21 3/11 4/22 6/10 0 2015 Tealbook publication date Unemployment Rate Percent, fourth quarter 8.0 2014 7.5 7.0 2015 6.5 6.0 5.5 2016 5.0 2017 9/5 10/17 12/5 2012 1/23 3/13 4/24 6/12 7/24 9/11 10/23 2013 12/11 1/22 3/12 4/23 6/11 7/23 9/10 10/22 2014 12/10 1/21 3/11 4/22 6/10 4.5 2015 Tealbook publication date Change in PCE Prices excluding Food and Energy Percent, Q4/Q4 2.5 2015 2.0 2017 2016 1.5 2014 1.0 0.5 9/5 2012 10/17 12/5 1/23 2013 3/13 4/24 6/12 7/24 9/11 10/23 12/11 1/22 3/12 4/23 2014 Tealbook publication date Page 35 of 96 6/11 7/23 9/10 10/22 12/10 1/21 2015 3/11 4/22 6/10 0.0 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 (This page is intentionally blank.) Page 36 of 96 Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 International Economic Developments and Outlook Foreign real GDP growth slowed by almost 1 percentage point in the first quarter to 1½ percent, a rate about ¼ percentage point lower than previously estimated. A 0.6 percent contraction in the Canadian economy, where investment has been hard-hit by earlier declines in oil prices, accounted for much of both the slowdown and the downward revision, although there was a significant step-down in growth in several of activity, including data on PMIs and trade, suggest that total foreign growth is picking up in the second quarter, although not quite as much as we had anticipated, to a rate of 2¼ percent. Beyond the current quarter, we expect foreign GDP growth to increase to 3 percent by early next year as the Canadian economy shakes off the effect of the lower oil prices and the euro area continues on its moderate recovery path, supported by expansionary monetary policy. We also expect some acceleration in activity in EMEs, supported by policy stimulus in China and stronger demand in the advanced economies. Many foreign economies should also benefit from depreciated currencies. This projection has been revised down slightly since April, reflecting the softer-than-expected tone of recent data, the lower path for U.S. GDP, and some restraint from recent increases in long-term interest rates in the advanced foreign economies (AFEs). Despite indications that the pace of foreign activity is picking up, there is still a significant risk that growth will not recover as projected, which might also prompt the dollar to appreciate more than we are assuming. We explore the effects of such a scenario on the U.S. economy in the Risks and Uncertainty section. The situation in Greece continues to represent another important risk to our outlook. Our baseline forecast assumes that negotiations between Greece and its creditors will continue to be contentious, and it encompasses the possibility that Greece might be forced to impose capital controls and miss some debt payments. However, it assumes that spillovers to other peripheral countries will remain contained. In the alternative scenario “Greek Exit with Severe Spillovers,” we examine the possibility that the situation in Greece deteriorates much more than in the baseline, resulting in a disruptive Greek exit from the euro area that roils global financial markets and pushes Europe back into recession. Page 37 of 96 Int’l Econ Devel & Outlook the emerging market economies (EMEs) as well. Recent indicators of foreign economic Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Equilibrium Interest Rates in the Advanced Foreign Economies Int’l Econ Devel & Outlook The equilibrium interest rate—the real interest rate consistent with output at potential and inflation at its target—plays a central role in assessing the stance of monetary policy, with policy expansionary (contractionary) if the short-term real interest rate lies below (above) this benchmark. Estimates of the equilibrium interest rate, however, can vary greatly over time as both cyclical and structural developments affect its level, with implications for the path of the policy rate that would be consistent with achieving the objectives of monetary policy. Here we discuss estimates of equilibrium interest rates in the advanced foreign economies (AFEs) based on two alternative approaches. Our first empirical framework is an estimated dynamic stochastic general equilibrium (DSGE) model. This model consists of a Phillips curve equation (which relates inflation to output gaps), an IS equation (which relates output gaps to the deviation in the real policy interest rate from the equilibrium interest rate), and a Taylor rule (which describes monetary policy). The estimation technique assumes that output growth, inflation, and the policy rate all fluctuate around stable averages, thus helping to identify cyclical fluctuations in potential output and the equilibrium interest rate from those data.1 Figure 1 on the following page shows the evolution of the AFE aggregate equilibrium interest rate estimated using this approach. According to our DSGE model, the aggregate AFE equilibrium interest rate declined by an outsized and unprecedented amount during the global financial crisis and the European debt crisis; the rate currently stands about 4 percentage points below its steady-state value of nearly 2 percent. Moreover, the effects of the recession are deemed to be very persistent: Absent additional shocks, the AFE aggregate equilibrium interest rate in 2020 is still projected to be more than ½ percentage point below its nearly 2 percent steady-state value. Thus, this evidence suggests that the slow recovery in AFE aggregate demand should lead to only a very gradual normalization of AFE policy rates toward pre-crisis average levels. As previously noted, the DSGE-based approach imposes a constant steady-state value on the equilibrium interest rate and abstracts from trend changes in its path. However, Laubach and Williams (2003) provide econometric evidence indicating that the long-run value of the equilibrium interest rate in the United States has drifted down considerably over the past several decades.2 Their approach is somewhat different, as—starting from an empirical framework that includes an IS equation and a Phillips curve equation—they focus on estimating the link between slow-moving changes in the equilibrium interest rate and the trend growth of output. Figure 2 presents estimates of this trend concept of the equilibrium interest rate that are based on applying a methodology very similar to that in Laubach and Williams (2003) to data from the 1 Our model and estimation follow Vasco Cúrdia, Andrea Ferrero, Ging Cee Ng, and Andrea Tambalotti (2015), “Has U.S. Monetary Policy Tracked the Efficient Interest Rate?” Journal of Monetary Economics, vol. 70 (March), pp. 72–83. 2 Thomas Laubach and John Williams (2003), “Measuring the Natural Rate of Interest,” Review of Economics and Statistics, vol. 85 (March), pp. 1063–70. Page 38 of 96 Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 The estimates based on the Laubach and Williams (2003) methodology suggest that, absent developments that would push the long-run equilibrium rate back up, aggregate demand and the associated neutral policy rates in the AFEs are likely to be much lower than in the early 2000s and will not return to pre-crisis levels, as in the first approach. An implication is that, going forward, even shallow recessions may take policy rates in the AFEs to the zero lower bound constraint. All told, both cyclical and trend estimates suggest that equilibrium interest rates in the AFEs are currently low and will likely remain so for many years. However, the degree to which the decline is due to cyclical versus structural factors—in other words, how low the equilibrium rate will be in the long run—remains difficult to disentangle with confidence. Moreover, in either approach, confidence intervals around estimates of the equilibrium interest rate tend to be very large. Finally, some of the structural factors that may have contributed to lower long-run equilibrium interest rates over the past decade may still unwind. For instance, global savings could conceivably fall going forward, as Asian economies rebalance toward domestic demand somewhat, thus putting upward pressure on global interest rates. Choosing an appropriate path of policy rates over time in AFEs will thus require important judgments related to these uncertainties. 3 Our methodology differs from Laubach and Williams (2003) in two respects. First, we use staff estimates of potential output for the AFEs rather than treat this variable as unobserved. Second, we construct real policy rates using survey-based measures of inflation expectations rather than construct inflation expectations using an autoregressive process on estimated inflation data, as these authors do. When we apply our methodology to U.S. data, however, we obtain estimates very similar to the original article, suggesting that these changes have a modest effect on the results. Page 39 of 96 Int’l Econ Devel & Outlook AFE economies.3 According to this approach, the AFE equilibrium interest rate (shown by the red line) has fallen steadily over the past 15 years and is currently negative. A number of possible structural factors have been put forward to account for this decline in the long-run value of the equilibrium interest rate. For example, potential output growth appears to have stepped down, partly reflecting demographic trends and the effects of the global financial crisis on financial intermediation and productivity. In addition, from an open-economy perspective, the sizable upward shift in global savings in the early to mid-2000s may have contributed to lower world interest rates. Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Quarterly foreign inflation appears to have bottomed out along with oil prices in the first quarter, and it is expected to turn positive in all of the major AFEs in the current quarter. Inflation is projected to reach central bank targets of 2 percent in Canada and the United Kingdom by 2017, and to pick up but remain below the 2 percent objective in both the euro area and Japan at the end of the forecast period. Inflation rates in EMEs also appear to be increasing and are expected to average about 3 percent over the forecast period. Int’l Econ Devel & Outlook We continue to expect monetary policy to remain quite accommodative in most foreign economies. We assume that both the European Central Bank (ECB) and the Bank of Japan will keep rates constant and continue to implement their plans for further quantitative easing over much of the forecast period. We anticipate that the Bank of England (BOE) will begin to increase its policy rate in early 2016 and that the Bank of Canada (BOC) will do so a quarter later. Nonetheless, even for the BOE and the BOC, we expect only modest increases in policy rates over the forecast period, consistent with the view that equilibrium interest rates in the AFEs will remain low for many years (see the box “Equilibrium Interest Rates in the Advanced Foreign Economies”). Central banks of some major EMEs, including China and India, have loosened monetary policy since the most recent FOMC meeting. A prominent exception is Brazil, where policy rates have been tightened further to contain inflation. ADVANCED FOREIGN ECONOMIES Euro area. Real GDP grew 1.5 percent in the first quarter as domestic demand strengthened, and recent indicators, including PMIs and retail sales, are consistent with our estimate of an expansion at about the same pace in the current quarter. We expect GDP growth to rise to 2 percent in 2016 and 2¼ percent in 2017. This forecast is a touch weaker than our April Tealbook projection, reflecting the tightening of financial conditions in recent weeks: As noted in the Financial Developments section, government bond yields in the euro area have risen substantially, and the euro has appreciated about 4 percent in nominal effective terms. Twelve-month inflation rose further to 0.3 percent in May, the first positive reading since last November. We expect quarterly inflation to jump to 2 percent at an annual rate in the second quarter from negative 1½ percent in the first quarter, with energy prices contributing positively to total inflation for Page 40 of 96 Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 the first time since mid-2013. Inflation should settle around 1½ percent by the end of the year and then gradually pick up to 1¾ percent over the remainder of the forecast period as the output gap narrows. We continue to expect ECB asset purchases to total about €1.2 trillion by September 2016 and the ECB’s main policy rate to stay near zero through the end of 2017. Although Greece averted default on its obligations to the IMF in early May, its situation remains precarious. Greece and its creditors continue to disagree over the terms of official financial assistance, even as two deadlines for a deal earlier in the month, the Greek government faces a June 30 deadline to repay the IMF about €1.6 billion. Second, the Greek government’s eligibility to receive financial assistance from the European Financial Stability Facility (EFSF) is currently set to expire at the end of the month. Greece and its creditors are working on a deal to extend Greece’s EFSF program and to release some of its funds. There is some chance these talks will fail, in which case the Greek government may well miss a debt repayment, the ECB could curtail liquidity support to Greek banks, and Greece might have to impose capital controls. Even in this instance, however, our baseline forecast assumes that the associated financial and political tensions will ultimately motivate Greece and its creditors to put the existing financial assistance program back on track and, subsequently, to cover Greece’s medium-term financing needs with a new multiyear program. In addition, our baseline forecast assumes that financial spillovers to the rest of the euro area are contained. However, we cannot rule out the possibility that the Greek situation will spiral out of control, resulting in a Greek exit from the euro area and broader turmoil in global financial markets. Japan. Real GDP growth picked up to 3.9 percent in the first quarter, almost 3 percentage points above our estimate in the April Tealbook. However, the surprise was partly due to a substantial contribution from inventory investment. Thus, we expect GDP growth to slow to a still above-trend pace of 1½ percent in the current quarter and to remain at about that rate through 2016 before a second hike to the consumption tax rate stalls the expansion in 2017. Consumer prices edged down further in the first quarter, reflecting a drop in energy prices and a slowdown in core price increases. With oil prices Page 41 of 96 Int’l Econ Devel & Outlook approach. First, after postponing several debt repayments to the IMF due Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 turning up, inflation should increase to ½ percent in the second quarter. Thereafter, as the output gap narrows and inflation expectations rise, we see inflation (excluding the direct effect of the consumption tax hike) rising to almost 1½ percent by the end of 2017. Canada. Real GDP declined 0.6 percent in the first quarter, as earlier declines in oil prices took a toll on investment in the energy industry. The first-quarter growth rate was considerably weaker than expected, reflecting surprisingly soft private consumption that was due, in part, to the severe winter weather. Int’l Econ Devel & Outlook Recent data point to a modest rebound in economic activity starting in the second quarter; the manufacturing PMI picked up in May, although it remained slightly contractionary. We now expect growth to bounce back to nearly 1½ percent in the second quarter and to increase further to about 2½ percent by the end of the year, supported by the BOC’s accommodative monetary policy, a weak Canadian dollar, and firming U.S. growth. This projection has been revised down a little for 2015, as we have carried forward some of the recent weakness in consumption. With oil prices having turned around and projected to move up a little further, we see inflation bouncing back to 1¾ percent in the second quarter and reaching the BOC’s 2 percent target by 2017. United Kingdom. Real GDP growth slowed to a 1.2 percent pace in the first quarter, nearly 1 percentage point below the April Tealbook projection. Domestic demand growth picked up, but exports declined after surging in the fourth quarter, and import growth remained high. With readings on economic sentiment remaining solid and retail sales growth increasing, we expect GDP growth to bounce back to a 2½ percent pace in the second quarter and to maintain that pace through 2016. After falling at a 1.6 percent rate in the first quarter, consumer prices are estimated to have risen nearly 1 percent in the second quarter, reflecting stabilizing energy prices. With labor market slack projected to dissipate slowly and inflation projected to rise only gradually to the BOE’s 2 percent target, we continue to expect the BOE to wait until the first quarter of 2016 before raising its policy rate. Page 42 of 96 Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 EMERGING MARKET ECONOMIES China. Chinese real GDP growth is estimated to have picked up from just 5.1 percent in the first quarter to a still-subdued 6 percent in the second. The estimate for the second quarter reflects mild improvement across a range of indicators. Industrial production and exports strengthened in April following a weak first quarter, and exports rose further in May. The pace of house price declines has lessened while sales have increased recently, suggesting that the drag on activity from the property sector is diminishing. Meanwhile, retail a 7¼ percent pace in the second half of the year, supported by recent and further monetary easing as authorities seek to keep growth near their 7 percent target for this year. Financial conditions have become more accommodative in recent weeks, as the interbank rate has declined 2 percentage points following the 100 basis point cut in banks’ reserve requirement ratios in April. Economic activity should also be supported beyond the current quarter by a strengthening of exports as demand in China’s trading partners improves and as the drag from last year’s appreciation of the real trade-weighted renminbi lessens. Over the medium term, we continue to see growth moderating to 6½ percent, in line with our estimate of declining potential growth. We expect consumer price inflation to come in at an annual rate of 1½ percent in the current quarter after having dipped below zero in the first quarter in response to falling food and fuel prices. We expect inflation to rise further to 2½ percent by the end of the year and to remain around that rate over the rest of the forecast period. Other Emerging Asia. First-quarter growth was surprisingly weak in several emerging Asian economies, due primarily to plummeting exports. The disappointing first-quarter outcomes, along with the mixed tone of more recent indicators, including exports and PMIs, prompted us to lower our estimate for GDP growth in the current quarter by ½ percentage point to 3¾ percent, up only slightly from the first-quarter rate. Nevertheless, we continue to expect growth in the region to move up to 4¼ percent in the second half of the year, in response to improved activity in China and in the advanced economies, and to remain at roughly that rate, supported by low oil prices and accommodative monetary policies. We judge that, for now, the Page 43 of 96 Int’l Econ Devel & Outlook sales continued to rise at a healthy rate. We expect GDP growth to increase to Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 outbreak of MERS (Middle East Respiratory Syndrome) in Korea will have little effect on the region’s growth, although it poses downside risks. Inflation in the region, which was slightly negative in the first quarter as a result of falling energy prices, is expected to turn positive this quarter and move up to 3¼ percent by 2016. Latin America. Mexican real GDP growth dropped to 1.6 percent in the first quarter, a little below our April Tealbook estimate. Demand-side components Int’l Econ Devel & Outlook will be released later this month, but monthly data indicate weakness in external demand for manufactured goods (in line with the contraction in U.S. production) and in fixed investment, particularly residential housing. In addition, oil production has continued to decline. A rebound in U.S. auto production, along with more-upbeat recent data on exports and PMIs, are consistent with our projection of a pickup in GDP growth to 2½ percent in the current quarter, and we expect further improvement to 3¼ percent over the forecast period. Headline inflation is expected to move up to 3¼ percent later this year from just ¼ percent in the first quarter as the influence of earlier declines in energy and administered telecommunication prices fades. In Brazil, real GDP contracted at an annual rate of ½ percent in the first quarter, a considerably smaller drop than we had expected, as a sharp decline in private domestic demand in response to tighter monetary policy and weak confidence was partly offset by a surprisingly large jump in exports. However, much of the rise in exports was reversed in April and May, and other recent indicators, including the manufacturing PMI and industrial production, also have been weak. As a result, we now expect GDP to contract 3¼ percent in the current quarter. Despite the weak economy, the substantial depreciation of the real and increases in administered prices have kept inflation stubbornly high, at an estimated 9¼ percent annual rate in the current quarter. To restrain inflation, the central bank has raised its policy rate by a cumulative 275 basis points since October 2014, including an increase of 50 basis points on June 3. We expect these moves to support the real and bring inflation down to 5¾ percent by the end of this year and to 5½ percent by 2017, allowing policy to begin to ease by mid-2016. The loosening in policy should contribute to an increase in real GDP growth to a still-sluggish 1¾ percent next year and to 2¼ percent in 2017. Page 44 of 96 Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Recent Foreign Indicators Nominal Exports Industrial Production Jan. 2010 = 100 Foreign AFE EME* Jan. 2010 = 100 160 Foreign AFE* EME** 150 125 120 140 115 130 110 120 100 100 90 2010 2011 2012 2013 2014 2015 95 2010 2011 2012 2013 2014 2015 * Excludes Australia and Switzerland. ** Excludes Venezuela, Hong Kong, and Colombia. * Excludes Venezuela. Retail Sales Employment 12-month percent change Foreign AFE* EME** 4-quarter percent change 12 Foreign AFE EME* 10 5 4 8 3 6 2 4 1 2 0 0 -2 2010 2011 2012 2013 2014 2015 * Excludes Australia. ** Includes Brazil, Chile, China, Indonesia, Korea, Mexico, and Taiwan. Headline Core* 2011 2012 2013 2014 2015 * Excludes Argentina and China. Consumer Prices: Advanced Foreign Economies 12-month percent change -1 2010 Consumer Prices: Emerging Market Economies 12-month percent change 7 Headline Ex. food--Emerging Asia* Ex. food--Latin America* 6 3.0 2.5 5 2.0 4 1.5 3 1.0 2 0.5 1 0.0 2010 2011 2012 2013 2014 Note: Excludes Australia, Sweden, and Switzerland. * Excludes all food and energy; staff calculation. Source: Haver Analytics and CEIC. 2015 0 2010 2011 2012 2013 * Excludes all food; staff calculation. Page 45 of 96 2014 2015 Int’l Econ Devel & Outlook 105 110 Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 The Foreign GDP Outlook Int’l Econ Devel & Outlook Real GDP* Percent change, annual rate H1 2014 Q3 Q4 1. Total Foreign Previous Tealbook 2.2 2.2 2.8 2.6 2. Advanced Foreign Economies Previous Tealbook Canada Euro Area Japan United Kingdom 1.5 1.6 2.2 0.7 -1.4 3.5 Emerging Market Economies Previous Tealbook China Emerging Asia ex. China Mexico Brazil 2.9 2.8 7.0 3.3 2.8 -1.4 3. 4. 5. 6. 7. 8. 9. 10. 11. Q1 2015 Q2 2016 2017 H2 2.4 2.7 1.6 1.8 2.2 2.4 2.8 2.9 3.0 3.1 2.9 2.9 1.7 1.7 3.2 0.7 -2.0 2.5 1.9 2.0 2.2 1.4 1.2 2.5 0.9 1.0 -0.6 1.5 3.9 1.2 1.6 1.8 1.4 1.6 1.5 2.4 2.0 2.1 2.1 1.7 1.6 2.5 2.2 2.2 2.4 1.9 1.4 2.4 1.9 1.9 2.0 2.2 -0.2 2.3 3.9 3.6 8.1 5.1 2.1 0.6 3.0 3.4 7.0 2.3 2.7 1.1 2.2 2.5 5.1 3.6 1.6 -0.6 2.8 3.0 6.1 3.8 2.6 -3.2 3.6 3.7 7.2 4.2 3.1 -0.0 3.8 3.9 6.6 4.4 3.1 1.8 3.9 3.9 6.5 4.2 3.2 2.3 * GDP aggregates weighted by shares of U.S. merchandise exports. Total Foreign GDP Foreign GDP Percent change, annual rate 8 Current Previous Tealbook Percent change, annual rate 10 Current Previous Tealbook 6 Emerging market economies 4 5 2 0 0 -2 Advanced foreign economies -4 -5 -6 -8 -10 -10 2009 2010 2011 2012 2013 2014 2015 2016 2017 2009 2010 2011 2012 2013 2014 2015 2016 2017 Page 46 of 96 Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 The Foreign Inflation Outlook Consumer Prices* Percent change, annual rate 2014 Q3 Q4 Q1 2015 Q2 H2 1. Total Foreign Previous Tealbook 2.5 2.5 2.0 2.0 1.1 1.1 -0.1 -0.1 2.1 2.0 2. Advanced Foreign Economies Previous Tealbook Canada Euro Area Japan United Kingdom 2.2 2.2 3.2 0.4 4.9 1.6 0.8 0.9 1.2 0.4 1.2 1.2 -0.4 -0.4 -0.0 -0.6 -0.6 -0.7 -0.8 -0.8 -0.2 -1.5 -0.3 -1.6 Emerging Market Economies Previous Tealbook China Emerging Asia ex. China Mexico Brazil 2.7 2.7 1.4 2.8 4.1 7.0 2.9 2.9 2.2 1.9 4.4 6.2 2.3 2.3 1.0 1.4 4.2 6.0 0.5 0.4 -0.4 -0.2 0.3 11.1 3. 4. 5. 6. 7. 8. 9. 10. 11. 2016 2017 2.3 2.3 2.4 2.4 2.6 2.6 1.4 1.1 1.8 1.9 0.5 0.9 1.3 1.4 1.8 1.4 0.7 1.7 1.6 1.6 1.8 1.6 1.0 1.8 2.0 2.0 2.0 1.7 2.6 1.9 2.6 2.7 1.6 2.9 2.6 9.3 3.0 3.0 2.4 3.1 3.3 5.9 3.1 3.1 2.5 3.2 3.3 5.6 3.1 3.1 2.5 3.3 3.3 5.4 Int’l Econ Devel & Outlook H1 * CPI aggregates weighted by shares of U.S. non-oil imports. Foreign Monetary Policy AFE Policy Rates AFE Central Bank Balance Sheets Percent Japan Euro area Canada United Kingdom Percent of GDP 3.0 Japan Euro area Canada 2.5 EME Policy Rates Percent 70 60 2.0 50 1.5 40 14 Korea Brazil Mexico 12 10 8 6 1.0 30 4 0.5 20 0.0 2009 2011 2013 2015 2017 2 10 2009 2011 2013 Page 47 of 96 2015 0 2009 2011 2013 2015 2017 Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Evolution of Staff’s International Forecast Total Foreign GDP Percent change, Q4/Q4 6 5 2015 2014 4 2016 2017 Int’l Econ Devel & Outlook 3 2 1 9/5 10/17 12/5 1/23 3/13 4/24 6/12 7/24 9/11 10/23 12/11 1/22 3/12 4/23 6/11 7/23 9/10 10/22 12/10 1/21 3/11 4/22 6/10 2012 2013 2014 2015 0 Tealbook publication date Total Foreign CPI Percent change, Q4/Q4 4.0 3.5 2015 2014 2017 2016 3.0 2.5 2.0 1.5 1.0 0.5 9/5 10/17 12/5 1/23 3/13 4/24 6/12 7/24 9/11 10/23 12/11 1/22 3/12 4/23 6/11 7/23 9/10 10/22 12/10 1/21 3/11 4/22 6/10 2012 2013 2014 2015 0.0 Tealbook publication date U.S. Current Account Balance Percent of GDP 0 -1 -2 2016 2015 -3 2014 -4 2017 -5 9/5 10/17 12/5 1/23 3/13 4/24 6/12 7/24 9/11 10/23 12/11 1/22 3/12 4/23 6/11 7/23 9/10 10/22 12/10 1/21 3/11 4/22 6/10 2012 2013 2014 2015 Tealbook publication date Page 48 of 96 -6 Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Financial Developments Over the intermeeting period, longer-term Treasury yields increased notably amid heightened volatility, evidently boosted by rising core euro-area sovereign bond yields and, to a lesser extent, stronger-than-anticipated domestic labor market news late in the period. The sharp rise in core euro-area yields, though difficult to fully explain, appeared to reflect an increase in expected future short-term rates following some positive European economic data releases, as well as a notable rise in term premiums from significantly compressed levels. On net, 10-year nominal Treasury and German bund yields rose 43 basis points and 79 basis points, respectively. TIPS-based measures of inflation compensation were little changed over the period. Results of the Open Market Desk’s surveys of primary dealers and market participants indicated that September remained the most likely time of liftoff, with the expected pace of normalization after the liftoff little changed. The path of the federal funds rates implied by OIS quotes shifted up beyond 2015, The S&P 500 index moved slightly lower, and the VIX remained near the lower end of its historical range. Financing conditions for businesses and households stayed generally accommodative, even as residential mortgage and revolving credit availability continued to be tight for borrowers with lower credit scores. TREASURY YIELDS AND POLICY EXPECTATIONS Over the intermeeting period, longer-term Treasury yields rose substantially amid significant volatility. Market participants linked the yield movement primarily to the sharp rise in core euro-area sovereign bond yields, which many anecdotal reports attributed to investors abandoning their views about the profitability of the so-called QE trade, a set of positions designed to benefit from a further decline in core euro-area yields. Treasury yields also rose notably following the stronger-than-expected May employment report. On net, the nominal Treasury yield curve steepened appreciably over Page 49 of 96 Financial Developments likely reflecting in part an increase in term premiums. Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Treasury Yields and Policy Expectations Selected Interest Rates Percent 1.7 1.6 Percent Apr. Apr. FOMC Apr. ISM employment Apr. retail statement nonmanufacturing report sales Apr. FOMC minutes Dec. 2016 Eurodollar (left scale) 1.5 2.8 May employment report 2.7 2.6 Apr. CPI 2.5 2.4 1.4 2.3 1.3 2.2 10-year Treasury yield (right scale) 1.2 2.1 2.0 1.1 1.9 Apr. 29 May 4 May 6 May 8 May 13 May 18 May 21 May 26 May 29 June 3 June 8 Note: 5-minute intervals. 8:00 a.m. to 4:00 p.m. Source: Bloomberg. Implied Federal Funds Rate Percent 3.0 Most recent: June 9, 2015 Last FOMC: April 28, 2015 2.5 Distribution of Expected Timing of First Rate Increase from the Desk’s Primary Dealer Survey Percent 60 Recent: 22 respondents April FOMC: 22 respondents 50 2.0 40 1.5 30 20 Financial Developments 1.0 10 0.5 0 2015 2016 2017 2018 April 2019 June July Sept. Oct. Dec. 2016 Note: Path is estimated using overnight index swap quotes with a spline approach and a term premium of zero basis points. Source: Bloomberg; staff estimates. Note: Average across dealers of their individual probabilities attached to the first tightening occurring at a particular meeting. For 2016, expected timing is during or after that year. Source: Desk’s primary dealer survey from June 8, 2015. Treasury Yield Curve Inflation Compensation Percent Percent 3.5 Daily Most recent: June 9, 2015 Last FOMC: April 28, 2015 3.0 5 to 10 years ahead Apr. FOMC 4 3 2.5 2.0 June 9 1.5 1.0 2 Next 5 years* 1 0.5 0.0 1 3 5 7 10 20 Years ahead Note: Smoothed yield curve estimated from off-the-run Treasury coupon securities. Yields shown are those on notional par Treasury securities with semiannual coupons. Source: Federal Reserve Board. Page 50 of 96 0 2011 2012 2013 2014 2015 Note: Estimates based on smoothed nominal and inflationindexed Treasury yield curves. * Adjusted for lagged indexation of Treasury InflationProtected Securities (carry effect). Source: Barclays PLC; Federal Reserve Bank of New York; staff estimates. Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 the intermeeting period, with 2-, 5-, 10-, and 30-year Treasury yields increasing about 15, 34, 43, and 50 basis points, respectively. The changes for the 10- and 30-year Treasury yields stand at the 90th and 95th percentiles, respectively, of the distributions for changes over intermeeting periods since 1990. (For a more detailed discussion of Treasury yield movements, see the box “U.S. Treasury Yields and Global Factors during the Intermeeting Period.”) Most of the increase in nominal yields was attributable to a rise in real yields, as 5-year inflation compensation was little changed and 5-to-10-year inflation compensation rose only a bit. Federal Reserve communications following the April FOMC meeting were characterized by investors as generally in line with expectations and elicited limited market reaction. With respect to the FOMC statement and the minutes, market participants reportedly focused on the changes to the Committee’s assessment of the economy—in particular, the language that the slower economic growth during the winter months “in part” reflected “transitory factors.” On net, the path of the federal funds rate implied by OIS quotes steepened employment report. A significant portion of the pickup, however, may reflect higher term premiums. Indeed, the modal forecasts of the federal funds rate through 2018 from the Desk’s June surveys of dealers and market participants were little changed since the April survey, and respondents again saw the September 2015 meeting as the most likely date for the first increase in the federal funds rate target range. The probability of liftoff at or after the September meeting increased somewhat, with the probability of liftoff at the June 2015 meeting falling to near zero. The expected pace of tightening after the liftoff was little changed relative to the April survey. FOREIGN DEVELOPMENTS Since the April FOMC meeting, foreign sovereign bond yields increased, especially at longer maturities, and foreign stock prices generally moved down. The nominal exchange value of the dollar strengthened, on net, over the period. Benchmark sovereign bond yields in the advanced foreign economies rose sharply starting in late April. After falling back somewhat in late May as Greek concerns became Page 51 of 96 Financial Developments markedly beyond 2015, with some portion of the increase coming on the heels of the May Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 U.S. Treasury Yields and Global Factors during the Intermeeting Period Financial Developments Longer-term U.S. Treasury yields rose notably, on net, amid heightened volatility during the intermeeting period. The 10-year Treasury yield (the black line in figure 1 on the next page) increased 30 basis points over the first two weeks of May and reached 2.35 percent on May 13, its highest level since December. After retracing somewhat toward the end of May, Treasury yields again increased sharply in June, leaving the 10-year yield higher by 43 basis points, on net, since the April FOMC meeting. TIPS yields increased nearly as much as nominal yields, leaving inflation compensation little changed on net. Available evidence points to developments in the euro area as the main driver of the rise in Treasury yields, as sharp increases in German yields appeared to spill over into the U.S. Treasury market; by contrast, domestic developments appear to have played a limited role. The rise in U.S. yields coincided with similar increases in foreign yields (figure 1), and, in particular, the sharp rise in German yields (the green line). The correlation between U.S. and euro-area yields has historically been high, but as shown in figure 2, the correlation between far-forward rates in both countries appears to have increased over the past year. Furthermore, results from a Granger causality test (shown in figure 3) provide some evidence that the probability that movements in far-forward German yields can help predict movements in their U.S. counterparts has increased again recently (the red line), with the probability moving closer to levels last seen during the euro-area debt crisis. Finally, figure 4 shows that staff models attribute the increases in both U.S. yields and German bund yields largely to higher term premiums. The sharp increase in German term premiums appears to have been mostly the result of a reassessment among market participants of the substantial decline in German yields that began in early 2014. That decline—perhaps predicated on investor perceptions of significant tail risks such as protracted deflation associated with the sharp decline in oil prices and a further worsening of the global growth outlook—gained further momentum when the ECB began its purchase program of euro-area sovereign bonds in March, and pushed German yields with maturities up to eight years below zero. It is possible that the decline in German yields and term premiums was subsequently viewed as excessive, resulting in the rise in yields and premiums we saw during the intermeeting period, although what triggered the revision in investors’ views is not entirely clear. Although the rise in both German and U.S. yields can be primarily attributed to increases in term premiums, the expected rate component rose as well. Some better-thanexpected euro-area economic data—in particular, the release of the euro-area CPI for May, as well as some stabilization of oil prices—appear to have boosted primarily the expected rate component of German yields (the red dashed line in figure 4). Meanwhile, although the expected rate component in U.S. yields (the blue dashed line) initially remained stable amid an absence of significant changes in the U.S. economic and monetary policy outlook, the more recent and pronounced increase in expected rates Page 52 of 96 Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 appeared to be supported by some better-than-expected domestic economic news, such as the ISM data and the May employment report. Nonetheless, increases in U.S. yields in June again appeared in large part to be driven by the sharp increase in German yields, as the selloff of German bunds resumed, particularly following ECB communications that were interpreted as lacking concern about the recent increase in market volatility. Financial Developments In summary, the increase in U.S. yields over the intermeeting period does not seem to reflect major changes in the domestic economic or monetary policy outlook but rather a rise in term premiums that was closely linked to yield developments in the euro area, which in turn appeared to be largely driven by investors reassessing the level of valuation in the German bund market.1 This reassessment appears to have initiated an unwinding of widely held positions in euro-area sovereign bonds, particularly by momentum-driven investors, which may have exacerbated the rise in yields. 1 In response to a special question in the June Desk survey, the median dealer attributed more than two-thirds of the 36 basis point increase in the 10-year Treasury yield between late April and early June to higher term premiums. The selloff in core European sovereign bond markets was the most cited factor behind the rise in Treasury yields. Page 53 of 96 Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Foreign Developments AFE and U.S. 10-Year Nominal Benchmark Yields Percent Apr. FOMC Daily 3.5 36-Month-Ahead Policy Expectations Percent United Kingdom Euro area Canada 3.0 United States Apr. FOMC Daily 2.5 3.0 2.5 2.0 2.0 United Kingdom 1.5 1.5 June 9 Germany 1.0 June 9 1.0 0.5 Japan 0.5 0.0 0.0 -0.5 Feb Apr Jun Aug Oct Dec Feb Apr Jun 2014 2015 Sep Oct Nov Dec Jan Feb Mar Apr May Jun 2014 2015 Note: 1-month forward rates from OIS quotes, 3-day moving average. Source: Bloomberg. Source: Bloomberg. Dollar Exchange Rate Indexes 10-Year Peripheral Spreads 16 3.5 Percentage points Percentage points Apr. FOMC Daily Sept. 1, 2014 = 100 4.0 Apr. FOMC Daily EME AFE Broad Euro 3.5 14 3.0 12 130 120 2.5 Financial Developments 10 Greece (left scale) 8 6 110 2.0 June Italy (right scale) June 9 9 1.5 100 1.0 Spain (right scale) 4 0.5 90 Sep Oct Nov Dec Jan Feb Mar Apr May Jun 2014 2015 Sep Oct Nov Dec Jan Feb Mar Apr May Jun 2014 2015 Source: Bloomberg. Source: Federal Reserve Board; Bloomberg. Stock Price Indexes Flows to EME-Dedicated Funds Sept. 1, 2014 = 100 Daily MSCI Emerging Markets DJ Euro Stoxx Nikkei Toronto Stock Index Apr. FOMC Billions of dollars 140 130 Weekly Equity funds Bond funds Apr. FOMC 120 June 9 110 100 90 80 Sep Oct Nov Dec Jan Feb Mar Apr May Jun 2014 2015 Source: Bloomberg. Feb Apr Jun Aug Oct Dec Feb Apr Jun 2014 2015 Source: Emerging Portfolio Fund Research. Page 54 of 96 18 16 14 12 10 8 6 4 2 0 -2 -4 -6 -8 -10 -12 -14 Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 more prominent, yields resumed their climb following stronger-than-expected euro-area inflation data and comments by ECB President Draghi suggesting that the ECB was willing to tolerate some of the recent volatility in yields. On net, sovereign bond yields are up 79 basis points in Germany since the April FOMC meeting. Some of the move reflects higher expected policy rates; the market-implied policy rate for the euro area three years ahead increased 35 basis points. However, most of the move is attributed to a rise in the term premium, which appears to be a partial correction of an earlier decline. Foreign yields also rose, along with U.S. Treasury yields, following the release of the U.S. labor market data in June and are 15 basis points higher, on net, in Japan and 40 basis points higher in the United Kingdom. Early in the period, peripheral sovereign spreads narrowed, reflecting a somewhat improved outlook for Greek program negotiations. Subsequently, spreads widened after Greek officials announced they would postpone several debt repayments to the IMF until June 30. On net, spreads for Italy and Spain rose slightly, whereas Greek spreads declined. Nonetheless, continuing difficulties in program negotiations have raised concerns that the Greek government may miss this June 30 payment, and that the ECB could curtail liquidity support to Greek banks (for more details, see the International After falling during the first couple of weeks of the period, the foreign exchange (FX) value of the dollar began rising again in mid-May, reflecting higher-than-expected CPI data for April, the strong May employment report, and perhaps some step-up in market concerns over Greece. On net over the period, the dollar gained against most currencies, with the broad dollar index up 1½ percent. However, the dollar declined slightly, on balance, against the euro, which may have reflected the solid incoming data for the euro area and the especially pronounced increase in euro-area yields. Against the backdrop of rising yields, equity prices in the advanced foreign economies generally moved lower over the period. Stock prices in Canada and Europe declined 4 to 6 percent, with the Canadian market reacting in part to the release of disappointing data for employment in April and GDP in the first quarter. EME equity prices declined substantially, as macroeconomic data in several EMEs came in weaker than had been expected and as global yields moved up sharply. Page 55 of 96 Financial Developments Economic Developments and Outlook section). Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Corporate Asset Prices and Business Finance S&P 500 Stock Price Index Corporate Bond Spreads Log scale; Apr. 28, 2015 = 100 Apr. FOMC Daily June 9 Basis points Basis points 120 400 800 Apr. FOMC Daily 110 100 350 650 90 300 10-year high-yield (right scale) 80 70 60 500 250 June 9 200 350 10-year triple-B (left scale) 50 2011 2012 2013 2014 2011 2012 2013 2014 2015 Note: Spreads over 10-year Treasury yield. Source: Staff estimates of smoothed corporate yield curves based on Merrill Lynch data and smoothed Treasury yield curve. Selected Components of Net Debt Financing, Nonfinancial Firms Billions of dollars Monthly rate May e Q1 H1 Financial Developments 200 2015 Source: Bloomberg. H2 Apr. Commercial paper* C&I loans* Bonds Total 2011 150 2012 2013 2014 Institutional Leveraged Loan Issuance, by Purpose Billions of dollars 160 140 120 100 80 60 40 20 0 -20 -40 -60 -80 -100 May Q1 New money Refinancings 60 50 Q2 40 Apr. Q3 30 Q4 20 Q1 10 0 2015 2003 2005 2007 2009 2011 2013 2014 e Estimate for change in commercial and industrial (C&I) loans. * Period-end basis, seasonally adjusted. Source: Depository Trust & Clearing Corporation; Mergent Fixed Investment Securities Database; Federal Reserve Board. 2015 Source: Thomson Reuters LPC LoanConnector. Outstanding Bank Loans to Businesses Billions of dollars 70 Monthly rate CMBS Issuance Billions of dollars 2200 Billions of dollars 650 14 Monthly rate Quarterly 2000 12 625 Apr. 1800 Small loans (right scale) 600 H2 Q1 Q1 1600 May 575 10 8 H1 6 1400 550 Large loans (left scale) 1200 4 525 1000 2 500 2007 2009 2011 2013 0 2015 Note: Data are annual through 2009 and quarterly thereafter. Small loans (a proxy for loans to small businesses) are those with an origination amount of $1 million or less; large loans are those with an origination amount of more than $1 million. Source: Call Reports. 2011 2012 2013 2014 Note: CMBS is commercial mortgage-backed securities. Source: Commercial Mortgage Alert. Page 56 of 96 2015 Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 CORPORATE ASSET PRICES Over the intermeeting period, broad U.S. equity price indexes moved down a bit, on net, amid mixed macroeconomic news and little earnings news. Option-implied volatility on the S&P 500 index at the one-month horizon—the VIX—edged up, on balance, but remained near the lower end of its historical range. Yield spreads on corporate bonds stayed near their historical median levels outside of recessions. Spreads on 10-year triple-B-rated corporate bonds over comparable-maturity Treasury securities widened somewhat, on balance, while spreads on speculative-grade corporate bonds narrowed slightly. BUSINESS FINANCE In April and May, financing conditions for large nonfinancial businesses continued to be accommodative. Firms raised a substantial volume of funds in debt markets, particularly for the refinancing of existing debt and the funding of M&A activity. Gross corporate bond issuance remained quite strong, and institutional leveraged loan issuance picked up significantly. The growth of C&I loans on banks’ balance sheets also continued to be solid. Meanwhile, financing conditions for small books remained subdued, reflecting in part still-tepid demand for credit from small business owners. CRE prices continued to rise at a fast pace through the first quarter of 2015, supported in part by rising rents and declining vacancy rates as well as by accommodative financing conditions. CMBS issuance continued to be robust, and the spreads of CMBS rates over Treasury swap rates remained narrow. The growth of CRE loans on banks’ books slowed in April and May, reportedly driven by sales of loans secured by nonfarm nonresidential properties into CMBS pools. HOUSEHOLD FINANCE Credit availability for residential mortgages continued to ease gradually over the intermeeting period. Nevertheless, credit remained tight for borrowers with lower credit scores. Interest rates on 30-year fixed-rate mortgages increased 37 basis points, in line with MBS yields and other longer-term rates. Page 57 of 96 Financial Developments businesses continued to improve, though the growth of small business loans on banks’ Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Household Finance Mortgage Rate and MBS Yield Credit Scores at Mortgage Origination FICO score Percent 800 6.0 Daily Monthly Apr. FOMC 30-year conforming fixed mortgage rate 5.5 5.0 750 Median 4.5 Mar. 4.0 700 June 9 10th percentile 3.0 MBS yield 650 3.5 2.5 2.0 600 2003 2005 2007 2009 2011 2013 1.5 2015 2010 2011 2012 2013 2014 2015 Note: Concerns 30-year GSE-backed purchase mortgages originated in month shown. Source: For data, LPS Applied Analytics/Black Knight. Note: The MBS yield is the Fannie Mae 30-year current-coupon rate. Source: For MBS yield, Barclays; for mortgage rate, Loansifter. Mortgage Credit Availability Index Consumer Credit Index points Percent change from a year earlier 1000 Monthly Monthly Index points 800 125 Student loans May 120 115 24 18 12 600 110 105 6 Apr. 400 Financial Developments 100 0 95 2011 2013 Auto loans 200 2015 -6 May 0 2005 2007 2009 2011 2013 Credit cards 2015 2007 Source: Mortgage Bankers Association. 2009 -12 2011 2013 2015 Note: The data are not seasonally adjusted. Source: Federal Reserve Board. Real Credit Card Limits per Capita for Nonprime Borrowers Thousands of dollars Consumer Delinquency Rates Thousands of dollars 10 Quarterly 8 Near prime (right scale) 6 Subprime (left scale) 4 Q1 2 0 2000 2003 2006 2009 2012 2015 Note: Subprime refers to borrowers with Equifax Risk Scores lower than 620, and near prime, between 620 and 719. Includes those with zero credit limit. Source: Federal Reserve Bank of New York Consumer Credit Panel/Equifax. Percent 20 18 16 14 12 10 8 6 4 2 0 7 Quarterly 6 Credit cards at commercial banks 5 4 3 Auto loans Q1 2 1 2000 2003 2006 2009 2012 2015 Note: Loans 30 days or more past due. Source: For credit cards, American Bankers Association; for auto loans, Federal Reserve Bank of New York Consumer Credit Panel/Equifax. Page 58 of 96 Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Financing conditions in consumer credit markets remained generally accommodative in March and April. Outstanding balances of auto and student loans expanded further at a robust pace through April, as such credit continued to be widely available, including to borrowers with subprime credit scores. Revolving credit picked up in March and April after a slow start at the beginning of the year. However, overall, revolving credit lending continued to be tight for borrowers with less-than-pristine credit records: In the first quarter, the distribution of credit scores on new revolving accounts moved sideways, offered credit card interest rates continued to trend up, and credit card limits per capita for nonprime borrowers remained mostly flat at subdued levels. The credit quality of consumer loans remained mixed on balance. Delinquency rates on credit card loans continued to decline from already low levels, those on student loans moderated somewhat but remained elevated, and those on auto loans remained low. In contrast, delinquency rates on recently originated subprime auto loans continued to edge up, likely reflecting the expansion of lending and easing of standards to such borrowers. BANKING DEVELOPMENTS AND MONEY loan growth was partially offset by a resurgence in consumer lending. Meanwhile, the growth rate of holdings of securities was about in line with its first-quarter pace, as large banks continued to acquire Treasury and government-backed MBS securities. In the first quarter of 2015, the profitability of BHCs increased slightly but remained well below the levels observed in the decade prior to the financial crisis. Declining net interest margins continued to be a key factor for the relatively low profitability of large banks (see the box “Why Are Net Interest Margins of Large Banks So Compressed?”). In contrast, the trading and investment banking subcomponents of noninterest income increased. Finally, credit quality continued to improve across most major loan types in the first quarter of 2015, and standard measures of reserve adequacy increased modestly. Stock prices of large domestic BHCs outperformed the broader indexes, reportedly in part because of the steepening of the yield curve, which tends to boost banks’ net interest margins. News that three large domestic BHCs had reached Page 59 of 96 Financial Developments Bank credit decelerated slightly in April and May, as somewhat slower business Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Banking Developments and Money Return on Assets and Return on Equity at BHCs Selected Components of Liquid Assets at Large Percent Banks Government securities Government securities + cash Monthly Percent 40 30 Quarterly, s.a.a.r 30 Flow-based Tapering announced asset purchases Percent 2 20 1 Q1 10 20 May 0 0 10 -10 0 -10 Jan. Aug. 2011 Mar. Oct. 2012 May Nov. 2013 May Nov. May 2014 2015 -1 Return on assets (left scale) Return on equity (right scale) -2 1999 2003 2007 -20 2011 2015 Source: Federal Reserve Board, FR Y-9C, Consolidated Financial Statements for Holding Companies. Note: Year-over-year growth rates are shown. Government securities include Treasury and agency debt plus agency mortgage-backed securities. Source: Federal Reserve Board, FR 2644, Weekly Report of Selected Assets and Liabilities of Domestically Chartered Commercial Banks and U.S. Branches and Agencies of Foreign Banks. S&P 500 Stock Price Indexes CDS Spreads of Large Bank Holding Companies Ratio scale; Apr. 28, 2015 = 100 Apr. FOMC Daily Basis points 115 Daily June 9 S&P 500 Bank Index Apr. FOMC Citigroup JPMorgan Chase Wells Fargo Goldman Sachs Bank of America Morgan Stanley 105 95 250 200 150 Financial Developments 85 100 S&P 500 June 9 75 2013 2014 2015 65 Basis points 2015 Growth of M2 and Its Components Basis points Apr. FOMC Daily KBW index (left scale) 10-year Treasury yield (right scale) 4.0 2014 Source: Markit. KBW Bank Index and Treasury Yields 3.8 Percent, s.a.a.r. M2 3.4 June 9 3.8 Retail MMFs 5.7 7.0 -8.0 -2.4 7.5 2.6 6.1 7.3 -7.7 -2.8 8.5 2014:H2 5.2 6.5 -8.7 -2.0 6.2 2015:Q1 7.6 9.2 -12.1 -2.7 9.7 Apr. - May 4.4 6.4 -20.6 -5.9 4.2 1.4 Jan. Apr. July 2014 Oct. Jan. Apr. 2015 Note: The KBW index is a modified cap-weighted index consisting of 24 exchange-listed National Market System stocks, which represent national money center banks and leading regional institutions. The index is adjusted for the S&P 500. Source: Bloomberg. Curr. 2014 1.8 3.2 Small time deposits 2014:H1 2.2 3.4 Liquid deposits 3.0 3.6 50 0 2013 Source: Bloomberg. 4.2 -30 Note: Retail MMFs are retail money market funds. Source: Federal Reserve Board. Note: The shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research. Page 60 of 96 Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Why Are Net Interest Margins of Large Banks So Compressed? The extraordinarily low interest rate environment that has prevailed in the wake of the financial crisis has put downward pressure on the net interest margins (NIMs) of all bank holding companies (banks), but especially the largest ones. In particular, over roughly the past five years, NIMs of large banks have fallen about 80 basis points, while NIMs of small banks have decreased approximately 20 basis points (left panel).1 The more pronounced decline in NIMs at large banks is driven by two main factors related to the low interest rate environment. The first factor accounts for the majority of the difference in the behavior of NIMs at the two bank groups and arises from the liability side of banks’ balance sheets, namely from a more pronounced decline in deposit costs at small banks. In general, deposit rates tend to move with short-term interest rates and are typically lower at large banks. With the federal funds rate at the zero lower bound since late 2008, the degree to which large banks have been able to boost their profitability by reducing their deposit rates has been more limited relative to small banks. For example, the arithmetic effect of the decline in deposit rates at small banks has pushed up NIMs about 60 basis points, while the corresponding effect of declining rates at large banks has increased NIMs roughly 20 basis points (red portions of the bars, right panel). So far, at least, large domestic banks have been reluctant to charge negative deposit rates, a step that banks in foreign jurisdictions have been more willing to take.2 These empirical findings have implications for assessing the monetary transmission mechanism around the time of liftoff.3 At that time, for example, large banks could try to boost their profitability in the short term by delaying the increase in deposit rates relative to previous tightening cycles. If that happens, more deposits than usual could leave the banking system, putting some downward pressure on the level of short-term interest rates. However, with interest on excess reserves higher than many deposit rates, banks may act to preserve this funding source, accelerating the pass-through to market interest rates relative to previous tightening cycles. That said, this latter effect may be damped because many large banks face balance sheet constraints in light of the new regulatory environment. 1 Large banks are defined as those with more than $50 billion in consolidated assets. 2 Some custodial banks in the United States are reportedly currently charging negative rates on nonoperational deposits denominated in euros. Such reports are more common in foreign jurisdictions. 3 See the box “The Transmission of Monetary Policy to Deposit Rates” in the April 2015 Tealbook, Book B. Page 61 of 96 Financial Developments The second factor stems from the asset side of the balance sheet: Large banks have experienced a somewhat bigger decline in the interest income they earn on “other” assets, which includes assets held for trading purposes. Interest income on such assets has declined notably since 2010, and large banks hold more of these assets relative to small banks. This factor explains why interest income fell about 150 basis points at large banks while it moved down roughly 130 basis points at small banks (gray portions of the bars, right panel). Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Federal Reserve Operations and Short-Term Funding Markets ON RRP and Term RRP Take-Up Outstanding Term Deposits Billions of dollars Billions of dollars 550 400 Daily Oct. series Feb. series May series 500 350 ON RRP Term RRP 450 400 300 350 250 300 June 9 250 200 200 150 150 100 100 50 50 0 0 Oct. 17 Oct. 30 Nov. 13 Nov. 26 2014 Sept. Feb. 5 Feb. 19 May 28 2015 Oct. Nov. Dec. Jan. Feb. Mar. Apr. May June 2014 2015 Note: ON RRP is overnight reverse repurchase agreement; term RRP is term reverse repurchase agreement. Source: Federal Reserve Bank of New York. Note: Striped bars denote an offer rate of 1 basis point above the interest on excess reserves and a maximum award amount of $5 billion per counterparty. Source: Federal Reserve Board. Money Market Rates ON RRP Take-Up, by Type Basis points Billions of dollars 40 Daily Daily ON RRP ON RRP Federal funds Eurodollar 200 Govt. MMF Prime MMF Other 150 36 PD survey Treasury repo GCF Treasury repo 3-month Treasury bill Triparty Treasury repo 32 28 24 20 16 100 Financial Developments 12 8 50 4 0 0 Apr. 29 Apr. 29 May 19 May 29 June 9 2015 Note: GCF is General Collateral Finance; ON RRP is overnight reverse repurchase agreement; PD is primary dealer; repo is repurchase agreement. Source: Federal Reserve Bank of New York. May 8 May 19 May 29 June 9 2015 Note: ON RRP is overnight reverse repurchase agreement; MMF is money market fund. Source: Federal Reserve Bank of New York. Expected Overnight Treasury GCF Repo and Federal Funds Rates Annualized Most recent GCF Last FOMC GCF Most recent FF Last FOMC FF Agency MBS Issuance and Fed Settlement Percent 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 July Sept. Nov. Jan. Mar. May July Sept. 2015 2016 Note: Last FOMC is April 28, 2015; most recent is June 9, 2015. Federal funds (FF) rates are estimated using overnight index swap quotes with a spline approach; General Collateral Finance (GCF) rates are calculated using GCF Treasury repurchase agreement (repo) futures quotes. Source: Bloomberg; staff estimates. May May 8 Billions of dollars 220 200 180 160 140 120 100 80 60 40 20 0 -20 Percent of gross issuance Monthly Total gross issuance (left scale) Total net issuance (left scale) Total Fed settlement (left scale) Settlement, percent of gross issuance (right scale) Jan. July Sept. Nov. Jan. Mar. 2014 2015 Source: Federal Reserve Bank of New York. Page 62 of 96 Mar. May May 220 200 180 160 140 120 100 80 60 40 20 0 -20 Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 settlement with U.S. authorities regarding investigations into their conduct in FX markets left little imprint on these institutions’ stock prices. M2 expanded at an average annual rate of roughly 4½ percent over April and May. Growth in liquid deposits and currency slowed somewhat from the rates observed in the first quarter of 2015, bringing overall M2 growth more in line with the pace that would be expected based on fundamentals. Small time deposits and retail money market funds continued to run off. The monetary base contracted slightly, on net, as term deposits and the Treasury’s General Account balance increased.1 FEDERAL RESERVE OPERATIONS AND SHORT-TERM FUNDING MARKETS Testing of the ON RRP operations continued over the intermeeting period. Daily take-up averaged about $105 billion, with money funds accounting for the majority of participation.2 Overall, the ON RRP operations continued to provide a soft floor on money market rates during the intermeeting period. Overnight federal funds and Eurodollar rates stayed above the ON RRP rate, although both rates fell several basis points on the averaged 7 basis points. The overnight GCF repo rate continued to be above the overnight triparty rate. While both rates increased several basis points on the April and May month-ends, in line with expectations, the GCF rate increased more noticeably (for more information about the spread between these two rates, see the box “Market Segmentation in the Treasury Repo Market”). Over the intermeeting period, the Desk purchased $48.6 billion of MBS under the reinvestment program and rolled $1.6 billion in expected settlements. The ratio of the 1 The Federal Reserve offered a series of two overlapping TDF operations in May. Total take-up over the two operations reached nearly $150 billion. 2 The Desk announced term RRP operations over the June quarter-end. Specifically, there will be a seven-day operation on June 25 and a two-day operation on June 29, with a combined offer amount of at least $200 billion. The Desk also conducted two small-value repo operations with primary dealers on May 19 and 20 to test operational readiness. Both operations proceeded smoothly. 3 The effective federal funds rate averaged 12 basis points over the intermeeting period, with the intraday standard deviation averaging 4 basis points. Page 63 of 96 Financial Developments April and May month-ends.3 The overnight triparty repo rate for Treasury collateral Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Market Segmentation in the Treasury Repo Market Since late 2014, the spread between the overnight Treasury general collateral repo rate observed in the interdealer GCF market and general Treasury triparty repo rate has widened (see the figure on the following page). 1 Here we discuss the segmentation between these two markets, recent regulatory changes that have led to the spread widening, and quarter‐end dynamics. The behavior of this spread provides evidence that new bank regulations could be having an effect on money markets and highlights that these changes may differentially affect various aspects of markets for similar money market instruments. Financial Developments Analysis of supervisory data collected from the two major clearing banks suggests that the GCF rate is higher than the general triparty rate due to market segmentation; this results from differences in counterparty credit quality, which limits the markets in which some participants can borrow. Specifically, some small dealers with low or no credit rating predominantly use the GCF market to borrow Treasury repo in the triparty market. In contrast, large dealers with high credit ratings tend to supply funds to the GCF market and are the primary borrowers in the general triparty market, so they can earn the spread between rates in the GCF and general triparty markets. While this segmentation has been present for some time, recent regulatory changes may have contributed to a widening of the rate spread. For example, market participants have commented on the reduced attractiveness for large dealers to intermediate repos as the Basel III leverage ratio reportedly provides a disincentive to engage in low‐yield, balance‐sheet‐intensive activities. This regulatory shift has likely contributed to decreasing repo volumes since 2013. The combination of reduced supply from large dealers and stable demand from dealers that depend on the GCF market for funding has contributed to the recent widening of the spread. This segmentation and widening of the spread becomes particularly noticeable on quarter‐ends. Specifically, there have been sharp increases in GCF market rates on recent quarter‐ends, especially the December 2014 and March 2015 quarter‐ends, as U.S. primary dealers reduce their net GCF lending on those dates relative to the rest of the year (see the table on the following page). At the same time, nonprimary dealers, many of which rely on the GCF market for funding, increase their net borrowing and represent a larger share of overall borrowing.2 This increase in borrowing may be in response to a contraction in GCF‐dependent dealers’ alternative funding options on these dates and provides further evidence of GCF‐dependent dealers’ need to use the GCF market for funding even at higher rates. 1 The General Collateral Finance (GCF) repo market is an interdealer market within the overall triparty repo market. It is blind‐brokered with a central counterparty, which reduces counterparty risk, making it an attractive funding market for less creditworthy borrowers. 2 Foreign primary dealers borrow less on net, which could put downward pressure on rates. However, it appears not to be the dominant effect. Page 64 of 96 Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Net Lending in GCF Market from January 2013–March 2015 for Overnight U.S. Treasury Collateral (Billions of dollars) Sample mean Quarter‐end mean % Change U.S. Primary Dealer $ 19.6 $ 16.7 ‐15% Foreign Primary Dealer $ ‐12.1 $ ‐5.7 53% Page 65 of 96 U.S. Nonprimary Dealer $ ‐1.4 $ ‐2.3 ‐66% Foreign Nonprimary Dealer $ ‐6.2 $ ‐8.8 ‐42% Financial Developments Overall, the widening of the spread between the overnight Treasury GCF repo and general Treasury triparty repo rates seems to be explained in part by regulatory changes and market segmentation. The staff will continue to monitor activity in these markets as the time of policy firming approaches. Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Desk’s MBS settlements to gross issuance of these securities picked up again in May to 36 percent after a decrease in April to 27 percent, its lowest level since late 2012. TREASURY AND AGENCY FINANCE AND MARKET FUNCTIONING Various liquidity metrics for Treasury and MBS markets were little changed over the intermeeting period, and they have generally pointed to relatively stable market functioning over the past several years.4 However, the majority of the June SCOOS respondents indicated that, over the past five years, liquidity and functioning in these markets, especially in Treasury markets, have deteriorated. Respondents attributed the deterioration primarily to securities dealers’ decreased willingness to provide balance sheet resources for marketmaking purposes as a result of both regulatory changes and Financial Developments changes in internal risk-management practices. 4 Since the March FOMC meeting, the Treasury Department has auctioned $207 billion of Treasury nominal fixed-coupon securities, $13 billion of Treasury Inflation-Protected Securities, and $28 billion of two-year Floating Rate Notes. Page 66 of 96 Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Risks and Uncertainty ASSESSMENT OF RISKS We continue to view the uncertainty around our projections for real GDP growth and the unemployment rate as roughly in line with the average over the past 20 years (the benchmark used by the FOMC). However, we continue to view the risks to our forecast for real GDP growth as tilted somewhat to the downside. Importantly, neither monetary nor fiscal policy appears well positioned to help the economy withstand adverse shocks. By contrast, we continue to view the risks around our unemployment projection as roughly balanced, with the risk of a higher unemployment rate from adverse demand-side developments roughly offset by the possibility that the surprisingly steep declines in the unemployment rate of recent years will continue. With regard to inflation, we see significant uncertainty around our projection but do not view the current level of uncertainty as unusually high. At the same time, we continue to view the risks around our inflation projection as tilted to the downside. Despite some recent increases, TIPS-based inflation compensation remains well below its level of a year ago and core PCE price inflation remains below the Committee’s target despite a declining unemployment rate and other signs of labor market tightening. One factor that has likely held down U.S. inflation recently has been the increase in the exchange value of the dollar. With other major central banks conducting aggressive policies to fight their own inflation shortfalls, the dollar may be stronger than in the baseline, leading to continued downward pressure on U.S. inflation. Our view of the risks to the economic outlook is informed by the staff’s quarterly quantitative surveillance assessment, which judges the vulnerabilities of the U.S. financial system to adverse shocks as moderate overall. This assessment reflects low levels of leverage and maturity transformation in the banking sector, moderate use of the private nonfinancial sector. That said, there are pockets of concern: Some indicators suggest stretched valuations in equity and bond markets, and borrowing by lower-rated firms has been quite strong. Commercial real estate valuation pressures, while still moderate, have risen amid weakening underwriting standards. As best as we can determine, leverage in margin accounts employed by hedge funds appears somewhat Page 67 of 96 Risks & Uncertainty leverage in most parts of the nonbank financial sector, and overall modest debt growth in Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Alternative Scenarios (Percent change, annual rate, from end of preceding period except as noted) 2015 Measure and scenario Risks & Uncertainty H1 H2 2016 2017 201819 Real GDP Extended Tealbook baseline Lower long-run equilibrium fed funds rate Near-term slowdown in economic activity Lower natural rate of unemployment Faster growth with higher inflation Weaker foreign growth and stronger dollar Greek exit with severe spillovers 1.0 1.0 1.0 1.0 1.0 1.0 1.0 2.1 1.9 .5 2.2 3.3 1.8 .2 2.4 2.2 .5 2.5 3.9 1.9 .8 2.2 2.2 1.6 2.4 2.3 1.8 2.2 1.8 1.9 2.6 2.0 1.5 2.1 2.3 Unemployment rate1 Extended Tealbook baseline Lower long-run equilibrium fed funds rate Near-term slowdown in economic activity Lower natural rate of unemployment Faster growth with higher inflation Weaker foreign growth and stronger dollar Greek exit with severe spillovers 5.5 5.5 5.5 5.5 5.5 5.5 5.5 5.3 5.4 5.7 5.2 5.1 5.4 5.6 5.2 5.4 6.4 4.8 4.5 5.5 6.2 5.2 5.3 6.7 4.6 4.5 5.6 6.3 5.1 5.2 5.8 4.3 4.8 5.5 5.9 Total PCE prices Extended Tealbook baseline Lower long-run equilibrium fed funds rate Near-term slowdown in economic activity Lower natural rate of unemployment Faster growth with higher inflation Weaker foreign growth and stronger dollar Greek exit with severe spillovers -.1 -.1 -.1 -.1 -.1 -.1 -.1 1.3 1.3 1.3 1.3 1.6 .9 .5 1.6 1.6 1.6 1.6 1.9 1.0 .5 1.8 1.8 1.7 1.8 2.2 1.3 1.2 1.9 2.0 1.8 1.9 2.4 1.9 1.7 Core PCE prices Extended Tealbook baseline Lower long-run equilibrium fed funds rate Near-term slowdown in economic activity Lower natural rate of unemployment Faster growth with higher inflation Weaker foreign growth and stronger dollar Greek exit with severe spillovers 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.4 1.4 1.4 1.4 1.6 1.3 1.0 1.6 1.6 1.5 1.6 1.9 1.2 .7 1.8 1.8 1.7 1.8 2.2 1.5 1.2 2.0 2.0 1.8 1.9 2.4 1.8 1.6 Federal funds rate1 Extended Tealbook baseline Lower long-run equilibrium fed funds rate Near-term slowdown in economic activity Lower natural rate of unemployment Faster growth with higher inflation Weaker foreign growth and stronger dollar Greek exit with severe spillovers .1 .1 .1 .1 .1 .1 .1 .3 .2 .2 .3 .5 .3 .3 1.3 .6 .3 1.0 2.3 1.1 .2 2.1 1.2 .3 1.8 3.9 1.5 .3 3.2 2.1 1.5 2.9 4.9 2.5 2.0 1. Percent, average for the final quarter of the period. Page 68 of 96 Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 elevated. Structural vulnerabilities in the mutual fund sector persist, particularly for U.S. money market funds and funds that invest in illiquid assets. And bond market liquidity is reported by some market participants to be more likely to dissipate in the presence of market stress than has historically been the case. ALTERNATIVE SCENARIOS To illustrate some of the risks to the outlook, we construct a number of alternatives to the baseline projection using simulations of staff models. In the first scenario, aggregate demand is persistently weaker than in the baseline, such that the longrun equilibrium real interest rate is lower. The second scenario also features weaker aggregate demand than in the baseline; in this case, however, the weakening is more pronounced in the near term but is of shorter duration. The third scenario considers the possibility that the natural rate of unemployment is lower than in the baseline. In the fourth, recent softness in the incoming data proves to be more transitory—and the underlying pace of economic activity stronger—than assumed in the baseline projection, leading to a higher path of inflation. In the fifth scenario, foreign economic growth is significantly weaker than in our baseline outlook, while the dollar appreciates markedly. In the final scenario, a disorderly exit of Greece from the euro-area monetary union causes Europe to plunge into a deep recession with severe adverse effects on global financial conditions and confidence. We generate the first, second, and third scenarios using the FRB/US model, while the fourth one uses the EDO model. The final two scenarios are generated using the multicountry SIGMA model. Once the federal funds rate has risen above its current target range, its movements are governed—as in the baseline forecast—by an inertial version of the Taylor (1999) rule. The date of liftoff in each scenario is set using a mechanical procedure intended to be broadly consistent with the guidance provided in the Committee’s recent statements.1 In all cases, we assume that the size and composition of 1 For the scenarios run in SIGMA, we assume a policy rule broadly similar to the FRB/US and EDO simulations. One key difference relative to the FRB/US and EDO simulations is that the policy rule in SIGMA uses a measure of slack equal to the difference between actual output and the model’s estimate of the level of output that would occur in the absence of slow adjustment of wages and prices. Page 69 of 96 Risks & Uncertainty the SOMA portfolio follow their baseline paths. Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Forecast Confidence Intervals and Alternative Scenarios Confidence Intervals Based on FRB/US Stochastic Simulations Extended Tealbook baseline Lower long−run equilibrium fed funds rate Near−term slowdown in economic activity Lower natural rate of unemployment Faster growth with higher inflation Real GDP Weaker foreign growth and stronger dollar Greek exit with severe spillovers Unemployment Rate 4-quarter percent change 70 percent interval Percent 6 9.0 8.5 5 8.0 7.5 4 7.0 6.5 3 6.0 2 5.5 5.0 1 4.5 4.0 0 3.5 3.0 −1 90 percent interval 2.5 −2 2012 2014 2016 2.0 2018 2012 PCE Prices excluding Food and Energy 2014 2016 2018 Federal Funds Rate 4-quarter percent change Percent 4.0 7 3.5 6 3.0 5 2.5 4 2.0 Risks & Uncertainty 3 1.5 2 1.0 1 0.5 0 0.0 2012 2014 2016 2018 2012 Page 70 of 96 2014 2016 2018 Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Lower Long-Run Equilibrium Federal Funds Rate Thus far in the recovery, aggregate demand has been weak, likely reflecting both domestic and global factors. In the baseline, these factors are expected to dissipate, so the equilibrium real federal funds rate is assumed to rise over time. However, some have argued that the factors that have depressed aggregate demand are essentially permanent; accordingly, in this scenario, we assume that the current weakness in aggregate demand continues such that the equilibrium real federal funds rate rises 1 percentage point less over the next decade than in the baseline. We assume that policymakers immediately recognize the lower trajectory of the equilibrium interest rate. As a result of the lower level of aggregate demand, output expands more slowly than in the baseline until the end of 2017. However, monetary policy is able to offset a significant portion of the shortfall, and real GDP growth in 2016 is just ¼ percentage point lower than in the baseline. The path for the unemployment rate is slightly higher than in the baseline. Because the lower value for the long-run equilibrium federal funds rate is known from the start of the simulation, it affects the setting of monetary policy in the near term, and the initial increase in the federal funds rate is delayed until the first quarter of 2016. Thereafter, the difference between the alternative and the baseline widens, and by 2018, the federal funds rate is 1 percentage point lower than in the baseline. Near-Term Slowdown in Economic Activity In the first scenario, the weakness in aggregate demand is assumed to be permanent but modest in magnitude. In this scenario, we assume that the softness in aggregate demand turns out to be less persistent, but much sharper, than in the first scenario. Relative to the baseline, the projected acceleration in consumer demand and housing construction falters. The resulting weaker economy adversely affects profits and business confidence, causing firms to reduce their investment spending. ½ percentage point less than the baseline. The unemployment rate rises to 6¾ percent at the end of 2017 before gradually moving back toward its assumed natural rate. The path for inflation is lower than in the baseline projection. Given this weaker outlook, liftoff is delayed until the first quarter of 2016 and the federal funds rate remains at or below 50 basis points until early 2018. The federal funds rate reaches 1½ percent by the end of 2019, about 1¾ percentage points below baseline. Page 71 of 96 Risks & Uncertainty Real GDP rises only ½ percent in 2016. In 2017, real GDP grows 1½ percent, Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Selected Tealbook Projections and 70 Percent Confidence Intervals Derived from Historical Tealbook Forecast Errors and FRB/US Simulations Measure Real GDP (percent change, Q4 to Q4) Projection Confidence interval Tealbook forecast errors FRB/US stochastic simulations Civilian unemployment rate (percent, Q4) Projection Confidence interval Tealbook forecast errors FRB/US stochastic simulations PCE prices, total (percent change, Q4 to Q4) Projection Confidence interval Tealbook forecast errors FRB/US stochastic simulations PCE prices excluding food and energy (percent change, Q4 to Q4) Projection Confidence interval Tealbook forecast errors FRB/US stochastic simulations Risks & Uncertainty Federal funds rate (percent, Q4) Projection Confidence interval FRB/US stochastic simulations 2015 2016 2017 2018 2019 1.6 2.4 2.2 1.9 1.7 .2–3.1 .7–2.4 .2–4.0 1.1–4.1 -.1–3.8 .8–4.1 ... .3–3.8 ... .0–3.6 5.3 5.2 5.2 5.1 5.1 4.9–5.6 4.9–5.8 4.3–6.3 4.3–6.0 3.9–6.8 3.7–6.3 ... 3.4–6.3 ... 3.3–6.4 .6 1.6 1.8 1.9 2.0 -.1–1.2 .1–1.2 .8–3.3 .7–2.6 .8–3.4 .7–2.8 ... .8–3.1 ... .8–3.1 1.3 1.6 1.8 1.9 2.0 .9–1.6 .9–1.8 .8–2.4 .7–2.4 ... .9–2.7 ... 1.0–3.0 ... 1.0–3.1 .4 1.3 2.1 2.8 3.2 .1–.5 .2–2.1 .6–3.6 1.0–4.9 1.2–5.7 Note: Shocks underlying FRB/US stochastic simulations are randomly drawn from the 1969–2014 set of model equation residuals. Intervals derived from Tealbook forecast errors are based on projections made from 1980 to 2014 for real GDP and unemployment and from 1998 to 2014 for PCE prices. The intervals for real GDP, unemployment, and total PCE prices are extended into 2017 using information from the Blue Chip survey and forecasts from the CBO and CEA. . . . Not applicable. Page 72 of 96 Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Prediction Intervals Derived from Historical Tealbook Forecast Errors Historical Distributions Forecast Error Percentiles Q4 Level, Percent Unemployment Rate Historical revisions Tealbook forecasts Augmented Tealbook 1 median 15% to 85% 5% to 95% data/forecast range 2012 2013 2014 2015 2016 2017 12 4 10 3 8 2 6 1 4 0 2 2012 1980 to 2014 Q4/Q4, Percent Real GDP Growth Q4/Q4, Percent PCE Inflation 2013 2014 2015 2016 2017 -1 1998 to 2014 Q4/Q4, Percent Core PCE Inflation 4 8 6 3 4 2 2 1 0 0 -2 2012 2013 2014 2015 2016 2017 -4 2012 1980 to 2014 2013 2014 2015 2016 2017 -1 1998 to 2014 Historical Distributions Real GDP Growth Annual, Percent 25 median 15% to 85% 5% to 95% 20 2.5% to 97.5% range Annual, Percent PCE Inflation Annual, Percent 20 16 12 12 12 8 8 4 4 0 0 -4 -4 -8 -8 -8 -12 -12 -12 0 -4 5 0 1980 to 2014 Annual, Percent 4 10 1930 to 1947 to 2014 2014 16 16 8 15 Core PCE Inflation -16 1930 to 1947 to 1980 to 2014 2014 2014 -16 1930 to 1947 to 1998 to 2014 2014 2014 -16 1930 to 1947 to 1998 to 2014 2014 2014 Note: See the technical note in the appendix for more information on this exhibit. 1. Augmented Tealbook prediction intervals use 1- and 2-year-ahead forecast errors from Blue Chip, CBO, and CEA to extend the Tealbook prediction intervals through 2017. Page 73 of 96 Risks & Uncertainty Unemployment Rate Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Lower Natural Rate of Unemployment While the unemployment rate has come down substantially over the past few years, inflation has not picked up, with core PCE inflation averaging less than 1½ percent since 2012. One reason inflation has remained subdued despite falling unemployment may be that the natural rate of unemployment is lower than generally thought. A lower trajectory for the natural rate would also help reconcile the rapid decrease in unemployment seen in recent years with the modest increases in GDP. In this scenario, we assume that the natural rate of unemployment has fallen faster over the past five years than assumed by the staff, to 4.2 percent in the current quarter, 1 percentage point less than in the baseline. The higher level of potential output in this scenario implies that the output gap is initially wider than in the baseline and that the first increase in the federal funds rate is delayed until the last quarter of 2015. As a result of more-accommodative monetary policy, real GDP growth picks up, averaging about 2¼ percent over the 2015–19 period, about 15 basis points higher than in the baseline. The unemployment rate declines faster than in the baseline and does not approach its natural rate until the end of 2019. Given that the Phillips curve is very flat, the path for inflation is essentially unchanged. Faster Growth with Higher Inflation While some incoming data have been soft, other indicators have been more encouraging. Real GDI rose 1½ percent in the first quarter, auto sales surged in May, and some indicators of residential investment have been more positive. Job openings are elevated, and initial claims for unemployment insurance are at historical lows. In this scenario, households and businesses are more confident about the underlying strength of the economy, and that greater confidence leads them to be more willing to spend and hire than in the baseline, supporting a much faster economic expansion. We also assume that inflation is more sensitive to reductions in resource slack than in the standard version of Risks & Uncertainty the EDO model, consistent with the estimates of some other DSGE models.2 Real GDP growth averages about 3¼ percent in the second half of 2015 and 4 percent in 2016, compared with 2 percent and 2½ percent, respectively, in the baseline projection. The unemployment rate falls below 5 percent by early 2016, bottoms out at 2 We make inflation more sensitive to slack by reducing the adjustment cost parameters for prices and wages in EDO. In particular, we use values that are two standard deviations below the EDO point estimates of these two parameters. Page 74 of 96 Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 4½ percent at the beginning of 2017, and then increases slowly for the remainder of the forecast period. With resource utilization running tighter, inflation rises faster than in the baseline, reaching 2¼ percent by the end of 2017. The federal funds rate lifts off at the same time as in the baseline but rises more steeply thereafter, passing 4 percent in 2018 and approaching 5 percent by the end of 2019. Given enough time, this path for the federal funds rate would eventually drive the unemployment rate up to its assumed natural rate and bring inflation back down to 2 percent. Weaker Foreign Growth and Stronger Dollar In our baseline forecast, we project that foreign output growth will pick up noticeably from its languid pace over the past two years, especially in the EMEs, and that this pickup in foreign growth will contribute to a modest depreciation of the broad real dollar in 2016 and 2017. However, foreign growth may continue to disappoint for a number of reasons: China could experience a more pronounced slowdown than in our baseline if the property market weakens further and lending conditions tighten; growth in EME exports and investment spending may remain subdued rather than bounce back as in our baseline; or the BOJ’s and ECB’s large-scale quantitative easing programs may fail to deliver much of a boost to output and inflation. In this scenario, we assume that a weakening of household and business confidence abroad and a modest tightening of credit conditions cause foreign GDP growth to run 1 percentage point below the baseline over the forecast period, with the negative growth surprises somewhat more concentrated in the EMEs. Given the heightened divergence between monetary policy abroad and in the United States, the gradual removal of policy accommodation in the United States is assumed to generate substantial flows toward dollar-denominated assets, causing the broad real dollar to appreciate 7 percent relative to baseline. The slower foreign growth and stronger dollar cause U.S. real net exports to fall relative to the baseline. All told, U.S. real GDP expands by less than 2 percent in 2016, about ½ percentage point less than in the baseline, and the unemployment rate remains inflation hold core inflation to about 1¼ percent through 2016. The federal funds rate Page 75 of 96 Risks & Uncertainty above 5½ percent until 2019. Weaker U.S. economic activity and lower import price Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 lifts off at the same time as in the baseline, but U.S. monetary policy removes accommodation more gradually going forward.3 Greek Exit with Severe Spillovers Our baseline assumption is that spillovers from developments in Greece will be contained, even in the event that debt negotiations break down completely and Greece’s crisis deepens. However, it is far from assured that the firewalls erected during the past few years and actions that the authorities would presumably take to limit contagion will succeed, especially if Greece actually leaves the euro area. In this scenario, we consider a direr outcome in which Greece abandons the euro and the related disruptions cause the euro area to plunge into a deep recession, with severe adverse effects on global financial conditions and confidence. Specifically, our scenario assumes that financial conditions in the euro area tighten sharply and that confidence plummets amid rising unemployment and heightened disinflationary pressures. Peripheral sovereign spreads rise 400 basis points above baseline, while euro-area corporate borrowing spreads rise more than 200 basis points. As a result, euro-area real GDP falls about 6 percent relative to the baseline by early 2017. The euro-area crisis has substantial adverse spillovers to the United States. U.S. corporate bond spreads are assumed to rise about 100 basis points, while flight-to-safety flows help push the trade-weighted dollar up nearly 8 percent and depress 10-year Treasury yields about 25 basis points. Weaker foreign activity and the stronger dollar cause U.S. real net exports to fall relative to the baseline. U.S. domestic demand also declines relative to the baseline as a result of lower confidence and tighter credit conditions, and U.S. real GDP nearly stalls in the second half of 2015 and expands only ¾ percent in 2016. Lower domestic demand and lower import price inflation cause U.S. core inflation to run at ¾ percent in 2016, about 1 percentage point below baseline. The inertial Taylor rule prescribes a Risks & Uncertainty substantially shallower path for the federal funds rate than in the baseline. The box “Alternative View: The Risk of Significant Macroeconomic Imbalances over the Medium Term” in the Domestic Economic Developments and Outlook section considers a scenario in which the broad real dollar appreciates by 20 percent, and raises the possibility that the much lower path of the federal funds rate prescribed by the inertial Taylor rule in this scenario (relative to the staff’s baseline) could pose financial stability risks. 3 Page 76 of 96 Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Alternative Models (Percent change, Q4 to Q4, except as noted) 2015 Measure and projection 2016 2017 March Tealbook Current Tealbook March Tealbook Current Tealbook March Tealbook Current Tealbook Real GDP Staff FRB/US EDO 2.2 2.8 2.7 1.6 1.9 1.7 2.3 2.5 2.5 2.4 2.6 2.4 2.0 2.2 2.5 2.2 2.2 2.6 Unemployment rate1 Staff FRB/US EDO 5.2 5.3 5.7 5.3 5.4 5.7 5.1 5.2 5.8 5.2 5.4 5.9 5.0 5.3 5.9 5.2 5.5 5.9 Total PCE prices Staff FRB/US EDO .6 .7 .7 .6 .7 .9 1.7 1.7 1.8 1.6 1.7 2.1 1.9 1.5 2.0 1.8 1.5 2.1 Core PCE prices Staff FRB/US EDO 1.3 1.3 1.4 1.3 1.5 1.6 1.6 1.6 1.8 1.6 1.7 2.1 1.8 1.5 2.0 1.8 1.5 2.1 Federal funds rate1 Staff FRB/US EDO .7 .9 1.4 .4 .6 1.0 1.8 1.6 2.4 1.3 1.2 2.1 2.7 1.8 2.9 2.1 1.1 2.7 Risks & Uncertainty 1. Percent, average for Q4. Page 77 of 96 Authorized for Public Release Assessment of Key Macroeconomic Risks (1) Probability of Inflation Events (4 quarters ahead—2016:Q2) Probability that the 4-quarter change in total PCE prices will be ... Staff FRB/US EDO BVAR Greater than 3 percent Current Tealbook Previous Tealbook .04 .06 .07 .06 .14 .15 .08 .00 Less than 1 percent Current Tealbook Previous Tealbook .29 .24 .19 .21 .22 .22 .16 .64 Probability of Unemployment Events (4 quarters ahead—2016:Q2) Probability that the unemployment rate will... Staff FRB/US EDO BVAR Increase by 1 percentage point Current Tealbook Previous Tealbook .05 .03 .04 .02 .25 .24 .01 .00 Decrease by 1 percentage point Current Tealbook Previous Tealbook .10 .13 .04 .09 .04 .04 .35 .40 Probability of Near-Term Recession Probability that real GDP declines in each of 2015:Q3 and 2015:Q4 Current Tealbook Previous Tealbook Staff FRB/US EDO BVAR Factor Model .04 .05 .03 .02 .03 .03 .03 .03 .41 .30 Note: “Staff” represents Tealbook forecast errors applied to the Tealbook baseline; baselines for FRB/US, BVAR, EDO, and the factor model are generated by those models themselves, up to the current-quarter estimate. Data for the current quarter are taken from the staff estimate for the second Tealbook in each quarter; if the second Tealbook for the current quarter has not yet been published, the preceding quarter is taken as the latest historical observation. Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Assessment of Key Macroeconomic Risks (2) Probability that Total PCE Inflation Is above 3 Percent Probability that Total PCE Inflation Is below 1 Percent (4 quarters ahead) (4 quarters ahead) Probability Probability 1 1 .8 .8 .6 .6 .4 .4 .2 .2 FRB/US BVAR 0 1998 2000 2002 2004 2006 2008 2010 2012 2014 0 1998 Probability that the Unemployment Rate Increases 1 ppt 2000 2002 2004 2006 2008 2010 2012 2014 Probability that the Unemployment Rate Decreases 1 ppt (4 quarters ahead) (4 quarters ahead) Probability Probability 1 1 .8 .8 .6 .6 .4 .4 .2 .2 0 1998 2000 2002 2004 2006 2008 2010 2012 2014 0 1998 2000 2002 2004 2006 2008 2010 2012 2014 Probability that Real GDP Declines in Each of the Next Two Quarters Probability 1 .8 .4 .2 0 1998 2000 2002 2004 2006 2008 2010 2012 2014 Note: See notes on facing page. Recession and inflation probabilities for FRB/US and the BVAR are real-time estimates. See Robert J. Tetlow and Brian Ironside (2007), "Real−Time Model Uncertainty in the United States: The Fed, 1996−2003," Journal of Money, Credit and Banking , vol. 39 (October), pp. 1533−61. Page 79 of 96 Risks & Uncertainty .6 Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Risks & Uncertainty (This page is intentionally blank.) Page 80 of 96 Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Appendix Technical Note on “Prediction Intervals Derived from Historical Tealbook Forecast Errors” This technical note provides additional details about the exhibit “Prediction Intervals Derived from Historical Tealbook Forecast Errors.” In the four large fan charts, the black dotted lines show staff projections and current estimates of recent values of four key economic variables: average unemployment rate in the fourth quarter of each year and the Q4/Q4 percent change for real GDP, total PCE prices, and core PCE prices. (The GDP series is adjusted to use GNP for those years when the staff forecast GNP and to strip out software and intellectual property products from the currently published data for years preceding their introduction. Similarly, the core PCE inflation series is adjusted to strip out the “food away from home” component for years before it was included in core.) The prediction intervals around the current and one-year-ahead forecasts are derived from historical staff forecast errors, comparing staff forecasts with the latest published data. For the unemployment rate and real GDP growth, errors were calculated for 1980 through 2014, yielding percentiles of the sizes of the forecast errors. For PCE and core PCE inflation, errors for 1998 through 2014 were used. This shorter range reflects both more limited data on staff forecasts of PCE inflation and the staff judgment that the distribution of inflation since the mid1990s is more appropriate for the projection period than distributions of inflation reaching further back. In all cases, the prediction intervals are computed by adding the percentile bands of the errors onto the forecast. The blue bands encompass 70 percent prediction-interval ranges; adding the green bands expands this range to 90 percent. The dark blue line plots the median of the prediction intervals. There is not enough historical forecast data to calculate meaningful 90 percent ranges for the two inflation series. A median line above the staff forecast means that forecast errors were positive more than half of the time. Stanley Lebergott (1957), “Annual Estimates of Unemployment in the United States, 1900–1954,” in National Bureau of Economic Research, The Measurement and Behavior of Unemployment (Princeton, N.J.: Princeton University Press), pp. 213 –41. 1 Page 81 of 96 Risks & Uncertainty The historical distributions of the corresponding series (with the adjustments described above) are plotted immediately to the right of each of the fan charts. The thin black lines show the highest and lowest values of the series during the indicated time period. At the bottom of the page, the distributions over three different time periods are plotted for each series. To enable the use of data for years prior to 1947, we report annual-average data in this section. The annual data going back to 1930 for GDP growth, PCE inflation, and core PCE inflation are available in the conventional national accounts; we used estimates from Lebergott (1957) for the unemployment rate from 1930 to 1946.1 Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Because the staff has produced two-year-ahead forecasts for only a few years, the intervals around the two-year-ahead forecasts are constructed by augmenting the staff projection errors with information from outside forecasters: the Blue Chip consensus, the Council of Economic Advisers, and the Congressional Budget Office. Specifically, we calculate prediction intervals for outside forecasts in the same manner as for the staff forecasts. We then calculate the change in the error bands from outside forecasts from one year ahead to two years ahead and apply the average change to the staff’s one-year-ahead error bands. That is, we assume that any deterioration in the performance between the one- and two-year-ahead projections of the outside forecasters would also apply to the Tealbook projections. Limitations on the availability of data mean that a slightly shorter sample is used for GDP and unemployment, and the outside projections may only be for a similar series, such as total CPI instead of total PCE prices or annual growth rates of GDP instead of four-quarter changes. In particular, because data on forecasts for core inflation by these outside forecasters are much more limited, we did not extrapolate the staff’s errors for core PCE inflation two years ahead. Risks & Uncertainty The intervals around the historical data in the four fan charts are based on the history of data revisions for each series. The previous-year, two-year-back, and three-year-back values as of the current Tealbook forecast are subtracted from the corresponding currently published estimates (adjusted as described earlier) to produce revisions, which are then combined into distributions and revision intervals in the same way that the prediction intervals are created. Page 82 of 96 -.8 6.8 6.4 2.4 .3 4.6 3.7 4.2 4.3 4.1 4.2 4.2 2.9 4.4 2.4 3.9 4.2 4.2 4.6 3.7 3.2 4.2 4.0 Quarterly 2014:Q1 Q2 Q3 Q4 2015:Q1 Q2 Q3 Q4 2016:Q1 Q2 Q3 Q4 Two-quarter2 2014:Q2 Q4 2015:Q2 Q4 2016:Q2 Q4 Four-quarter3 2013:Q4 2014:Q4 2015:Q4 2016:Q4 2017:Q4 Page 83 of 96 4.6 3.7 2.7 4.1 4.1 2.9 4.4 2.2 3.3 4.2 4.1 -.8 6.8 6.4 2.4 -.6 5.0 3.0 3.6 4.2 4.1 4.2 4.0 06/10/15 3.1 2.4 1.8 2.4 2.1 1.2 3.6 1.2 2.4 2.3 2.4 -2.1 4.6 5.0 2.2 .1 2.4 2.4 2.4 2.4 2.3 2.4 2.5 04/22/15 3.1 2.4 1.6 2.4 2.2 1.2 3.6 1.0 2.1 2.4 2.4 -2.1 4.6 5.0 2.2 -.5 2.5 1.9 2.3 2.3 2.5 2.5 2.4 06/10/15 Real GDP 1.0 1.1 .6 1.6 1.8 1.9 .4 -.2 1.5 1.6 1.6 1.4 2.3 1.2 -.4 -2.0 1.5 1.5 1.6 1.6 1.6 1.6 1.6 04/22/15 1.0 1.1 .6 1.6 1.8 1.9 .4 -.1 1.3 1.6 1.6 1.4 2.3 1.2 -.4 -2.0 1.9 1.4 1.2 1.6 1.6 1.6 1.6 06/10/15 PCE price index 1.3 1.4 1.3 1.6 1.8 1.6 1.2 1.2 1.4 1.6 1.6 1.2 2.0 1.4 1.1 .8 1.6 1.4 1.4 1.6 1.6 1.6 1.5 04/22/15 Greensheets 1.3 1.4 1.3 1.5 1.7 1.3 1.4 1.3 1.6 1.8 1.6 1.2 1.2 1.4 1.6 1.5 1.2 2.0 1.4 1.1 .8 1.6 1.5 1.3 1.6 1.6 1.6 1.5 06/10/15 7.4 6.2 5.4 5.2 5.1 -.8 -1.3 -.4 -.1 -.1 -.8 -.5 -.3 -.1 -.1 .0 6.6 6.2 6.1 5.7 5.6 5.4 5.3 5.3 5.3 5.2 5.2 5.2 04/22/15 7.4 6.2 5.4 5.3 5.2 -.8 -1.3 -.4 -.1 .0 -.8 -.5 -.2 -.2 .0 -.1 6.6 6.2 6.1 5.7 5.6 5.5 5.4 5.3 5.3 5.3 5.3 5.2 06/10/15 Core PCE price index Unemployment rate1 Class II FOMC - Restricted (FR) Annual 2013 3.7 3.7 2.2 2.2 1.2 1.2 1.3 2014 3.9 3.9 2.4 2.4 1.3 1.3 1.4 2015 3.3 3.0 2.2 2.0 .3 .3 1.3 2016 4.2 4.0 2.4 2.3 1.6 1.5 1.5 2017 4.1 4.1 2.3 2.3 1.7 1.7 1.7 1. Level, except for two-quarter and four-quarter intervals. 2. Percent change from two quarters earlier; for unemployment rate, change is in percentage points. 3. Percent change from four quarters earlier; for unemployment rate, change is in percentage points. 04/22/15 Interval Nominal GDP Changes in GDP, Prices, and Unemployment (Percent, annual rate except as noted) Authorized for Public Release June 10, 2015 Page 84 of 96 85 85 Change in priv. inventories2 Previous Tealbook2 82 82 4.4 4.4 9.9 16.0 .4 1.1 -431 -431 4.5 -.9 8.9 8.9 10.1 10.1 4.8 4.8 3.2 3.2 3.2 3.2 9.2 2.5 2.5 5.0 5.0 4.1 4.1 5.0 5.0 Q3 80 80 -1.9 -1.9 -7.3 -12.2 1.5 1.6 -471 -471 4.5 10.4 4.7 4.7 4.4 4.4 5.9 5.9 3.8 3.8 4.4 4.4 6.2 4.1 4.3 2.3 2.3 4.5 4.5 2.2 2.2 Q4 98 95 -.6 -2.3 .1 -1.0 2.0 -1.1 -546 -497 -5.9 6.7 -2.8 -4.3 2.4 1.8 -18.9 -22.7 6.3 1.8 1.8 1.9 1.1 .1 2.5 -.9 -.3 1.3 .9 -.5 .1 Q1 100 103 1.3 1.3 -1.6 -2.0 -1.0 3.2 -554 -524 3.0 3.7 1.0 -1.9 3.7 2.3 -8.3 -16.0 11.3 1.1 2.8 4.2 6.7 2.3 2.3 2.4 2.2 2.8 3.1 2.5 2.4 Q2 88 81 .5 .3 -1.2 -1.6 -.6 1.6 .3 .2 -1.5 -2.2 -.5 1.5 96 96 -617 -596 2.2 5.5 3.6 3.6 4.2 4.2 1.7 1.0 6.2 12.9 3.5 4.0 7.7 2.9 3.0 2.6 2.8 3.6 4.3 2.3 2.4 Q4 -591 -558 .5 6.0 2.0 1.0 3.2 3.0 -2.2 -6.5 6.8 9.6 3.4 4.2 7.6 3.8 2.6 2.0 2.6 3.3 4.0 1.9 2.4 Q3 2015 92 77 .6 .3 -1.2 -2.0 .0 1.8 -667 -635 -2.1 5.8 3.3 3.3 4.7 4.5 -2.1 -1.6 11.6 12.6 3.6 3.7 7.1 2.6 3.3 2.2 2.5 3.9 4.0 2.3 2.4 Q1 84 66 .3 .5 -2.4 -3.9 .0 1.9 -699 -673 2.0 6.3 3.9 3.2 4.5 3.7 1.6 1.1 13.1 12.7 3.5 3.6 7.0 2.9 3.1 2.7 2.6 3.9 3.9 2.5 2.3 Q2 80 68 1.6 1.6 .8 1.3 .0 2.0 -738 -710 1.5 6.8 3.8 3.4 4.6 3.9 .8 1.0 12.4 11.4 3.3 3.1 6.7 2.8 3.0 2.6 2.4 3.8 3.5 2.5 2.4 Q3 2016 67 76 .6 .7 -2.0 -3.3 .0 2.1 -746 -730 3.7 4.0 3.6 3.2 4.5 3.8 .4 .8 10.8 9.3 2.8 2.7 5.3 2.5 2.5 2.7 2.3 3.3 3.0 2.4 2.5 Q4 71 71 .8 .8 .2 -.3 1.1 1.2 -453 -453 2.4 5.6 6.2 6.2 6.1 6.1 6.5 6.5 2.5 2.5 2.9 2.9 8.1 2.2 2.2 2.4 2.4 3.3 3.3 2.4 2.4 20141 95 94 .4 -.1 -1.1 -1.7 .0 1.3 -577 -544 -.1 5.5 .9 -.4 3.4 2.8 -7.3 -11.5 7.6 6.2 2.9 3.6 5.7 2.3 2.6 1.5 1.8 2.8 3.1 1.6 1.8 20151 81 72 .8 .8 -1.2 -2.0 .0 2.0 -712 -687 1.3 5.7 3.7 3.3 4.6 4.0 .2 .3 12.0 11.5 3.3 3.3 6.5 2.7 3.0 2.6 2.4 3.7 3.6 2.4 2.4 20161 39 69 1.1 1.1 -.8 -1.5 .1 2.2 -785 -766 3.2 3.7 2.9 2.1 3.6 2.6 .3 .5 8.0 7.8 2.7 2.5 4.2 2.5 2.5 2.6 2.3 3.0 2.7 2.2 2.1 20171 Class II FOMC - Restricted (FR) 1. Change from fourth quarter of previous year to fourth quarter of year indicated. 2. Billions of chained (2009) dollars. 1.7 1.7 -.9 .9 -3.8 3.4 Gov’t. cons. & invest. Previous Tealbook Federal Defense Nondefense State & local 9.7 9.7 8.9 8.9 12.6 12.6 Nonres. priv. fixed invest. Previous Tealbook Equipment & intangibles Previous Tealbook Nonres. structures Previous Tealbook -460 -460 11.1 11.3 8.8 8.8 Residential investment Previous Tealbook Net exports2 Previous Tealbook2 Exports Imports 2.5 2.5 14.1 2.2 .9 3.2 3.2 3.8 3.8 Final sales Previous Tealbook Priv. dom. final purch. Previous Tealbook Personal cons. expend. Previous Tealbook Durables Nondurables Services 4.6 4.6 Q2 Real GDP Previous Tealbook Item 2014 Greensheets Changes in Real Gross Domestic Product and Related Items (Percent, annual rate except as noted) Authorized for Public Release June 10, 2015 Page 85 of 96 3.3 3.3 8.4 9.4 6.5 .2 -34 -34 Gov’t. cons. & invest. Previous Tealbook Federal Defense Nondefense State & local Change in priv. inventories1 Previous Tealbook1 -148 -148 2.3 2.3 3.9 3.6 4.6 1.3 -395 -395 .8 -6.2 -12.2 -12.2 -6.0 -6.0 -27.1 -27.1 -10.8 -10.8 -.2 -.2 2.5 .2 -.8 -.4 -.4 -2.4 -2.4 -.2 -.2 2009 58 58 -1.1 -1.1 3.2 2.0 5.5 -4.0 -459 -459 10.1 12.0 8.1 8.1 12.0 12.0 -4.0 -4.0 -5.2 -5.2 3.1 3.1 9.3 3.3 2.0 2.0 2.0 3.5 3.5 2.7 2.7 2010 Greensheets 38 38 -3.0 -3.0 -4.0 -4.1 -3.9 -2.3 -459 -459 4.2 3.5 9.0 9.0 9.2 9.2 8.0 8.0 6.0 6.0 1.5 1.5 4.8 .4 1.4 1.5 1.5 2.6 2.6 1.7 1.7 2011 57 57 -1.7 -1.7 -2.6 -4.9 1.4 -1.0 -452 -452 2.4 .4 3.7 3.7 3.3 3.3 4.8 4.8 15.8 15.8 2.0 2.0 7.5 1.0 1.5 2.1 2.1 2.6 2.6 1.6 1.6 2012 64 64 -1.9 -1.9 -6.3 -6.1 -6.6 1.2 -420 -420 5.1 2.5 4.7 4.7 4.8 4.8 4.4 4.4 6.9 6.9 2.8 2.8 5.9 2.5 2.4 2.6 2.6 3.2 3.2 3.1 3.1 2013 71 71 .8 .8 .2 -.3 1.1 1.2 -453 -453 2.4 5.6 6.2 6.2 6.1 6.1 6.5 6.5 2.5 2.5 2.9 2.9 8.1 2.2 2.2 2.4 2.4 3.3 3.3 2.4 2.4 2014 95 94 .4 -.1 -1.1 -1.7 .0 1.3 -577 -544 -.1 5.5 .9 -.4 3.4 2.8 -7.3 -11.5 7.6 6.2 2.9 3.6 5.7 2.3 2.6 1.5 1.8 2.8 3.1 1.6 1.8 2015 81 72 .8 .8 -1.2 -2.0 .0 2.0 -712 -687 1.3 5.7 3.7 3.3 4.6 4.0 .2 .3 12.0 11.5 3.3 3.3 6.5 2.7 3.0 2.6 2.4 3.7 3.6 2.4 2.4 2016 39 69 1.1 1.1 -.8 -1.5 .1 2.2 -785 -766 3.2 3.7 2.9 2.1 3.6 2.6 .3 .5 8.0 7.8 2.7 2.5 4.2 2.5 2.5 2.6 2.3 3.0 2.7 2.2 2.1 2017 Class II FOMC - Restricted (FR) 1. Billions of chained (2009) dollars. -558 -558 -2.8 -6.0 Net exports1 Previous Tealbook1 Exports Imports -8.9 -8.9 -11.8 -11.8 -1.2 -1.2 -24.3 -24.3 Residential investment Previous Tealbook Nonres. priv. fixed invest. Previous Tealbook Equipment & intangibles Previous Tealbook Nonres. structures Previous Tealbook -2.0 -2.0 -12.9 -2.7 .3 -2.1 -2.1 -4.1 -4.1 Final sales Previous Tealbook Priv. dom. final purch. Previous Tealbook Personal cons. expend. Previous Tealbook Durables Nondurables Services -2.8 -2.8 2008 Real GDP Previous Tealbook Item Changes in Real Gross Domestic Product and Related Items (Change from fourth quarter of previous year to fourth quarter of year indicated, unless otherwise noted) Authorized for Public Release June 10, 2015 Page 86 of 96 1.4 1.4 Change in priv. inventories Previous Tealbook .0 .0 .8 .8 .7 .7 .0 .1 .8 .8 .6 .2 1.1 1.1 1.0 1.0 .1 .1 .1 .1 2.2 2.2 .7 .4 1.2 5.0 5.0 3.5 3.5 5.0 5.0 Q3 -.1 -.1 -.4 -.4 -.5 -.6 .0 .2 -1.0 -1.0 .6 -1.6 .6 .6 .4 .4 .2 .2 .1 .1 3.0 3.0 .5 .6 1.9 2.3 2.3 3.7 3.7 2.2 2.2 Q4 .4 .4 -.1 -.4 .0 .0 .1 -.1 -1.8 -.6 -.8 -1.0 -.4 -.6 .2 .2 -.6 -.7 .2 .1 1.2 1.3 .1 .0 1.1 -.9 -.3 1.1 .8 -.5 .1 Q1 .1 .2 .2 .2 -.1 -.1 .0 .3 -.2 -.6 .4 -.6 .1 -.2 .4 .2 -.2 -.5 .4 .0 1.9 2.8 .5 .3 1.1 2.4 2.2 2.4 2.6 2.5 2.4 Q2 -.1 -.2 .1 .0 -.1 -.1 .0 .2 -.9 -.8 .1 -.9 .3 .1 .3 .3 -.1 -.2 .2 .3 2.3 2.9 .6 .5 1.2 2.0 2.5 2.8 3.3 1.9 2.4 Q3 2015 -.2 -.4 .1 .1 -.1 -.1 .0 .2 -.6 -.9 .3 -.9 .5 .4 .4 .4 .0 .0 .2 .4 2.4 2.8 .6 .4 1.4 2.5 2.8 3.0 3.6 2.3 2.4 Q4 .1 -.1 .1 .1 -.1 -.1 .0 .2 -1.2 -.9 -.3 -.9 .4 .4 .5 .4 -.1 .0 .4 .4 2.5 2.5 .5 .4 1.5 2.2 2.5 3.3 3.3 2.3 2.4 Q1 -.2 -.3 .1 .1 -.2 -.2 .0 .2 -.7 -.9 .3 -1.0 .5 .4 .4 .4 .0 .0 .4 .4 2.4 2.5 .5 .4 1.5 2.6 2.6 3.3 3.3 2.5 2.3 Q2 -.1 .1 .3 .3 .1 .1 .0 .2 -.9 -.9 .2 -1.1 .5 .4 .5 .4 .0 .0 .4 .4 2.3 2.1 .5 .4 1.4 2.6 2.4 3.2 2.9 2.5 2.4 Q3 2016 -.3 .2 .1 .1 -.1 -.1 .0 .2 -.2 -.4 .5 -.6 .5 .4 .4 .4 .0 .0 .4 .3 1.9 1.9 .4 .4 1.2 2.7 2.3 2.8 2.6 2.4 2.5 Q4 .0 .0 .1 .1 .0 .0 .0 .1 -.6 -.6 .3 -.9 .8 .8 .6 .6 .2 .2 .1 .1 1.9 1.9 .6 .3 1.0 2.4 2.4 2.8 2.8 2.4 2.4 20141 .0 .0 .1 .0 -.1 -.1 .0 .1 -.9 -.8 .0 -.9 .1 -.1 .3 .3 -.2 -.3 .2 .2 2.0 2.4 .4 .3 1.2 1.5 1.8 2.3 2.6 1.6 1.8 20151 -.1 .0 .1 .1 -.1 -.1 .0 .2 -.8 -.8 .2 -.9 .5 .4 .5 .4 .0 .0 .4 .4 2.3 2.3 .5 .4 1.4 2.5 2.4 3.2 3.1 2.4 2.4 20161 -.3 -.1 .2 .2 -.1 -.1 .0 .2 -.2 -.2 .4 -.6 .4 .3 .4 .3 .0 .0 .3 .3 1.9 1.8 .3 .4 1.2 2.6 2.3 2.6 2.3 2.2 2.1 20171 Class II FOMC - Restricted (FR) 1. Change from fourth quarter of previous year to fourth quarter of year indicated. .3 .3 -.1 .0 -.1 .4 Gov’t. cons. & invest. Previous Tealbook Federal Defense Nondefense State & local 1.2 1.2 .8 .8 .4 .4 Nonres. priv. fixed invest. Previous Tealbook Equipment & intangibles Previous Tealbook Nonres. structures Previous Tealbook -.3 -.3 1.4 -1.8 .3 .3 Residential investment Previous Tealbook Net exports Previous Tealbook Exports Imports 1.8 1.8 1.0 .3 .4 3.2 3.2 3.2 3.2 Final sales Previous Tealbook Priv. dom. final purch. Previous Tealbook Personal cons. expend. Previous Tealbook Durables Nondurables Services 4.6 4.6 Q2 Real GDP Previous Tealbook Item 2014 Contributions to Changes in Real Gross Domestic Product (Percentage points, annual rate except as noted) Greensheets Authorized for Public Release June 10, 2015 Page 87 of 96 2.4 2.4 2.2 2.2 3.4 3.4 2.9 2.9 -1.0 -1.1 -3.9 -3.9 CPI Previous Tealbook Ex. food & energy Previous Tealbook ECI, hourly compensation2 Previous Tealbook2 Business sector Output per hour Previous Tealbook Compensation per hour Previous Tealbook Unit labor costs Previous Tealbook .5 .5 3.3 3.3 2.1 2.1 -1.2 -1.2 2.7 2.7 1.2 1.2 1.4 1.4 1.2 1.2 -4.0 -4.0 3.1 3.1 1.4 1.4 1.4 1.4 1.4 1.4 Q3 -.8 -.8 -2.3 -2.4 3.1 1.6 5.5 4.0 2.0 2.3 -.9 -.9 1.5 1.5 -.4 -.4 -26.0 -26.0 2.1 2.1 1.1 1.1 .7 .7 .1 .1 Q4 -4.3 -4.0 -2.8 -1.8 3.1 3.2 6.1 5.1 3.0 2.6 -3.1 -3.1 1.7 1.7 -2.0 -2.0 -44.5 -45.0 -.2 -.2 .8 .8 .5 .5 -.1 .3 Q1 -4.0 -4.0 2.3 2.8 2.7 3.0 .4 .2 2.5 2.6 3.0 2.0 2.6 2.2 1.9 1.5 15.6 3.9 -.9 -.3 1.6 1.6 1.8 1.5 2.5 2.2 Q2 -.2 -.1 2.9 2.3 3.4 3.0 .5 .7 2.6 2.6 1.4 2.0 1.7 1.9 1.2 1.6 -2.8 4.5 1.4 1.5 1.3 1.4 1.3 1.4 1.2 1.7 Q4 Greensheets -.6 -.8 2.2 2.7 2.9 3.0 .7 .3 2.6 2.6 1.7 1.9 1.9 1.8 1.4 1.5 -.7 3.0 .8 1.3 1.5 1.4 1.5 1.4 1.1 1.3 Q3 2015 .5 .4 2.0 1.9 3.5 3.4 1.5 1.5 2.9 2.9 2.0 2.1 2.0 2.0 1.6 1.6 3.2 3.5 1.5 1.5 1.6 1.6 1.6 1.6 1.9 1.9 Q1 1.0 .9 2.0 1.8 3.3 3.4 1.3 1.5 2.9 2.9 2.0 2.0 2.0 2.0 1.6 1.6 2.3 2.7 1.6 1.6 1.6 1.6 1.6 1.6 1.7 1.7 Q2 1.2 1.2 1.9 1.8 3.4 3.4 1.4 1.6 2.9 2.9 2.0 2.0 2.0 2.0 1.6 1.6 2.1 2.3 1.7 1.7 1.6 1.6 1.6 1.6 1.7 1.7 Q3 2016 1.2 1.2 1.8 1.8 3.4 3.4 1.5 1.6 2.9 2.9 2.0 2.0 2.0 2.0 1.6 1.6 1.6 2.0 1.8 1.8 1.5 1.5 1.5 1.5 1.6 1.7 Q4 .6 .6 -.4 -.4 2.6 2.3 3.0 2.7 2.3 2.3 1.2 1.2 1.7 1.7 1.1 1.1 -6.1 -6.1 2.8 2.8 1.4 1.4 1.2 1.2 1.2 1.2 20141 -2.3 -2.3 1.1 1.4 3.0 3.0 1.9 1.6 2.7 2.6 .7 .7 2.0 1.9 .6 .6 -11.3 -11.4 .3 .6 1.3 1.3 1.3 1.2 1.2 1.4 20151 1.0 .9 1.9 1.8 3.4 3.4 1.4 1.5 2.9 2.9 2.0 2.0 2.0 2.0 1.6 1.6 2.3 2.6 1.6 1.6 1.6 1.6 1.6 1.6 1.7 1.8 20161 1.5 1.6 1.9 1.8 3.4 3.5 1.4 1.7 2.9 3.0 2.1 2.1 2.1 2.1 1.8 1.8 1.3 1.6 1.9 1.9 1.8 1.8 1.8 1.8 1.8 1.8 20171 Class II FOMC - Restricted (FR) 1. Change from fourth quarter of previous year to fourth quarter of year indicated. 2. Private-industry workers. 3. Core goods imports exclude computers, semiconductors, oil, and natural gas. .2 .2 2.3 2.3 5.2 5.2 4.5 4.5 2.0 2.0 1.8 1.8 PCE chain-wt. price index Previous Tealbook Energy Previous Tealbook Food Previous Tealbook Ex. food & energy Previous Tealbook Ex. food & energy, market based Previous Tealbook Core goods imports chain-wt. price index3 Previous Tealbook3 2.1 2.1 Q2 GDP chain-wt. price index Previous Tealbook Item 2014 Changes in Prices and Costs (Percent, annual rate except as noted) Authorized for Public Release June 10, 2015 1.5 1.5 -8.2 -8.2 6.9 6.9 1.6 1.6 2.2 2.2 1.6 1.6 2.0 2.0 2.4 2.4 -.2 -.2 2.9 2.9 3.2 3.2 3.9 3.9 PCE chain-wt. price index Previous Tealbook Energy Previous Tealbook Food Previous Tealbook Ex. food & energy Previous Tealbook Ex. food & energy, market based Previous Tealbook CPI Previous Tealbook Ex. food & energy Previous Tealbook ECI, hourly compensation1 Previous Tealbook1 Business sector Output per hour Previous Tealbook Compensation per hour Previous Tealbook Unit labor costs Previous Tealbook Page 88 of 96 Core goods imports chain-wt. price index2 Previous Tealbook2 -1.9 -1.9 5.6 5.6 1.3 1.3 -4.2 -4.2 1.2 1.2 1.5 1.5 1.8 1.8 1.2 1.2 2.3 2.3 -1.8 -1.8 1.4 1.4 1.8 1.8 .4 .4 2009 2.3 2.3 1.7 1.7 1.2 1.2 -.4 -.4 2.1 2.1 1.2 1.2 .6 .6 1.3 1.3 6.4 6.4 1.3 1.3 1.0 1.0 .7 .7 1.8 1.8 2010 4.3 4.3 .0 .0 .6 .6 .6 .6 2.2 2.2 3.3 3.3 2.2 2.2 2.7 2.7 12.0 12.0 5.1 5.1 1.9 1.9 1.9 1.9 1.9 1.9 2011 .2 .2 .2 .2 5.6 5.6 5.4 5.4 1.8 1.8 1.9 1.9 1.9 1.9 1.6 1.6 2.1 2.1 1.2 1.2 1.6 1.6 1.5 1.5 1.8 1.8 2012 -1.0 -1.0 2.3 2.3 -.1 -.1 -2.3 -2.3 2.0 2.0 1.2 1.2 1.7 1.7 1.0 1.0 -2.6 -2.6 .7 .7 1.3 1.3 1.2 1.2 1.4 1.4 2013 .6 .6 -.4 -.4 2.6 2.3 3.0 2.7 2.3 2.3 1.2 1.2 1.7 1.7 1.1 1.1 -6.1 -6.1 2.8 2.8 1.4 1.4 1.2 1.2 1.2 1.2 2014 -2.3 -2.3 1.1 1.4 3.0 3.0 1.9 1.6 2.7 2.6 .7 .7 2.0 1.9 .6 .6 -11.3 -11.4 .3 .6 1.3 1.3 1.3 1.2 1.2 1.4 2015 1.0 .9 1.9 1.8 3.4 3.4 1.4 1.5 2.9 2.9 2.0 2.0 2.0 2.0 1.6 1.6 2.3 2.6 1.6 1.6 1.6 1.6 1.6 1.6 1.7 1.8 2016 1.5 1.6 1.9 1.8 3.4 3.5 1.4 1.7 2.9 3.0 2.1 2.1 2.1 2.1 1.8 1.8 1.3 1.6 1.9 1.9 1.8 1.8 1.8 1.8 1.8 1.8 2017 Class II FOMC - Restricted (FR) 1. Private-industry workers. 2. Core goods imports exclude computers, semiconductors, oil, and natural gas. 1.9 1.9 2008 GDP chain-wt. price index Previous Tealbook Item Greensheets Changes in Prices and Costs (Change from fourth quarter of previous year to fourth quarter of year indicated, unless otherwise noted) Authorized for Public Release June 10, 2015 Page 89 of 96 18.1 3.1 12.8 12.2 6.4 2.4 2.4 4.8 4.8 1.0 16.7 4.1 4.1 4.4 4.4 77.5 77.5 -1.3 -1.3 59.0 60.1 .7 6.1 6.1 5.2 5.2 Q3 18.2 3.2 -5.5 12.0 2.4 4.1 3.6 4.7 4.6 1.1 16.7 4.6 4.6 3.8 3.8 77.8 77.8 -1.0 -1.0 59.2 60.0 .9 5.7 5.7 5.2 5.2 Q4 18.4 3.4 -23.0 11.2 -.6 5.4 6.5 5.5 5.6 1.0 16.6 -.7 -1.0 -1.0 -1.2 77.3 77.2 -1.5 -1.3 59.3 60.0 .8 5.6 5.6 5.2 5.2 Q1 18.0 3.0 17.1 11.6 5.0 2.3 2.0 5.3 5.1 1.1 17.0 -1.8 -.8 .1 1.8 77.0 77.3 -1.3 -1.2 59.4 59.9 .6 5.5 5.4 5.2 5.2 Q2 2015 17.6 2.5 -5.2 11.3 3.0 2.1 2.1 5.0 4.6 1.1 16.9 1.3 .7 1.3 1.9 76.9 77.3 -1.2 -1.0 59.4 59.8 .7 5.4 5.3 5.2 5.2 Q3 17.5 2.4 -1.5 11.2 3.6 2.0 2.2 4.6 4.2 1.2 16.8 -.5 .6 1.1 2.0 76.8 77.4 -1.0 -.8 59.4 59.7 .6 5.3 5.3 5.2 5.2 Q4 17.2 2.0 -3.7 11.0 4.2 3.6 3.4 4.7 4.1 1.2 16.8 1.2 2.4 1.2 2.3 76.7 77.5 -.9 -.6 59.3 59.7 .6 5.3 5.3 5.2 5.2 Q1 17.3 2.1 1.8 10.9 4.1 2.4 2.5 4.4 3.9 1.3 16.8 2.6 2.9 2.4 2.6 76.9 77.6 -.7 -.5 59.3 59.6 .6 5.3 5.2 5.2 5.2 Q2 2016 17.1 1.8 1.9 10.8 4.2 2.5 2.6 4.2 3.8 1.3 16.8 1.8 2.0 2.1 2.1 76.9 77.7 -.5 -.3 59.3 59.5 .5 5.3 5.2 5.2 5.2 Q3 17.2 1.9 6.3 10.9 4.0 2.6 2.8 4.2 3.8 1.4 16.8 1.7 1.5 2.0 1.8 76.9 77.7 -.4 -.1 59.3 59.4 .5 5.2 5.2 5.2 5.2 Q4 Greensheets 18.2 3.2 -.2 12.0 3.7 3.3 3.1 4.7 4.6 1.0 16.4 4.6 4.6 4.1 4.1 77.8 77.8 -1.0 -1.0 59.2 60.0 2.9 5.7 5.7 5.2 5.2 20141 17.5 2.4 -4.2 11.2 2.7 2.9 3.2 4.6 4.2 1.1 16.8 -.4 -.1 .4 1.1 76.8 77.4 -1.0 -.8 59.4 59.7 2.7 5.3 5.3 5.2 5.2 20151 17.2 1.9 1.5 10.9 4.1 2.8 2.8 4.2 3.8 1.3 16.8 1.8 2.2 1.9 2.2 76.9 77.7 -.4 -.1 59.3 59.4 2.2 5.2 5.2 5.2 5.2 20161 17.0 1.5 .5 10.5 4.1 2.5 2.5 4.0 3.8 1.5 16.7 1.9 1.5 1.7 1.5 76.8 77.4 .1 .3 59.2 59.1 1.7 5.2 5.1 5.2 5.2 20171 Class II FOMC - Restricted (FR) 1. Change from fourth quarter of previous year to fourth quarter of year indicated, unless otherwise indicated. 2. Change, millions. 3. Percent; annual values are for the fourth quarter of the year indicated. 4. Percent difference between actual and potential GDP; a negative number indicates that the economy is operating below potential. Annual values are for the fourth quarter of the year indicated. 5. Percent change, annual rate. 6. Level, millions; annual values are annual averages. 7. Percent change, annual rate, with inventory valuation and capital consumption adjustments. 17.9 2.9 1.0 16.5 Housing starts6 Light motor vehicle sales6 Gross national saving rate3 Net national saving rate3 5.7 5.7 7.0 7.0 77.1 77.1 Industrial production5 Previous Tealbook5 Manufacturing industr. prod.5 Previous Tealbook5 Capacity utilization rate - mfg.3 Previous Tealbook3 38.3 12.0 -2.3 -2.3 GDP gap4 Previous Tealbook4 Corporate profits7 Profit share of GNP3 58.9 60.2 Employment-to-Population Ratio3 Employment-to-Population Trend3 6.8 3.1 3.1 5.1 5.1 .8 6.2 6.2 5.2 5.2 Employment and production Nonfarm payroll employment2 Unemployment rate3 Previous Tealbook3 Natural rate of unemployment3 Previous Tealbook3 Income and saving Nominal GDP5 Real disposable pers. income5 Previous Tealbook5 Personal saving rate3 Previous Tealbook3 Q2 Item 2014 Other Macroeconomic Indicators Authorized for Public Release June 10, 2015 Page 90 of 96 .9 13.1 -.9 1.1 1.1 6.1 6.1 Housing starts5 Light motor vehicle sales5 Income and saving Nominal GDP4 Real disposable pers. income4 Previous Tealbook4 Personal saving rate2 Previous Tealbook2 14.6 -1.7 53.7 10.6 .1 -.7 -.7 5.6 5.6 .6 10.4 -5.5 -5.5 -6.1 -6.1 67.1 67.1 -5.5 -5.5 58.4 61.3 -5.6 9.9 9.9 6.2 6.2 2009 15.2 -.4 18.0 12.0 4.6 2.6 2.6 5.5 5.5 .6 11.5 6.2 6.2 6.4 6.4 72.7 72.7 -4.4 -4.4 58.3 60.9 .8 9.5 9.5 6.2 6.2 2010 16.1 .8 6.8 12.3 3.6 1.7 1.7 5.8 5.8 .6 12.7 3.2 3.2 3.1 3.1 74.6 74.6 -4.2 -4.2 58.5 60.6 2.0 8.7 8.7 6.0 6.0 2011 17.8 2.8 3.8 12.4 3.5 5.0 5.0 8.6 8.6 .8 14.4 3.2 3.2 3.5 3.5 75.5 75.5 -4.1 -4.1 58.7 60.3 2.2 7.8 7.8 5.8 5.8 2012 17.9 3.0 4.7 12.4 4.6 -1.9 -1.9 4.4 4.4 .9 15.5 3.3 3.3 2.9 2.9 76.4 76.4 -2.8 -2.8 58.5 60.2 2.5 7.0 7.0 5.4 5.4 2013 18.2 3.2 -.2 12.0 3.7 3.3 3.1 4.7 4.6 1.0 16.4 4.6 4.6 4.1 4.1 77.8 77.8 -1.0 -1.0 59.2 60.0 2.9 5.7 5.7 5.2 5.2 2014 17.5 2.4 -4.2 11.2 2.7 2.9 3.2 4.6 4.2 1.1 16.8 -.4 -.1 .4 1.1 76.8 77.4 -1.0 -.8 59.4 59.7 2.7 5.3 5.3 5.2 5.2 2015 17.2 1.9 1.5 10.9 4.1 2.8 2.8 4.2 3.8 1.3 16.8 1.8 2.2 1.9 2.2 76.9 77.7 -.4 -.1 59.3 59.4 2.2 5.2 5.2 5.2 5.2 2016 17.0 1.5 .5 10.5 4.1 2.5 2.5 4.0 3.8 1.5 16.7 1.9 1.5 1.7 1.5 76.8 77.4 .1 .3 59.2 59.1 1.7 5.2 5.1 5.2 5.2 2017 Class II FOMC - Restricted (FR) 1. Change, millions. 2. Percent; values are for the fourth quarter of the year indicated. 3. Percent difference between actual and potential GDP; a negative number indicates that the economy is operating below potential. Values are for the fourth quarter of the year indicated. 4. Percent change. 5. Level, millions; values are annual averages. 6. Percent change, with inventory valuation and capital consumption adjustments. 14.9 -1.6 -8.9 -8.9 -11.6 -11.6 70.0 70.0 Industrial production4 Previous Tealbook4 Manufacturing industr. prod.4 Previous Tealbook4 Capacity utilization rate - mfg.2 Previous Tealbook2 Gross national saving rate2 Net national saving rate2 -3.8 -3.8 GDP gap3 Previous Tealbook3 -30.8 6.9 61.4 62.0 Employment-to-Population Ratio2 Employment-to-Population Trend2 Corporate profits6 Profit share of GNP2 -2.8 6.9 6.9 5.6 5.6 2008 Employment and production Nonfarm payroll employment1 Unemployment rate2 Previous Tealbook2 Natural rate of unemployment2 Previous Tealbook2 Item Greensheets Other Macroeconomic Indicators (Change from fourth quarter of previous year to fourth quarter of year indicated, unless otherwise noted) Authorized for Public Release June 10, 2015 Page 91 of 96 -452.1 .2 .2 .2 -.1 .1 .2 -404.2 -1.0 -.1 -.1 .0 .1 -.2 .3 .3 -.1 .2 .1 .2 -494.3 -541 3,574 4,150 966 612 354 3,184 -576 249 197 551 13 -120 3,419 3,863 -444 -472 .3 .3 -.1 .2 .1 .4 -587.6 -598 3,715 4,356 981 617 364 3,376 -641 248 196 589 1 -120 3,550 4,020 -470 -491 2017 -.6 -.6 .0 -.1 -.5 -.1 -342.8 -539 3,243 3,803 957 610 347 2,846 -560 251 142 262 20 -42 656 897 -241 -241 Q1a .0 .0 -.1 .4 -.3 .5 -427.0 -580 3,277 3,875 956 610 345 2,920 -599 255 139 -46 3 -4 938 890 47 47 158 211 -19 -74 760 877 -117 -117 Q3a .7 .7 .7 .1 -.1 .3 -488.7 -589 3,342 3,953 988 641 347 2,965 -611 254 2014 Q2a -.4 -.4 -.5 .2 -.1 -.2 -457.3 -532 3,349 3,901 961 614 347 2,940 -552 256 223 240 -65 1 739 916 -177 -177 Q4a 2015 Q3 231 -37 -131 87 1,025 945 81 76 211 57 20 5 812 894 -82 -90 Q4 191 249 19 -30 753 991 -239 -249 Not seasonally adjusted Q2 -.1 -.4 .0 -.1 .0 -.3 -403.9 -482 .4 .4 -.1 .3 .2 .3 -469.9 -535 .3 .3 -.1 .2 .2 .0 -477.3 -539 .3 .3 -.1 .2 .2 -.2 -439.1 -498 Seasonally adjusted annual rates 3,401 3,469 3,500 3,532 3,907 4,030 4,068 4,061 963 961 960 960 613 612 610 610 350 350 350 350 2,944 3,069 3,108 3,102 -506 -562 -568 -529 254 253 252 251 100 67 123 73 680 943 -263 -263 Q1a .2 .1 -.1 .2 .1 .4 -526.3 -580 3,544 4,158 968 614 355 3,190 -613 250 183 252 8 -30 719 949 -230 -235 Q1 .2 .2 -.2 .2 .1 -.2 -493.6 -537 3,587 4,161 966 611 356 3,195 -575 248 204 -80 -21 -30 1,082 951 130 124 197 129 7 -30 865 971 -106 -112 Q3 .4 .4 .1 .2 .1 .1 -518.1 -550 3,632 4,219 971 613 357 3,249 -587 249 2016 Q2 Greensheets .2 .2 -.1 .2 .1 .1 -532.2 -553 3,680 4,274 970 611 359 3,304 -594 248 194 193 3 -30 803 969 -166 -173 Q4 Class II FOMC - Restricted (FR) 1. Other means of financing include checks issued less checks paid, accrued items, and changes in other financial assets and liabilities. 2. Gross saving is the current account surplus plus consumption of fixed capital of the general government as well as government enterprises. 3. HEB is gross saving less gross investment (NIPA) of the federal government in current dollars, with cyclically sensitive receipts and outlays adjusted to the staff’s measure of potential output and the natural rate of unemployment. The sign on Change in HEB, as a percent of nominal potential GDP, is reversed. Quarterly figures for change in HEB are not at annual rates. 4. Fiscal impetus measures the contribution to growth of real GDP from fiscal policy actions at the general government level (excluding multiplier effects). It equals the sum of the direct contributions to real GDP growth from changes in federal purchases and state and local purchases, plus the estimated contribution from real consumption and investment that is induced by discretionary policy changes in transfers and taxes. a Actual. Fiscal indicators High-employment (HEB) surplus/deficit3 Change in HEB, percent of potential GDP Fiscal impetus (FI), percent of GDP4 Previous Tealbook Federal purchases State and local purchases Taxes and transfers -522 -561 211 3,430 3,977 961 612 349 3,015 -547 254 158 Cash operating balance, end of period 327 -52 166 3,257 3,697 -441 -453 2016 Fiscal year 2015 3,267 3,844 963 617 346 2,882 -577 256 798 -70 -245 Means of financing: Borrowing Cash decrease Other1 NIPA federal sector Receipts Expenditures Consumption expenditures Defense Nondefense Other spending Current account surplus Gross investment Gross saving less gross investment2 3,021 3,504 -482 -482 2014 Unified budget Receipts Outlays Surplus/deficit Previous Tealbook Item Staff Projections of Federal Sector Accounts and Related Items (Billions of dollars except as noted) Authorized for Public Release June 10, 2015 2.0 2.0 1.4 3.2 .7 1.5 .4 .4 2.5 1.4 1.4 .8 5.3 4.8 6.5 Consumer prices 2 Total foreign Previous Tealbook Advanced foreign economies Canada Japan United Kingdom Euro area Germany Emerging market economies Asia Korea China Latin America Mexico Brazil Page 92 of 96 2 2.0 2.0 .8 1.2 1.2 1.2 .4 1.5 2.9 2.1 .6 2.2 4.9 4.4 6.2 2.8 2.6 1.7 3.2 -2.0 2.5 .7 .3 3.9 6.2 3.2 8.1 2.1 2.1 .6 Q3 GDP aggregates calculated using shares of U.S. exports. Foreign CPI aggregates calculated using shares of U.S. non-oil imports. 3.0 3.0 3.1 3.3 9.3 1.6 .4 .3 2.9 2.4 2.2 2.0 4.3 3.3 7.4 2.3 2.4 1.3 3.4 -6.8 3.4 .4 -.3 3.3 4.9 2.0 7.6 2.1 3.7 -5.5 Q2 1.1 1.1 -.4 .0 -.6 -.7 -.6 -.5 2.3 1.2 -.2 1.0 4.8 4.2 6.0 2.4 2.7 1.9 2.2 1.2 2.5 1.4 2.8 3.0 4.0 1.1 7.0 1.9 2.7 1.1 Q4 -.1 -.1 -.8 -.2 -.3 -1.6 -1.5 -1.7 .5 -.3 -.3 -.4 1.7 .3 11.1 1.6 1.8 .9 -.6 3.9 1.2 1.5 1.1 2.2 4.1 3.3 5.1 .9 1.6 -.6 2.1 2.0 1.4 1.8 .5 .9 1.9 2.2 2.6 2.0 1.9 1.6 3.7 2.6 9.3 2.2 2.4 1.6 1.4 1.5 2.4 1.6 1.7 2.8 4.7 3.3 6.1 1.2 2.6 -3.2 2.2 2.2 1.3 1.7 .7 1.6 1.3 1.6 3.0 2.5 2.6 2.2 4.0 3.3 6.2 2.7 2.8 1.8 1.9 1.6 2.5 1.7 1.7 3.5 5.4 3.9 7.5 2.1 3.1 -.8 2.4 2.4 1.4 1.8 .8 1.8 1.5 1.6 3.1 2.7 2.9 2.5 3.9 3.3 5.7 2.9 3.0 2.1 2.4 1.5 2.5 1.8 1.8 3.6 5.3 4.0 7.0 2.3 3.1 .8 2.4 2.4 1.5 1.8 .9 1.8 1.6 1.7 3.1 2.8 3.1 2.5 3.9 3.3 5.7 3.0 3.0 2.2 2.5 1.5 2.4 1.8 1.9 3.7 5.2 4.0 6.6 2.5 3.1 1.6 2.4 2.4 1.5 1.8 1.0 1.7 1.6 1.7 3.1 2.8 3.2 2.5 3.9 3.3 5.7 3.0 3.0 2.2 2.5 1.4 2.4 1.9 1.9 3.7 5.2 4.0 6.6 2.6 3.1 1.7 2.5 2.5 1.6 1.9 1.1 1.8 1.6 1.7 3.1 2.8 3.2 2.5 3.9 3.3 5.7 3.1 3.1 2.2 2.4 1.3 2.4 2.0 2.1 3.9 5.2 4.1 6.6 2.9 3.2 1.8 2.5 2.5 1.6 1.9 1.2 1.8 1.6 1.8 3.1 2.8 3.2 2.5 3.8 3.3 5.6 3.1 3.1 2.1 2.2 1.4 2.4 2.0 2.1 4.0 5.2 4.1 6.6 2.9 3.2 2.0 ------------------------------------Projected-----------------------------------2015 2016 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Class II FOMC - Restricted (FR) 1 Foreign 2.1 2.0 1.7 1.0 4.4 3.6 .9 3.1 2.5 4.4 4.4 6.4 .8 2.0 2.9 Q1 Real Total foreign Previous Tealbook Advanced foreign economies Canada Japan United Kingdom Euro area Germany Emerging market economies Asia Korea China Latin America Mexico Brazil GDP 1 Measure and country 2014 Foreign Real GDP and Consumer Prices: Selected Countries (Quarterly percent changes at an annual rate) Greensheets Authorized for Public Release June 10, 2015 Page 93 of 96 1.2 1.2 .2 .8 -2.0 2.2 .4 .3 2.0 1.2 2.4 .6 3.9 4.0 4.3 Consumer prices 2 Total foreign Previous Tealbook Advanced foreign economies Canada Japan United Kingdom Euro area Germany Emerging market economies Asia Korea China Latin America Mexico Brazil 3.2 3.2 1.7 2.2 -.3 3.4 2.0 1.6 4.3 4.3 3.2 4.6 4.4 4.3 5.6 4.8 4.7 3.1 3.6 3.6 2.2 2.3 4.4 6.7 8.4 6.1 9.7 4.7 4.4 5.8 3.4 3.4 2.2 2.7 -.3 4.6 2.9 2.6 4.3 4.5 3.9 4.6 4.0 3.5 6.7 3.2 3.2 1.8 3.0 .3 1.5 .6 2.4 4.6 4.9 2.9 8.7 4.2 4.2 2.5 2011 2 Foreign 2.3 2.3 1.3 1.0 -.2 2.6 2.3 2.0 3.1 2.6 1.7 2.1 4.3 4.1 5.6 2.3 2.3 .3 1.0 .0 .4 -.9 .1 4.3 5.7 2.1 7.8 3.4 3.4 2.3 2012 Greensheets Foreign GDP aggregates calculated using shares of U.S. exports. CPI aggregates calculated using shares of U.S. non-oil imports. .9 .9 -1.5 -1.4 -.6 -1.5 -2.4 -3.0 3.7 7.5 4.9 11.4 .0 -1.2 5.2 Real GDP 1 Total foreign Previous Tealbook Advanced foreign economies Canada Japan United Kingdom Euro area Germany Emerging market economies Asia Korea China Latin America Mexico Brazil 2010 2.3 2.4 1.0 1.0 1.4 2.1 .8 1.3 3.4 3.1 1.1 2.9 4.0 3.7 5.9 2.6 2.6 1.9 2.7 2.3 2.4 .5 1.1 3.3 5.2 3.4 7.5 1.5 1.0 2.1 2013 2.0 2.0 1.2 1.9 2.5 .9 .2 .4 2.7 1.8 1.0 1.5 4.8 4.2 6.5 2.4 2.4 1.6 2.5 -.9 3.0 .9 1.5 3.2 4.9 2.7 7.3 1.7 2.6 -.3 2014 1.6 1.6 .8 1.3 .4 .7 .8 .9 2.3 1.7 1.8 1.5 3.3 2.4 8.1 2.3 2.5 1.6 1.3 2.1 2.2 1.6 1.6 3.0 4.9 3.6 6.4 1.6 2.6 -1.0 2.4 2.4 1.6 1.8 1.0 1.8 1.6 1.7 3.1 2.8 3.2 2.5 3.9 3.3 5.6 3.0 3.1 2.2 2.4 1.4 2.4 1.9 2.0 3.8 5.2 4.0 6.6 2.7 3.1 1.8 2.6 2.6 2.0 2.0 2.6 1.9 1.7 1.8 3.1 2.8 3.2 2.5 3.7 3.3 5.4 2.9 2.9 1.9 2.0 -.2 2.3 2.2 2.2 3.9 5.0 3.8 6.5 3.0 3.2 2.3 -------------Projected------------2015 2016 2017 Class II FOMC - Restricted (FR) 1 2009 Measure and country Foreign Real GDP and Consumer Prices: Selected Countries (Percent change, Q4 to Q4) Authorized for Public Release June 10, 2015 Page 94 of 96 -380.8 -380.8 -2.6 -2.6 -383.8 132.3 257.7 -125.4 -129.3 2009 -411.5 -403.9 -2.4 -2.4 -501.7 218.6 293.2 -74.6 -128.4 Q3 2010 -403.4 -395.7 -2.3 -2.2 -503.5 248.5 314.9 -66.5 -148.4 -443.9 -443.9 -3.0 -3.0 -494.7 185.7 288.0 -102.3 -135.0 -383.1 -389.1 -2.2 -2.2 -514.8 228.8 293.1 -64.3 -97.0 Q2 -459.3 -459.3 -3.0 -3.0 -548.6 229.0 298.6 -69.5 -139.8 2011 Q2 Q3 -459.9 -460.8 -2.8 -2.9 -536.8 211.4 281.6 -70.2 -134.6 2012 2013 -535.4 -499.9 -3.0 -2.8 -541.1 156.1 254.1 -97.9 -150.4 -414.2 -410.6 -2.4 -2.4 -508.3 226.9 295.6 -68.7 -132.8 -132.4 2014 -561.7 -537.0 -3.1 -2.9 -573.1 159.4 266.4 -107.0 -148.0 Q4 -402.3 -400.3 -2.4 -2.4 -478.4 208.5 290.9 -82.3 Billions of dollars -496.2 -462.5 -2.8 -2.6 -496.1 147.7 240.3 -92.5 -147.8 Billions of dollars, s.a.a.r. Q1 -499.4 -472.1 -2.8 -2.7 -521.0 175.7 258.7 -83.0 -154.1 Annual Data -459.0 -453.8 -2.6 -2.6 -513.3 211.8 281.1 -69.3 -157.5 Q4 -630.0 -607.1 -3.4 -3.3 -649.4 167.3 295.2 -127.9 -147.8 Q2 -676.9 -657.3 -3.6 -3.5 -692.1 165.7 307.7 -142.0 -150.4 Q3 -697.8 -685.4 -3.7 -3.6 -710.1 160.3 318.0 -157.7 -148.0 Q4 -150.1 -523.2 -492.9 -2.9 -2.7 -532.8 159.7 254.9 -95.1 -153.2 -658.3 -636.6 -3.5 -3.4 -669.6 164.5 300.7 -136.1 -153.2 -747.6 -739.3 -3.8 -3.8 -754.6 160.2 365.4 -205.2 -------------Projected------------2015 2016 2017 -628.4 -596.4 -3.4 -3.2 -626.9 164.9 281.8 -116.8 -166.5 Q1 ------------------------------------Projected-----------------------------------2015 2016 Class II FOMC - Restricted (FR) U.S. current account balance Previous Tealbook Current account as percent of GDP Previous Tealbook Net goods & services Investment income, net Direct, net Portfolio, net Other income and transfers, net U.S. current account balance Previous Tealbook Current account as percent of GDP Previous Tealbook Net goods & services Investment income, net Direct, net Portfolio, net Other income and transfers, net Q1 2014 Quarterly Data U.S. Current Account Greensheets Authorized for Public Release June 10, 2015 Authorized for Public Release Class II FOMC - Restricted (FR) June 10, 2015 Abbreviations AFE advanced foreign economy BHC bank holding company BOC Bank of Canada BOE Bank of England BOJ Bank of Japan C&I commercial and industrial CMBS commercial mortgage-backed securities CPI consumer price index CRE commercial real estate Desk Open Market Desk DSGE model dynamic stochastic general equilibrium model ECB European Central Bank ECI employment cost index EFSF European Financial Stability Facility EME emerging market economy FOMC Federal Open Market Committee; also, the Committee FX foreign exchange GCF General Collateral Finance GDI gross domestic income GDP gross domestic product IMF International Monetary Fund JOLTS Job Openings and Labor Turnover Survey M&A mergers and acquisitions MBS mortgage-backed securities MERS Middle East Respiratory Syndrome OIS overnight index swap ON RRP overnight reverse repurchase agreement PCE personal consumption expenditures Page 95 of 96 Authorized for Public Release Class II FOMC - Restricted (FR) PMI June 10, 2015 purchasing managers index PRISM model Philadelphia Research Intertemporal Stochastic Model repo repurchase agreement SCOOS Senior Credit Officer Opinion Survey on Dealer Financing Terms SOMA System Open Market Account S&P Standard & Poor’s TIPS Treasury Inflation-Protected Securities Page 96 of 96
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