Board of Governors of the Federal Reserve System

By many measures, the labor market has only partially recovered from the depths of the pandemic-driven recession. This discussion presents comparisons of recent readings on labor market conditions to those just before the pandemic. However, the reactions of businesses and workers to the pandemic may have long-lasting effects on the structure of the labor market. For example, the pandemic seems to have accelerated the adoption of new technologies by firms and the pace of retirements by workers. The post-pandemic labor market and the characteristics of maximum employment may well be different from those of early 2020.

As shown in the top bar of figure A, in June the percentage of the population aged 16 and older that is employed—or the employment-to-population (EPOP) ratio—was about 3 percentage points below its pre-pandemic (February 2020) level. This figure decomposes the decline in the EPOP ratio into the amount attributable to a decline in the percentage of the population working or actively looking for work, or the labor force participation rate (LFPR, light-blue bar), and an increase in unemployment (dark-blue bar).¹ About one-half of the decline in the EPOP ratio since February 2020 reflects a decline in the LFPR, which in June was 1-3/4 percentage points below its pre-pandemic level, while the rest is due to elevated unemployment.

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Differences in these measures across various demographic groups existed even before the recession, and they widened after the start of the pandemic. While they have generally narrowed somewhat over the past year, the figure illustrates that differences across groups relative to pre-pandemic levels remain significant: EPOP ratios are more depressed for those without a college education relative to the college educated and for Hispanics relative to others, with much of these differences reflecting larger declines in the LFPRs of these groups.² The EPOP ratio is depressed more for those aged 25 to 54 relative to other ages, while the LFPR has fallen by more for those aged 55 or older.

While the unemployment rate has moved down gradually but steadily since peaking in April 2020, improvements in the LFPR have been less consistent, and since August 2020, the LFPR has fluctuated in a narrow, low range despite broader improvement in labor market conditions. The LFPRs for most of the groups shown in figure A also remain well below pre-pandemic levels. The rest of this discussion covers three reasons why the recovery in the LFPR remains incomplete, and that also may help explain why the recovery has been weaker for some groups than others—namely, a surge in retirements, heightened caregiving responsibilities, and individuals' fears of contracting COVID-19. In addition, expansions to the availability, amount, and duration of unemployment insurance (UI) benefits have given many individuals the financial means to be more selective when finding a new job, especially if pandemic- or individual-specific factors have limited their ability to quickly reenter the labor force.

Retirements: Even in the absence of the pandemic, the aging of the baby boomer cohort would likely have implied an increase in the share of the population that is retired relative to pre-pandemic levels of around 0.3 percentage point.³ However, the share of the population in the Current Population Survey (CPS) that indicates being out of the labor force and retired jumped at the start of the pandemic and, as shown in figure B, has increased by 1 percentage point since early 2020—accounting for more than one-half of the 1.7 percentage point decline in the aggregate LFPR over this period.⁴ Among individuals aged 55 and older, the increase has been larger for women than for men and larger for Hispanics and Asians than for whites and Blacks.

B. Percent of the population not in the labor force and retired, change from January and February 2020 to April and May 2021

Caregiving responsibilities: Figure C shows that nonparticipation in the labor force associated with caregiving has increased 0.7 percentage point.⁵ This increase likely reflects in part the difficulties imposed on parents and other caregivers from in-person education not being fully available to many K–12 students, and some of these parents may have decided to stop working or looking for work to help care for their children and facilitate their virtual education.⁶

C. Percent of the population not in the labor force and caregiving, change from January and February 2020 to April and May 2021

Consistent with a considerable effect from students' virtual education, estimates from the figure also show that the increase in nonparticipation for caregiving reasons has been larger for mothers aged 25 to 54 with children aged 6 to 17 (2.6 percentage points) than for women without their own children in the home (1.0 percentage point), women who only have children aged 5 and younger (1.4 percentage points), and fathers (0.6 percentage point) and accounts for all of the decline in the LFPR for mothers.⁷ The increase in nonparticipation for caregiving has been especially large for Black and Hispanic mothers, and it accounts for much of the larger decline in the LFPR for these groups.⁸

Fear of the COVID-19 virus: Individuals' fears of contracting the COVID-19 virus are likely also still depressing labor force participation somewhat and may in part be reflected in the factors previously discussed; COVID-19 fears may be especially relevant for those who would otherwise be working on-site in high-contact industries and occupations—and even for some fully vaccinated individuals, such as older and immunocompromised workers who are at higher risk for severe illness or death from COVID-19. Consistent with the importance of this reason, data from the Census Bureau's Household Pulse Survey show that between May 26 and June 7, 2021, about 1 percent of the population reported not working or having recently looked for work because of fears of COVID-19.⁹ This share was higher for Blacks and Hispanics, those aged 18 to 24, and individuals with no college education, which aligns with demographic differences in the share of individuals employed in high-contact industries before COVID-19 and with differences in individuals' ability to work from home.

Expanded unemployment insurance: The pandemic recession prompted an unprecedented expansion in the availability and level of support of UI. A suite of federal programs has extended benefits to groups normally ineligible for UI, increased the potential duration of benefits, and boosted the weekly benefit amounts received by UI claimants.¹⁰ Complementing the new programs, many states broadened UI eligibility at the start of the pandemic by temporarily suspending work search requirements and relaxing other eligibility criteria. While the income support from expanded UI and other fiscal stimulus likely led some jobseekers to search less intensively or to be more selective in accepting job offers, the effects of these programs on labor force participation are not clear.¹¹ The support from enhanced UI has been especially consequential for lower-wage workers, who have borne the brunt of recent job losses and who have benefited most from broader coverage and higher benefit levels.¹²

The path ahead: Many of the factors constraining labor force participation should gradually abate in the coming months, and, as they do, the overall participation rate should rise and the demographic disparities in labor force participation that widened during the pandemic will likely continue to narrow. Fears of getting or spreading COVID-19 are likely to recede if vaccination rates continue to climb and if caseloads continue to diminish, and caregiving responsibilities should ease if most students return to in-person instruction in the fall. With federal pandemic UI programs slated to end in September and many states withdrawing from them in advance of their nationwide expiration, any effects of enhanced UI benefits on labor force participation will likely wane soon as well. The spate of retirements spurred by the pandemic will continue to weigh on labor force participation for some time, but this factor should leave a gradually diminishing imprint over the next few years, because these workers were likely poised to retire soon even in the absence of the pandemic. The full effect of the pandemic on the structure of the labor market remains to be seen, and the characteristics of maximum employment may well be different from those of early 2020.

Since the beginning of this year, personal consumption expenditures (PCE) inflation—as measured by 12-month percent changes—has increased markedly, reaching 3.9 percent in May (figure 8 in the main text). The sharp increase in inflation this year reflects both a rebound in prices from pandemic-induced price declines last spring and imbalances between demand and supply associated with a strong increase in aggregate demand amid supply chain bottlenecks, hiring difficulties, and other capacity constraints.

As global demand has surged, prices for crude oil and other traded commodities, such as livestock, crops, and metals, have increased notably (figures 9 and 10 in the main text). Commodity prices started to rebound during the second half of last year as the global economy partially reopened and have continued to rise this year, in some cases reaching multiyear highs. These prices most directly affect food and energy consumer prices (the blue and black lines, respectively, in figure A). However, readings from manufacturing surveys and anecdotes reported in the Federal Reserve's Beige Book suggest rising costs for raw materials have contributed to inflation for other goods as well (the red line in figure A). More recently, prices of some commodities, such as lumber, have come down from their peaks in the spring or have flattened out, suggesting that inflation pressures from commodities might ease in the coming months or even reverse.

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Supply chain bottlenecks are another factor pushing up consumer prices this year. As the economy reopened and as consumer demand for goods surged, many producers have reported shortages of critical parts and packaging materials, as well as delivery delays. (See the box "Supply Chain Bottlenecks in U.S. Manufacturing and Trade.") Supply chain bottlenecks have been particularly constraining in the motor vehicle sector, where global shortages of semiconductors and other parts have curtailed production, at the same time that demand by households and rental companies has been strong. Prices for motor vehicles—particularly used vehicles—have jumped in recent months and are currently at levels well above their pre-COVID-19 trends (figure B, top-left panel). Strong demand amid supply chain bottlenecks has also boosted prices for other durable goods in recent months, but the pattern is not quite as pronounced as it is for motor vehicles (figure B, top-right panel). In fact, the rise in prices connected to the motor vehicle sector—including prices for new and used vehicle purchases and vehicle rental services—accounts for almost one-third of the increase in PCE prices in April and May.

Regarding services prices, demand for certain non-energy services that were severely curtailed by social distancing during the pandemic has surged this spring as the vaccines have become widely available (the green line in figure A). Just as the drop in demand last year led to a step-down in prices for categories related to travel and group activities, the resurgence in demand for these services is pushing up prices this year. As two prominent examples, airline fares and prices for hotel accommodations have jumped since the beginning of the year but so far remain somewhat below their pre-COVID trends (figure B, bottom panels).

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Even as demand for services appears to be strong and growing, many service-sector businesses have reported difficulties in finding workers quickly enough to ramp up their operations accordingly. These reports are consistent with most available measures of wage growth, which have stepped up notably since the beginning of the year. Wage gains have been especially large in the leisure and hospitality sector and in other service industries that have relatively low average wages, which has likely contributed to the rise in inflation for certain categories of spending, such as food away from home.

Overall, an important part of the rise in inflation this spring appears to be due to a surge in demand, including the rebound in travel-related spending, running up against short-run production bottlenecks and hiring difficulties. As these extraordinary circumstances pass, supply and demand should become better aligned, and inflation is widely expected to move down toward the FOMC's 2 percent longer-run goal. (For a more detailed discussion of recent developments in inflation expectations, see the box "Assessing the Recent Rise in Inflation Expectations.")

The strong U.S. demand for goods has been faced with a supply chain that has struggled to keep pace. With the onset of the pandemic in the spring of 2020, many manufacturers sharply curtailed production in expectation of a long downturn and a drawn-out recovery. Companies laid off workers, idled plants, and canceled orders for materials. In many cases, however, the pause in demand was much shorter and the rebound in demand was much stronger than anticipated, and by late 2020, factories in some industries were scrambling to find the workers, parts, and materials to fill a rush of new orders. As demand for goods surged in the second half of 2020, U.S. import volumes shot up to record levels and have remained elevated. The massive influx of goods combined with COVID-19-related staffing issues have overwhelmed U.S. ports, resulting in additional challenges for manufacturers that experience extended wait times for imported parts.

Ample evidence—including widespread anecdotes of shortages mentioned in the press and in the Federal Reserve's Beige Book—points to broad and sometimes deep supply chain disruptions across the manufacturing sector. The challenges in procuring materials are also reflected in reports from the Institute for Supply Management on order backlogs, which recently reached historical highs at the same time as customer inventories were at historical lows (figure A).¹ Additionally, roughly one-fourth of all manufacturers cannot produce at full capacity because of an insufficient supply of materials, labor, or both (figure B).² Amid strong demand, these shortages have put upward pressure on the prices manufacturers pay for parts and materials (figure C).

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A few key manufacturing industries have experienced pronounced supply disruptions or shortfalls. Perhaps most notably, the burst in demand for consumer electronics contributed to full order books, long lead times, and shortages of semiconductors; these shortages led to widespread shutdowns and slowdowns at several U.S. motor vehicle assembly plants.³ Lumber supply has also fallen short, as last year's increase in remodeling projects and new home construction outpaced production at sawmills. Meanwhile, supply bottlenecks for steel emerged last fall after a resurgence in orders surprised mill operators that had not yet fully restarted steelmaking equipment idled in the early days of the pandemic.⁴ Finally, extremely cold temperatures in mid-February caused extensive damage to several petrochemical facilities along the Gulf Coast, resulting in acute shortages; the outages resolved slowly, and only in early May did operations essentially return to normal.

Logjams at some of the nation's ports—particularly on the West Coast—resulted from the unprecedented volume of imports and were compounded by limitations on labor attributable to COVID-19 precautions and to isolated outbreaks among dock workers. For example, since the fall of 2020, the Port of Los Angeles, the nation's busiest port, has had more ships to unload than it could easily accommodate. Typically, ships have little to no wait before they reach a berth at the port, but since last October, on average, more than 10 ships have been waiting at anchor at any given time (figure D). While this number has retreated from its peak, ships are still spending an extended time in the port. Continued high import volumes have hampered the port's progress in resolving congestion even as the quick pace of vaccinations in the United States has allowed the port to resume processing incoming containers at full capacity.

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In addition to the congestion at ports, carriers have raised shipping rates and imposed large surcharges on containers sent to the United States.⁵ These delays and elevated costs have likely discouraged additional imports of low-value, high-volume products, contributing to higher prices and reduced inputs for U.S. manufacturers. Relatedly, the higher inbound rates have created a challenge for U.S. exports in the form of a container shortage. Shipping rates for U.S. exports have risen by much less than rates for inbound shipments, so carriers find it more profitable at times to quickly return empty containers for another inbound U.S. delivery than to receive modest revenue from taking on U.S. exports. Thus, although the number of inbound loaded containers skyrocketed in the second half of last year, the number of outbound loaded containers stayed below pre-pandemic levels until March 2021 (figure E).

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In summary, trade and production bottlenecks have been an important factor as the economy emerges from the pandemic. As producers and the distribution network work through these bottlenecks, production is expected to pick up and price pressures to ease—for example, lumber prices have come down from their late-spring peaks. The time frame for the resolution of these bottlenecks is uncertain, as they reflect both the global supply chain and some industry-specific reasons for the tight conditions.

The sharp rise in inflation so far this year (see the box "Recent Inflation Developments") has raised the question of whether the recent elevated pace of price increases (1) will abate, as the effects of the strong rebound in aggregate demand and accompanying supply chain bottlenecks fade, without calling for a change in the path of monetary policy or (2) will instead be followed by a period of higher inflation pressures and call for a change in the stance of monetary policy. The latter situation could arise if longer-term inflation expectations were to rise persistently above levels consistent with the Federal Open Market Committee's (FOMC) longer-run inflation goal. Inflation expectations are often seen as a driver of actual inflation, which is why a fundamental aspect of the FOMC's monetary policy framework is for longer-term inflation expectations to be well anchored at the Committee's 2 percent longer-run inflation objective.¹ In monitoring the inflation outlook, the FOMC considers a variety of financial and economic data in order to gauge whether inflation expectations are consistent with meeting its inflation objective. Recent readings on these measures indicate that inflation is expected to return to levels consistent with the Committee's 2 percent longer-run inflation objective after a period of temporarily higher inflation. That said, some measures suggest that the upside risks to the inflation outlook in the near term have increased.

Information concerning inflation expectations can be obtained from various sources, including financial instruments linked to inflation and surveys of financial market participants, professional forecasters, households, and businesses. For example, the compensation that investors require to hold certain financial instruments whose payouts are linked to inflation sheds light on financial market participants' expectations regarding inflation. Inflation compensation implied by the yields on Treasury securities, known as the Treasury Inflation-Protected Securities (TIPS) breakeven inflation rate, is defined as the difference between yields on conventional Treasury securities and yields on TIPS, which are linked to actual outcomes regarding headline consumer price index (CPI) inflation. An alternative market-based measure of inflation compensation can be derived from inflation swaps, which are contracts in which two parties agree to swap fixed nominal payments for floating cash flows that are tied to cumulative CPI inflation over some horizon.

Longer-horizon TIPS- and swaps-based measures of inflation compensation have both moved up since the start of the year. The TIPS-based measure of 10-year inflation compensation increased from an annual rate close to 2 percent in the beginning of 2021 to somewhat above 2-1/4 percent in early July. Over the same period, the swaps-based measure increased from around 2-1/4 percent to 2-1/2 percent. To shed further light on how the recent economic developments are influencing investors' views on the inflation rate likely to prevail at different horizons, it is useful to split the recent rise in inflation compensation over the next 10 years into changes in inflation compensation for the next year and for subsequent 1-year periods starting at times between 1 and 9 years from now. The result of this exercise suggests that market-based measures of inflation compensation over the next year have increased about 1-1/2 percentage points since early 2021, reaching levels above 3 percent in early July. Measures of inflation compensation for the period beyond the next year have also moved up but by a much smaller amount than have measures of 1-year inflation compensation. In particular, inflation compensation beyond five years has reversed the large declines seen earlier in the pandemic, bouncing back to levels consistent with those observed before 2014, when measures of longer-term inflation compensation ran modestly above 2 percent on a CPI basis, and before these measures showed signs that CPI inflation expectations may have drifted down (figure A).

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If the recent readings on inflation compensation could be interpreted as direct measures of expected CPI inflation, they would suggest that investors currently anticipate that average CPI inflation will temporarily run somewhat above 3 percent over the next year before moving back down. Over the longer run, assuming no wedge between inflation compensation and inflation expectations, market-based measures indicate that investors are expecting CPI inflation to settle at around 2-1/4 percent. This pattern is consistent with expectations of CPI inflation moving to levels in line with the FOMC's longer-run inflation goal of 2 percent PCE (personal consumption expenditures) inflation.²

TIPS- and swaps-based measures of inflation compensation, however, reflect not only expected inflation, but also other factors, including the inflation risk premium and possibly other premiums driven by liquidity differences and shifts in demand and supply of TIPS relative to those of nominal Treasury securities. The presence of these additional factors can make it difficult to ascertain the information regarding expected inflation embedded in market-based measures of inflation compensation.³ Survey-based measures, in contrast, provide information about inflation expectations that is not obscured by the presence of these risk premiums.

Information about inflation expectations obtained from surveys of financial market participants, economists, and professional forecasters tells a story similar to that of market-based measures. Since the turn of the year, projections of PCE inflation for 2021 as a whole, obtained from information in the Blue Chip Financial Forecasts, the Survey of Professional Forecasters, and the Survey of Primary Dealers, increased substantially to well above 2 percent. Over the same period, the projections of PCE inflation beyond 2022 appear, in comparison, to be little changed at levels just over 2 percent (figure B). This pattern suggests that these forecasters expect the recent jump in inflation to be transitory and that survey respondents do not appear to have revised their views regarding the longer-term inflation rate in response to the recent strong readings on inflation.

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Even if financial market participants and professional forecasters see inflation returning to levels close to 2 percent after a bout of higher inflation as the most likely outcome, they still could have judged that the likelihood of higher inflation had increased. Probability distributions of future inflation derived from surveys provide information on how respondents' views about the likelihood of various outcomes for inflation have evolved. Since the turn of the year, the probability distribution of PCE inflation for 2022 derived from the Survey of Professional Forecasters suggests that the average respondent now appears to attach lower probabilities to outcomes of inflation below 2 percent, and somewhat higher odds of inflation running above 3 percent, which suggests that respondents' perceived upside risks to inflation in the near term have shifted up somewhat.⁴

Finally, survey-based measures of households' inflation expectations have also moved up in recent months. And, similarly to the other surveys, the movements have been more pronounced in the near- to medium-term inflation expectations. In the University of Michigan Surveys of Consumers, households' expectations for inflation over the next 12 months in June were markedly higher than in February and well above the expectations for average inflation over the next 5 to 10 years (figure C). Over the same period, the median value of inflation expectations over the next 5 to 10 years picked up only slightly. Nevertheless, the latest reading is above its pre-pandemic level and stands close to levels last seen consistently in 2015 when this measure started drifting down and raised concerns that households' expectations might have slipped below the FOMC's 2 percent longer-run goal. In the Survey of Consumer Expectations, conducted by the Federal Reserve Bank of New York, the median of respondents' expected inflation rate 3 years ahead also increased sharply in May, the highest reading since the summer of 2013.

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The common inflation expectations (CIE) index constructed by Federal Reserve Board staff—a series that takes many measures of inflation expectations and inflation compensation and consolidates them into a single indicator—has continued to edge up in recent quarters, more than reversing the moderate decline recorded in the middle of last year (figure D).⁵ Taking a somewhat longer view, the CIE has now also reversed the net decline since 2014 and has brought the index up to levels that are likely more consistent with the FOMC's longer-term goal of 2 percent PCE inflation.

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While some financial vulnerabilities have increased since February, the institutions at the core of the financial system remain resilient. This discussion reviews vulnerabilities in the U.S. financial system. The framework used by the Federal Reserve Board for assessing the resilience of the U.S. financial system focuses on financial vulnerabilities in four broad areas: asset valuations, business and household debt, leverage in the financial sector, and funding risks.

Prices of risky assets have generally increased in the first half of 2021. They have been buoyed by the rapid deployment of highly effective COVID-19 vaccines in the United States, the support provided by fiscal policy, and increased investor risk appetite. Broad equity market indexes have reached record highs in recent months, and the ratio of prices to forecasts of earnings remains high relative to its historical distribution (figure A). Option-implied volatility has been declining throughout the first half of 2021 and now stands at about its historical median. Yields on corporate bonds and leveraged loans remain low. On balance, indicators of commercial real estate (CRE) valuations remain high; however, low transaction volumes—especially for distressed properties—may mask declines in commercial property values. Supported by relatively low mortgage rates and shifting supply and demand dynamics brought about by the pandemic, house prices have increased at double-digit annual rates for several months amid strong home sales. The surge in the prices of a variety of crypto-assets also reflects in part increased risk appetite. Long-term Treasury yields have risen since mid-February but remain low by historical standards. The high asset prices in part reflect the continued low level of Treasury yields. However, valuations for some assets are elevated relative to historical norms even when using measures that account for Treasury yields (figure B). Asset prices may be vulnerable to significant declines should investor risk appetite fall, interest rates rise unexpectedly, or the recovery stall.

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Vulnerabilities from both business and household debt have declined through the first quarter of 2021, reflecting a slower pace of business borrowing, an improvement in business earnings, and government programs that have supported business and household incomes. Even so, some businesses and households remain under considerable strain. Business debt outstanding changed little in the second half of 2020 and first quarter of 2021, although it remains high relative to gross domestic product (figure C). Recovering earnings and the low level of interest rates have generally aided businesses' ability to carry debt. Some smaller businesses continue to face significant financial strains but have been supported by government programs, including the Paycheck Protection Program (PPP). Debt owed by households remains at a moderate level relative to income. Household borrowing continues to be heavily concentrated among borrowers with high credit scores. Moreover, government actions taken in response to the pandemic have provided significant support to household balance sheets and incomes, with many households saving more and holding more liquid assets.

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In the financial sector, leverage at banks and broker-dealers remained low, while leverage at hedge funds and life insurance companies continued to be high. The common equity Tier 1 ratio for most banks increased, on net, over 2020 and into the first quarter of 2021. Measures of credit quality of bank loans have also improved in the first quarter of 2021. Moreover, the share of loan balances in loss-mitigation programs at the largest banks has declined. The shares of credit cards and auto loans in loss mitigation have seen larger declines, while the shares of residential real estate, commercial and industrial, and CRE loans remain high. Nevertheless, some uncertainty remains about the ability of borrowers in loss-mitigation programs to meet their obligations after those programs end and government support runs out. Broker-dealer leverage remained near historically low levels through the first quarter of 2021, although dealers continue to finance sizable inventories of Treasury securities. No notable effect on Treasury market functioning followed the expiration in March 2021 of temporary changes to the supplementary leverage ratio, which were implemented to ease strains in Treasury market intermediation in the initial weeks of the pandemic. Most measures of hedge fund leverage increased in the second half of 2020 into the beginning of 2021 and are now above their historical averages. A few recent episodes have highlighted the opacity of risky exposures and the need for greater transparency at hedge funds and other leveraged financial entities that can transmit stress to the financial system. The Financial Stability Oversight Council has restarted its Hedge Fund Working Group to improve data sharing, identify risks, and strengthen the financial system. Leverage at life insurance companies remains historically high as of the first quarter of 2021. Issuance volumes of non-agency securities recovered somewhat in the first quarter of 2021, although the recovery was uneven across asset classes.¹ Collateralized loan obligation and asset-backed securities issuance was elevated, whereas non-agency commercial mortgage-backed securities issuance was weak.

Funding risks at domestic banks remained low, as these banks rely only modestly on short-term wholesale funding and maintain sizable holdings of high-quality liquid assets. Liquidity ratios were well above regulatory requirements at most large domestic banks as of the first quarter of 2021. Assets under management at prime and tax-exempt money market funds (MMFs) have declined since the middle of 2020, but vulnerabilities at these funds remain and call for structural fixes.

The President's Working Group on Financial Markets released a report in December 2020 outlining potential reforms to address risks from the MMF sector.² Subsequently, the Securities and Exchange Commission issued a request for comment on these potential reforms and summarized its findings.³ If properly calibrated, some of these reforms—such as swing pricing, a minimum balance at risk, and capital buffers—could significantly reduce the run risk associated with MMFs. Meanwhile, the Money Market Mutual Fund Liquidity Facility and the Commercial Paper Funding Facility, which were deployed during the COVID-19 pandemic to backstop short-term funding markets, expired at the end of March with no material effect on these markets. Bond and bank loan mutual funds benefited from net inflows but are exposed to risks due to large holdings of illiquid assets.

A routine survey of market contacts on salient shocks to financial stability highlights several important risks. A worsening of the global pandemic could stress the financial systems in emerging markets and some European countries. Further, if global interest rates were to rise abruptly, some emerging market economies could experience additional fiscal strains. These risks, if realized, could interact with financial vulnerabilities and pose additional risks to the U.S. financial system.

Developments Associated with Facilities to Support the Economy during the COVID-19 Crisis

In the immediate wake of the pandemic, the Federal Reserve took forceful actions and established emergency lending facilities, with the approval of the Secretary of the Treasury as needed. These actions and facilities supported the flow of credit to households and businesses and served as backstop measures that have given investors confidence that support would be available should conditions deteriorate substantially.

Most of the facilities established at the onset of the pandemic expired at the end of December 2020, the beginning of January 2021, or the end of March 2021. These facilities expired with no notable effect on financial market functioning.

The termination date of the Federal Reserve's Paycheck Protection Program Liquidity Facility, which currently has $90.6 billion in loans outstanding funded to the PPP, was extended to July 30, 2021. The Federal Reserve has begun winding down the portfolio of the Secondary Market Corporate Credit Facility, an emergency lending facility that closed on December 31, 2020.⁴ The portfolio sales have been gradual and orderly and have aimed to minimize the potential for any adverse effect on market functioning by taking into account daily liquidity and trading conditions for exchange-traded funds and corporate bonds. To date, these sales have had no notable effect on mutual fund flows or price effects in the market.

The Federal Reserve also took actions to reduce spillovers to the U.S. economy from foreign financial stresses. Temporary U.S. dollar liquidity swap lines were established in March 2020, in addition to the preexisting standing lines, and have improved liquidity conditions in dollar funding markets in the United States and abroad by providing foreign central banks with the capacity to deliver U.S. dollar funding to institutions in their jurisdictions during times of market stress. The FIMA (Foreign and International Monetary Authorities) Repo Facility has helped support the smooth functioning of the U.S. Treasury market by providing a temporary source of U.S. dollars to a broad range of countries, many of which do not have swap line arrangements with the Federal Reserve. The Federal Reserve recently announced the extension of its temporary swap lines through December 31, 2021, which should help sustain improvements in global U.S. dollar funding markets.