Part 1: Recent Economic and Financial Developments

Monetary Policy Report submitted to the Congress on June 16, 2023, pursuant to section 2B of the Federal Reserve Act

Domestic Developments

Inflation has continued to decline but remains elevated, and progress has been uneven across categories

Inflation, as measured by the 12-month change in the price index for personal consumption expenditures (PCE), continued to step down, on net, in recent months, receding from its peak of 7.0 percent in June of last year to 4.4 percent in April, although it remained well above the Federal Open Market Committee's (FOMC) longer-run objective of 2 percent (figure 1). Core PCE prices—which exclude volatile food and energy prices—rose 4.7 percent over the 12 months to April, down from the 5.4 percent peak early last year but little changed since the end of the year, with outcomes that have varied widely across spending categories. The trimmed mean measure of PCE prices from the Federal Reserve Bank of Dallas also remained elevated, increasing 4.8 percent over the 12 months to April, little changed since last fall.

Consumer energy prices have declined so far this year, while food prices have flattened out recently

After declining in the second half of last year, oil prices have edged down further so far this year (figure 2). The lower oil prices appear to reflect weaker prospects for global growth. Meanwhile, prospects for supply have been mixed, with production cuts announced by OPEC (Organization of the Petroleum Exporting Countries) partly offset by the unexpected resilience of Russian oil production. Gasoline prices have edged down so far this year, and prices for natural gas and heating oil have declined more noticeably. All told, the PCE energy price index in April was more than 6 percent below its level 12 months earlier (figure 3).

Food prices have flattened out in recent months, as prices of many agricultural commodities and livestock have come down from the highs reached at the start of Russia's war on Ukraine (figure 4). Partly reflecting these declines, grocery store price increases slowed to an annual rate of 2.6 percent over the six months ending in April, down sharply from the 11 percent pace recorded over the previous six months. This moderation brought the 12-month change down to 6.9 percent in April, a rate that is still quite elevated but well below the increase of nearly 12 percent recorded at the end of last year (as shown in figure 3).

Prices of both energy and food products are of particular importance for lower-income households, for which such necessities account for a large share of expenditures.

Core goods price increases continue to soften as supply bottlenecks ease and import price inflation falls...

Outside of food and energy goods and services, recent inflation performance has varied markedly across the core spending categories. Prices for core goods increased 2.6 percent over the 12 months ending in April, substantially below the 6.3 percent increase recorded 12 months earlier but still well above the average rate observed during the years before the pandemic (figure 3). Over the past year, supply chain issues have diminished, other capacity constraints have eased, and demand appears to have stabilized. Transportation costs have also moved down over the past year, and suppliers' delivery times have improved (figure 5). Core goods inflation has also been held down this year by the net decline in nonfuel import prices (figure 6). This decline likely reflects the earlier appreciation of the dollar and decreases in prices for commodities such as industrial metals.

...while core services price inflation remains elevated

By contrast, core services price inflation remains elevated. Housing services prices have continued to rise especially rapidly, up 8.4 percent over the 12 months ending in April (figure 3). However, the monthly changes have started to ease in recent months, consistent with the moderate increases observed since last autumn in market rents on new housing leases to new tenants (figure 7). Because prices for housing services measure the rents paid by all tenants (and the equivalent rent implicitly paid by all homeowners)—including those whose leases have not yet come up for renewal—they tend to adjust slowly to changes in rental market conditions and should therefore be expected to continue to decelerate over the year ahead. By contrast, prices for other core services—a broad group that includes services such as travel and dining, financial services, and car repair—rose 4.6 percent over the 12 months ending in April and have not yet shown signs of slowing. However, the nascent softening of labor demand and improvements in labor supply, over time, should help slow core services price inflation as labor cost growth moderates.

Measures of longer-term inflation expectations have been generally stable, while shorter-term expectations have been volatile and remained somewhat elevated

The generally held view among economists and policy analysts is that inflation expectations influence actual inflation by affecting wage- and price-setting decisions. Since the end of last year, movements in the survey-based measures of expected inflation over a longer horizon have been mixed, but they remained within the range of values seen during the decade before the pandemic and appear broadly consistent with the FOMC's longer-run 2 percent inflation objective. Expected inflation over the next 5 to 10 years, as measured in the University of Michigan Surveys of Consumers, has edged up from its average level in the fourth quarter of 2022 but was still within the range of values observed before the pandemic (figure 8). Expected inflation over the next 10 years in the Survey of Professional Forecasters, conducted by the Federal Reserve Bank of Philadelphia, has moved down since the end of last year, reflecting a decline in the expectations for inflation over the next few years. Over the five years beginning five years from now, the median forecaster in the survey continued to expect PCE price inflation to average 2 percent.

Furthermore, inflation expectations over a shorter horizon—which tend to more closely follow observed inflation—have moved down since the middle of last year. In the Michigan survey, the median value for inflation expectations over the next year was 4.2 percent in May, below the peak rate of 5.4 percent last spring but still quite elevated. Expected inflation for the next year, as measured in the Survey of Consumer Expectations, conducted by the Federal Reserve Bank of New York, has also declined, on net, over this period and has retraced more than half of its earlier increase.

Market-based measures of longer-term inflation compensation, which are based on financial instruments linked to inflation, are also broadly in line with readings seen in the years before the pandemic and consistent with inflation returning to 2 percent. For example, the measure of inflation compensation over the next five years implied by Treasury Inflation-Protected Securities has declined slightly since the end of last year, while the measure of inflation compensation for the period 5 to 10 years ahead has increased slightly (figure 9).

The labor market has continued to strengthen

Payroll employment gains averaged 314,000 per month during the first five months of this year, down from the 400,000 per month average pace last year but still quite robust (figure 10). Employment gains have been spread somewhat less evenly across industries this year than in 2022.2 Employment in the leisure and hospitality and the health services sectors, as well as in state and local governments, continued to increase robustly over the first half of this year, while employment growth in construction, manufacturing, and retail trade—industries that are more sensitive to interest rate increases—has moderated. Employment gains from the Bureau of Labor Statistics' (BLS) household survey also have been robust, on average, since the end of last year, about in line with the payroll survey.

The unemployment rate has remained near historically low levels (figure 11). At 3.7 percent in May, the jobless rate was close to its level right before the pandemic and has been fluctuating within a narrow range since early last year. Unemployment rates among various age, educational attainment, gender, and ethnic and racial groups are also near their respective historical lows (figure 12). (The box "Developments in Employment and Earnings across Demographic Groups" provides further details.)

Developments in Employment and Earnings across Demographic Groups

Strong labor demand over the past two years, with plentiful job openings and low levels of layoffs, has pushed the unemployment rate down to its lowest level in 50 years. Just as previous economic expansions have tended to narrow long-standing differences in employment and wages across demographic groups, many of these gaps are now in historically narrow ranges as a result of today's very tight labor market. One notable exception is employment differences across age groups, as persistently elevated retirement rates since the onset of the COVID-19 pandemic have kept employment for older age groups (as a share of the population) below pre-pandemic levels.

Among prime-age workers, the tight labor market conditions of the past two years have reversed the pandemic-induced widening of the gaps in employment across racial, ethnic, and education groups. As shown in the left panel of figure A, Black or African American and Hispanic or Latino workers saw much larger employment declines in early 2020 than Asian and white workers. By mid-2022, however, employment in each of these groups had recovered to or surpassed its pre-pandemic level.1 This year has seen further improvements, on net, for Black or African American workers: The prime-age Black employment-to-population (EPOP) ratio stands near a historical high, and the prime-age Black–white employment gap recently hit a series low (not shown).2 Similarly, both men and women aged 25 to 54 with a high school degree or less saw much larger employment declines in early 2020 than prime-age workers with at least some college education, but by the end of 2022, these gaps had almost entirely returned to their 2019 levels, as shown in the right panel of figure A. For prime-age women as a whole, the employment rate has risen briskly in recent months and currently stands at a historical high, bolstered by a historically high participation rate.

Differences in employment dynamics between groups since the start of the pandemic stem from a mixture of demand and supply factors. On the labor demand side, the leisure and hospitality sector experienced severe losses in 2020 but has seen a strong rebound in employment in the past two years. Because workers with a high school degree or less are historically more than twice as likely as workers with a college degree to be employed in leisure and hospitality, part of this group's unusually large employment decline and rebound is likely attributable to the fluctuations in labor demand from this sector.3 Additionally, transportation and warehousing, the sector with the largest increase in labor demand during the pandemic, disproportionately employs Black workers and workers with a high school degree or less. As this sector has largely maintained its pandemic-era employment gains, these groups' employment rates have also benefited disproportionately. On the labor supply side, with schools having generally returned to in-person education for the past two years, childcare constraints have eased, allowing many parents, particularly mothers, to reenter the workforce. Furthermore, labor supply and demand factors may be combining to facilitate employment for historically marginalized workers. For instance, greater availability of telework, along with strong labor demand, is likely pulling more people with disabilities into employment—a group whose EPOP ratio has risen sharply over the past two years and stands roughly 3 percentage points above its pre-pandemic level.

While labor supply among prime-age workers appears to have largely normalized, differential effects of the pandemic on labor supply across age groups persist. Despite experiencing larger losses at the outset of the pandemic, workers aged 16 to 24 and 25 to 54 have now surpassed their pre-pandemic EPOP ratios (see figure B). The EPOP ratio for those aged 55 and over, however, has shown little net improvement since late 2021 and currently stands about 2 percentage points below its pre-pandemic level. The lower EPOP ratio for that group is entirely attributable to a lower labor force participation rate, which in turn largely reflects an increase in retirements since the onset of the pandemic.4

Although the pandemic-induced widening of employment gaps across racial, ethnic, and educational groups has reversed, considerable gaps remain. For example, while the prime-age EPOP ratio among Blacks recently reached an all-time high, it remains about 3.5 percentage points below that of whites, and the EPOP ratio of college-educated, prime-age people is about 13 percentage points higher than that of prime-age people with high school degrees or less.

The tight labor market conditions of the past two years have led to strong growth in nominal wages. However, increases in the prices of goods and services over this period have outpaced the nominal wage gains experienced by many workers. As a result, many workers' real wages shrank in late 2021 and for much of 2022, and real wage growth has remained quite slow since then. The real wages of the least advantaged groups, however, have held up better during this period. As shown in the upper panels of figure C, real wages for workers with a high school degree or less and for nonwhite workers shrank less through early 2022 and have grown more since then.5 This pattern largely reflects the fact that real wage growth has been consistently stronger at the lower end of the income distribution (see the lower-left panel).6 There has been less of a difference in the real wage growth patterns of men versus women, which have largely moved in tandem over the past few years (see the lower-right panel).

1. This discussion defines the pre-pandemic baseline employment-to-population (EPOP) ratio for each group as that group's average EPOP ratio over 2019. Return to text

2. The recent rise in the prime-age Black EPOP ratio has been driven by both a rapid rise in the prime-age Black participation rate above its pre-pandemic level and a falling of the Black unemployment rate to a historical low. Return to text

3. Similarly, Black or African American, Hispanic or Latino, and Asian workers are also overrepresented in the leisure and hospitality industry relative to white workers, although these differences are smaller than differences by education. See Guido Matias Cortes and Eliza Forsythe (2023), "Heterogeneous Labor Market Impacts of the COVID-19 Pandemic," ILR Review, vol. 76 (January), pp. 30–55. Return to text

4. For an analysis on the increase in retirements following the pandemic, see Joshua Montes, Christopher Smith, and Juliana Dajon (2022), " 'The Great Retirement Boom': The Pandemic-Era Surge in Retirements and Implications for Future Labor Force Participation," Finance and Economics Discussion Series 2022-081 (Washington: Board of Governors of the Federal Reserve System, November), Return to text

5. In order to reduce noise due to sampling variation, which can be pronounced when considering disaggregated groups' wage changes, the series shown in figure C are the 12-month moving averages of the groups' median 12-month real wage change. Thus, by construction, these series lag the actual real wage changes. Return to text

6. The tightening of labor market conditions during the previous expansion also resulted in stronger real wage growth for workers in the bottom income quartile, reflecting the tendency of less advantaged workers to benefit disproportionately from tight labor market conditions. Return to text

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Labor demand has eased but remains very strong...

Demand for labor remained very strong in the first half of 2023. The Job Openings and Labor Turnover Survey indicated that there were around 10 million job openings at the end of April—down about 2 million from the all-time high recorded in March 2022 but still around 3 million above pre-pandemic levels. An alternative measure of job vacancies constructed by Federal Reserve Board staff using job postings data from the large online job board Indeed also shows that vacancies have continued to move gradually lower through the first half of 2023 but have remained well above pre-pandemic levels. Many employers report having scaled back their hiring plans somewhat, though levels of anticipated hiring remain high by historical standards.3 Initial claims for unemployment insurance moved up notably in the first two months of the year but appear to have flattened out more recently at a relatively low level.4 Continued claims have been rising gradually, on net, since the turn of the year but have remained at a relatively low level as well.

...and labor supply has improved...

Meanwhile, the supply of labor continued to improve. The labor force participation rate, which measures the share of people either working or actively seeking work, moved up, on net, during the first five months of this year, though it is still roughly 1 percentage point below its February 2020 level (figure 13).5 The decline in overall participation reflects both the unusually large increase in retirements among older workers during the pandemic as well as the normal effects of population aging. Labor force participation for prime-age workers has risen markedly this year and recently surpassed its pre-pandemic level, while the rate for teens has flattened out after having moved above its pre-pandemic level last year. Participation has increased for all racial groups over the past year. (For a discussion of employment rates across demographic groups, see the box "Developments in Employment and Earnings across Demographic Groups.")

Labor supply has also been boosted over the past year by faster population growth, largely reflecting the rebound in immigration.6 After having slowed to an average increase of 0.5 percent per year in 2020 and 2021 because of the COVID-related increase in mortality and restrictions on immigration, population growth bounced back in 2022 and is estimated to have been at an annual rate of 0.7 percent so far this year, about the same as the average growth rate in 2018 and 2019 but still well below the average growth rate observed between 1990 and 2015.

...but the labor market remains very tight

With the easing in labor demand and improvement in labor supply so far this year, the labor market has become somewhat less tight than it was last year, but it nonetheless remains very tight. The number of total available jobs (measured by total employment plus job openings) continues to far exceed the number of available workers (measured by the size of the labor force). This jobs–workers gap was around 4 million in May, below the peak of 6 million recorded in April 2022 but still very elevated by historical standards (figure 14).7 Similarly, households' and small businesses' perceptions of labor market tightness have come down from their recent peaks but remain high. In addition, many employers surveyed for the Federal Reserve's May 2023 Beige Book reported some easing of hiring and retention difficulties but generally continued to report difficulty finding workers across a wide range of skill levels and industries.8 Other measures suggest labor market tightness has eased more substantially over the past year. For example, the share of workers quitting jobs each month, an indicator of the availability of attractive job prospects, has continued to decline this year and has retraced nearly all of the increase between the start of the pandemic and its all-time peak in late 2021.

Wage growth has slowed but remains elevated

Nominal wage growth continued to show signs of slowing in the first part of 2023 but remained elevated (figure 15). Total hourly compensation as measured by the employment cost index increased 4.8 percent over the 12 months ending in March, a strong gain but a step-down from the peak increase of 5.5 percent observed early last year. Increases in average hourly earnings (a less comprehensive measure of compensation) have slowed as well, rising 4.3 percent over the 12 months to May, down from 5.5 percent over the preceding 12 months. Wage growth as measured by the Federal Reserve Bank of Atlanta's Wage Growth Tracker, which reports the median 12-month wage growth of individuals responding to the Current Population Survey, was 6.0 percent in May, below its peak last summer but well above the 3 to 4 percent pace reported over the few years before the pandemic. A similar measure constructed by Federal Reserve Board staff using data from the payroll processing firm ADP, which has a much larger sample than the Wage Growth Tracker, has shown a more noticeable decline since last summer.

Following a period of strong growth, labor productivity weakened over the past year

The extent to which nominal wage gains raise firms' costs and act as a source of inflation pressure depends importantly on the pace of productivity growth. As measured by the BLS, productivity rose at a rapid average pace of 3 percent over 2020 and 2021, but it declined last year and early this year as output growth in the nonfarm business sector fell short of growth in hours worked (figure 16). In retrospect, much of the strong productivity growth in 2020 and 2021 seems to have been the result of temporary pandemic-related factors, and thus the declines since then may reflect a normalization as productivity moves back toward its trend. In 2021, as the economy reopened, firms struggled to hire workers, and many firms temporarily operated with overstretched workforces.9 Subsequently, the slowdown in aggregate demand growth over the past year allowed many firms to catch up in their hiring, and the level of productivity in the first quarter of this year was roughly back in line with its pre-pandemic trend.10

The pace of future productivity growth remains very uncertain. Productivity growth averaged only about 1 percent per year during the expansion that preceded the pandemic recession, and it is possible that the economy has remained in that low-productivity growth regime while experiencing large gyrations in aggregate demand and hiring induced by the pandemic. However, it also seems possible that the high rate of new business formation, widespread adoption of remote-work technology, and the wave of labor-saving investments that the pandemic brought about—as well as continued improvement in and adoption of artificial intelligence and robotics—could boost productivity growth above that pace in coming years.

Momentum in gross domestic product has slowed

After the strong rebound in 2021 from the pandemic-induced recession, economic activity lost momentum last year, and growth in the first quarter of this year was modest as financial conditions continued to tighten. Real gross domestic product (GDP) rose at an annual rate of 1.3 percent in the first quarter, following an increase of less than 1.0 percent over the four quarters of 2022 (figure 17).11 Among the components of GDP, growth in consumer spending picked up in the first quarter, reflecting unusually warm weather, a pickup in vehicle sales as the shortages eased, and a decline in energy prices that boosted households' purchasing power amid dour sentiment and tightening credit conditions. The sharp retrenchment in the housing sector that began last year in response to the rise in mortgage rates has moderated noticeably, while business investment growth has slowed. Finally, manufacturing output has been little changed, on net, so far this year, following a decline in the fourth quarter of last year, despite a rebound in motor vehicle production. Surveys of manufacturers point to continued weakness in coming months, as the diffusion indexes of new orders from various manufacturing surveys remained in contractionary territory, and backlogs of existing orders continued to decline.

Consumer spending growth has been resilient but appears to be moderating...

Consumer spending adjusted for inflation grew at a robust 3.8 percent rate in the first quarter, although the increase reflected a large gain in January that appears to have been partly attributable to temporary factors. For example, mild weather in some parts of the country boosted spending on services, and motor vehicle sales moved up sharply despite the tightening credit conditions, as a rebound in vehicle production alleviated some pent-up demand. All told, real consumer spending on goods has trended sideways since mid-2021 following its surge during 2020 and early 2021, while real spending on services has continued to grow but appears to be decelerating (figure 18). These data suggest that consumers' spending habits have been returning toward their pre-pandemic patterns, albeit very slowly. consumer confidence remains low and the saving rate edges up toward more typical levels

The fundamentals for household spending remain quite soft, despite some recent improvements, and appear to support only modest spending growth this year. The University of Michigan index of consumer sentiment remains very low by historical standards (figure 19). Although real disposable personal income (DPI) increased robustly in the first quarter, it has been roughly unchanged since the end of 2021 owing to the rise in prices, higher tax payments, and reduced transfers. Household wealth has declined since the end of 2021 and is providing less support to consumer spending, especially for households with low incomes that may have exhausted their excess savings accumulated earlier in the pandemic. The saving rate, which fell sharply in 2021 and the first half of 2022 as real DPI declined and excess savings were spent, began to increase in the second half of 2022 as real DPI started to rebound (figure 20). Households may be restraining consumer spending growth this year to continue raising the saving rate toward its pre-pandemic average level.

Consumer financing conditions have tightened

Consumer financing conditions have tightened in the wakes of the monetary policy tightening and the recent banking-sector developments. Interest rates on credit cards and auto loans have increased over the past year and are now higher than the levels observed in 2018 at the peak of the previous monetary policy tightening cycle. In addition, banks reported tighter lending standards across consumer credit products in the second half of 2022 and early 2023, in part reflecting increases in delinquency rates, concerns about further future deterioration in credit performance, and higher funding costs in the banking sector. (See the box "Recent Developments in Bank Lending Conditions.")

After having risen last year, delinquency rates leveled off in the first quarter for auto loans and continued to increase for credit card loans. Among nonprime borrowers, the share of delinquent balances for auto loans and that for credit cards are above pre-pandemic levels, although these borrowers represent small shares of both markets. Despite the tighter financial conditions, consumer credit continued to expand during the past several months (figure 21). Total credit card balances across the credit score distribution have increased, and auto loans have continued to expand at a steady pace.

Recent Developments in Bank Lending Conditions

Bank lending conditions have tightened notably over the past year, and bank loan growth has slowed. Tighter credit standards and terms at banks are a normal part of the monetary policy tightening cycle, but the recent stress in the banking sector has reportedly led to additional tightening in credit conditions at some banks.1

Rising interest rates, in response to elevated inflation, and uncertainty about the economic outlook have increased borrowing costs and tightened bank credit conditions since the second quarter of 2022. In addition, deposit outflows have reduced an important source of funding for banks, as investors have shifted toward higher-yielding alternative investment vehicles, such as money market funds (MMFs). These outflows reflect banks raising their deposit rates relatively slowly in response to policy tightening, and the spreads between MMF yields and bank deposit rates widening sharply. Despite these outflows, bank deposits have remained elevated relative to the pre-pandemic levels, given the large increase in bank deposits experienced during the COVID-19 pandemic.2

Bank credit conditions have tightened further since March. As detailed in the box "Developments Related to Financial Stability," some parts of the banking system came under severe stress late in the week of March 6, which led to large deposit outflows and depressed bank stock prices. Policy interventions by the Federal Reserve and other agencies helped mitigate the strains in the banking system, and deposit outflows slowed considerably, but the episode reportedly left an imprint on bank lending conditions, especially for mid-sized and small banks.

The Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) provides evidence on bank lending conditions. Figure A shows that banks reported having tightened lending standards across most loan categories since the beginning of the policy tightening cycle and well before the emergence of banking-sector stresses in March. Banks reported additional tightening in the April 2023 SLOOS and indicated that they expect to further tighten their lending standards over the remainder of 2023. While banks continued to cite concerns over credit quality, collateral values, and the macroeconomic outlook as reasons for tightening or expecting to tighten their lending standards, some banks also reported concerns about their liquidity positions, deposit outflows, and funding costs as reasons for tightening their lending standards in the first quarter and expecting to tighten over the remainder of 2023. Current and expected tightening, and concerns about liquidity, deposits, and funding costs, were more frequently reported by the mid-sized and small banks relative to the largest banks. This evidence suggests that the recent banking-sector stress and related concerns about deposit outflows and funding costs contributed to tightening and expected tightening in lending standards and terms at some banks beyond what these banks would have reported absent the banking-sector stress.3

From a sectoral perspective, commercial real estate (CRE) loans have registered the most frequent reports of tightening in lending standards over the past year (figure B). Similarly, in the April survey, a large fraction of banks reported expecting further tightening in CRE lending, especially among mid-sized and small banks. In addition, banks reported tightening over a broad range of terms for CRE loans in the past year, with the most frequently reported changes pertaining to wider spreads of loan rates over banks' cost of funds and lower loan-to-value ratios. Consistent with the tightening in standards for CRE loans, in the recent earnings calls, banks attributed increased loan loss provisioning, in part, to concerns about the worsening outlook for CRE loan quality. In turn, while demand for loans was reported to have weakened for most loan categories in the April SLOOS, this finding was more widely reported for CRE loans. Banks have been reporting weaker demand for CRE loans since mid-2022.

Consistent with the tightening standards, as well as with the weakening loan demand, growth in core loans on banks' books has been decelerating since late 2022. Commercial and industrial (C&I) and CRE loan growth at banks has slowed, and C&I loan balances have even declined in recent months. Growth of residential real estate and consumer loans has continued to be solid but has also decelerated.

Tighter credit conditions at banks can weigh on economic activity, but the extent of their effects is uncertain and may vary across borrowers. Economic research has shown that banks perform a key role in aggregating funding and developing relationships with borrowers, and thus disruptions in banks' ability to provide credit can negatively affect borrowers' economic well-being.4 Several papers document the effects of bank credit tightening on aggregate economic activity.5 Although different studies find effects that differ in magnitude and timing, a broad range of research highlights the potential for material adverse effects on economic activity from an acute tightening in bank credit availability. The economic research has also shown that the size of the effects varies by borrower type, geographic region, and economic sector.6

Bank-dependent sectors and communities, especially those that depend on small and mid-sized banks, are likely the most affected by the current tightening in bank credit conditions. The "Financial Accounts of the United States" show that the share of bank loans in aggregate outstanding credit to households and businesses has declined notably since the late 1970s, from more than one-half in those years to about one-third in recent years—a decline accompanied by the expansion of the market for corporate bonds and the growth in other sources of nonbank lending.

But many businesses and households still rely primarily on banks; for instance, while large businesses can access many nonbank sources of credit, small businesses mostly borrow from banks, often the small and mid-sized banks that service the geographic areas where these businesses are located. Therefore, tightening credit conditions can lead to reduced investment and employment at many small businesses. The CRE sector—which, as noted earlier, has seen a sharp tightening in standards, especially at mid-sized and small banks—also depends heavily on bank lending. Banks hold about 60 percent of total CRE mortgages, with smaller banks accounting for a notable share.7 Finally, banks still hold the majority of credit card loans and a sizable portion of auto loans.

1. For evidence on the relationship between tighter monetary policy and credit conditions, see Ben Bernanke and Mark Gertler (1995), "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, vol. 9 (Fall), pp. 27–48. Return to text

2. For a discussion of bank deposit growth during the COVID-19 pandemic, see Andrew Castro, Michele Cavallo, and Rebecca Zarutskie (2022), "Understanding Bank Deposit Growth during the COVID-19 Pandemic," FEDS Notes (Washington: Board of Governors of the Federal Reserve System, June 3), Return to text

3. In the April SLOOS, the largest banks are defined as those with total domestic assets of $250 billion or more as of December 31, 2022, mid-sized banks as those with assets between $50 billion and $250 billion, and banks in the small, or other, category as those with assets under $50 billion. See Board of Governors of the Federal Reserve System (2023), Senior Loan Officer Opinion Survey on Bank Lending Practices (Washington: Board of Governors, April), Return to text

4. See, for instance, Ben S. Bernanke (1983), "Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression," American Economic Review, vol. 73 (June), pp. 257–76; and Ben S. Bernanke (2018), "The Real Effects of Disrupted Credit: Evidence from the Global Financial Crisis," Brookings Papers on Economic Activity, Fall, pp. 251–322, Return to text

5. See, in particular, the SLOOS-based analysis by William F. Bassett, Mary Beth Chosak, John C. Driscoll, and Egon Zakrajšek (2014), "Changes in Bank Lending Standards and the Macroeconomy," Journal of Monetary Economics, vol. 62 (March), pp. 23–40. Other examples include Mark A. Carlson, Thomas King, and Kurt Lewis (2011), "Distress in the Financial Sector and Economic Activity," B.E. Journal of Economic Analysis and Policy, vol. 11 (1), pp. 1–31; and Ben Bernanke, Mark Gertler, and Simon Gilchrist (1996), "The Financial Accelerator and the Flight to Quality," Review of Economic and Statistics, vol. 78 (February), pp. 1–15. Return to text

6. Among others, see Diana Hancock and James A. Wilcox (1998), "The 'Credit Crunch' and the Availability of Credit to Small Business," Journal of Banking and Finance, vol. 22 (August), pp. 983–1014; Joe Peek and Eric S. Rosengren (2000), "Collateral Damage: Effects of the Japanese Bank Crisis on Real Activity in the United States," American Economic Review, vol. 90 (March), pp. 30–45; and Gabriel Chodorow-Reich (2014), "The Employment Effects of Credit Market Disruptions: Firm-Level Evidence from the 2008–9 Financial Crisis," Quarterly Journal of Economics, vol. 129 (February), pp. 1–59. Return to text

7. See the box "Financial Institutions' Exposure to Commercial Real Estate Debt" in Board of Governors of the Federal Reserve System (2023), Financial Stability Report (Washington: Board of Governors, May), pp. 16–17, Return to text

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Housing market activity appears to have bottomed out

Following a steep decline in housing activity last year, many measures of activity appear to have bottomed out in recent months. Mortgage rates have been little changed, on net, so far this year after rising sharply last year (figure 22). With higher mortgage rates and the large home price increases having greatly reduced affordability and depressed homebuying sentiment, activity in the housing market has remained far below its recent peak so far this year.

Existing home sales have edged up this year, albeit from very low levels, as demand appears to have stabilized at a lower level consistent with the higher mortgage rates (figure 23). Meanwhile, the supply of existing homes for sale has remained quite low. New home sales have also moved up somewhat, allowing homebuilders to continue to reduce their inventories of unsold new homes. The rise in demand, together with tight supplies, has supported house prices, which now appear to be increasing again and are only slightly below their peak from the middle of 2022 (figure 24).

Despite the rebound in new home sales, single-family housing starts have remained low this year, as homebuilders continue to focus on completing homes already in the construction pipeline (figure 25). Single-family starts are well below their 2021 highs, though multifamily starts have held up, likely supported by a shift in demand toward rental units in response to the decline in purchase affordability.

Capital spending growth has slowed further

Business investment in equipment and intangible capital slowed in the first quarter after having expanded only modestly in the fourth quarter of last year, likely reflecting tighter financial conditions and weaker output growth overall (figure 26). In particular, investment in equipment declined in the fourth quarter of last year and the first quarter of this year, while investment in intangibles—including software as well as research and development—decelerated. By contrast, investment in nonresidential structures—which tends to respond with a lag to economic conditions—stepped up from its very low level. The strength has been concentrated in the manufacturing sector, while demand for categories such as office buildings has remained relatively weak.

Business financing conditions remained restrictive, but credit generally stayed available

Credit remained available to most nonfinancial corporations but at generally elevated interest rates and under tighter financial conditions more broadly. Banks tightened lending standards on commercial and industrial loans and commercial real estate loans over the first quarter, and business loan growth at banks continued to decelerate. Issuance of leveraged loans has been low thus far this year, particularly following the recent stress in the banking system. By contrast, credit remained broadly available to large nonfinancial businesses through corporate bond markets; investment-grade corporate bond yields are little changed, on net, since the beginning of the year, and issuance of investment-grade bonds stayed solid outside of a temporary slowdown amid the onset of the banking-sector stresses. Issuance of speculative-grade bonds also picked up but remained subdued relative to pandemic-era levels. Credit quality has continued to be strong for most nonfinancial firms, though expectations of credit defaults in corporate bonds remain elevated, particularly for lower-rated firms.

For small businesses, which are more reliant on bank financing than large businesses, credit also remained available but under tighter financing conditions. Surveys indicate that credit supply for small businesses has tightened this year, and interest rates on small business loans have risen notably.12 Nevertheless, the volume of loan originations to small businesses has stayed within the range observed in the two years before the pandemic. Loan default and delinquency rates have risen notably over the past year and have returned to levels about in line with those observed before the pandemic.

Trade has picked up slightly

After declining in the second half of last year, real imports have increased only modestly this year, in line with the modest gains in domestic demand for goods (figure 27). Exports have rebounded more strongly, driven by a pickup in foreign growth but restrained by the past appreciation of the dollar. On balance, the reported change in net exports was neutral on GDP growth in the first quarter of this year after having contributed about 1-1/2 percentage points to annualized GDP growth in the second half of last year.13 The current account deficit as a share of GDP has been little changed since the second half of 2022 but remains wider than before the pandemic.

The support to economic activity from federal fiscal actions has been roughly neutral so far this year

The temporary policies the federal government enacted during the pandemic to alleviate hardship and support the economic recovery likely boosted GDP growth in 2020 and 2021 and then imparted a drag on GDP growth last year as the effects on spending waned. With the unwinding of the pandemic-related fiscal support having largely subsided by the end of last year, the contribution of discretionary changes in fiscal policy to GDP growth has been roughly neutral so far this year.

The budget deficit fell sharply from pandemic highs, causing growth in federal debt to moderate

Fiscal policies enacted since the start of the pandemic, combined with the effects of automatic stabilizers—the reduction in tax receipts and the increase in transfers that occur because of subdued economic activity—caused the federal deficit to surge to 15 percent of GDP in fiscal year 2020 and to more than 12 percent in fiscal 2021 (figure 28).14 However, with pandemic-related fiscal support fading and receipts on the rise, the deficit fell to 5.5 percent of GDP in 2022.

As a result of the unprecedented fiscal support enacted early in the pandemic, federal debt held by the public jumped roughly 20 percentage points to 100 percent of GDP in fiscal 2020—the highest debt-to-GDP ratio since 1947 (figure 29). The debt-to-GDP ratio has moved down since fiscal 2020 owing to the rapid growth in nominal GDP. However, with interest rates on the rise, net interest outlays have recently picked up and are expected to continue to grow over the next few years.

State and local government budget positions remain strong...

Federal policymakers provided a historically high level of fiscal support to state and local governments during the pandemic, leaving the sector in a strong budget position overall. In addition, total state tax collections rose appreciably in 2021 and 2022, pushed up by the economic recovery (figure 30). In response to their strong budget positions, lawmakers cut state taxes by roughly $16 billion in state fiscal 2023, according to the National Association of State Budget Officers.

At the local level, property taxes have continued to rise, and the typically long lags between changes in the market value of real estate and changes in taxable assessments suggest that property tax revenues will continue to grow despite the recent sharp deceleration in house prices.

...and growth in employment has picked up while growth in construction outlays has been solid

Growth in state and local employment has continued to pick up in recent quarters while growth in construction outlays has stayed solid, with both measures now appearing to better reflect the strong budget positions of state and local governments (figure 31). Although both measures remain below their pre-pandemic levels, growth has improved notably as the headwinds from the big increase in retirements earlier in the pandemic and construction-sector bottlenecks have waned.

Financial Developments

The expected level of the federal funds rate over the next year shifted up

The FOMC raised the target range for the federal funds rate a further 75 basis points since January. Market-based measures of the path of the federal funds rate expected to prevail through the start of 2025 also rose over this period, while market-implied expectations for late 2025 and 2026 are little changed on net (figure 32).15 The market-implied policy path declined significantly in March, reflecting investors' view that the emergence of strains in parts of the banking sector could result in a less restrictive path for the federal funds rate, but retraced much of the decline on stronger-than-expected economic data and signs of stabilization in the banking sector. According to these market-based measures, investors anticipate that the federal funds rate will decline gradually from slightly above current levels starting late this year and reach a trough of about 3.1 percent toward the end of 2025. Meanwhile, a measure based on the Blue Chip Financial Forecasts published in the beginning of June suggested that the expected policy rate path over 2023 had increased moderately since January, bringing it to a level about in line with market-implied expectations at the time of the survey.

Yields on longer-term U.S. nominal Treasury securities were little changed on net

Yields on longer-term nominal Treasury securities were little changed, on net, since the start of the year (figure 33). Meanwhile, short-term Treasury yields rose, reflecting expectations for a higher near-term path for the federal funds rate. Yields across maturities rose early in the year amid strong economic data and inflation readings, fell sharply on the onset of banking-sector strains in early March, and partially retraced since then.

Yields on other long-term debt fluctuated with Treasury yields

After increasing substantially last year, investment-grade corporate bond yields were little changed, on net, since January, while those for speculative-grade bonds declined moderately (figure 34). Spreads on corporate bonds to comparable-maturity Treasury securities decreased early in the year, reversed following the onset of the banking-sector strains, and then narrowed again. On net, spreads for investment-grade corporate bonds are little changed since the turn of the year, while those for speculative-grade bonds narrowed moderately, bringing both to levels slightly below their historical medians. Meanwhile, municipal bond spreads to comparable-maturity Treasury securities widened slightly since the beginning of the year. Spreads on investment-grade municipal bonds are now elevated by historical standards, while spreads on speculative-grade municipal bonds remain fairly low relative to their historical distribution. Overall, corporate and municipal credit quality remained strong, with defaults staying very low in both markets.

Yields on agency mortgage-backed securities (MBS)—an important pricing factor for home mortgage rates—rose further since January (figure 35). The MBS spread remained elevated relative to pre-pandemic levels, at least partly due to high interest rate volatility, which reduces the value of holding MBS.

Broad equity price indexes increased moderately

Since the beginning of the year, the S&P 500 index increased moderately on net (figure 36). The S&P 500 index declined in March, following the onset of banking concerns, but quickly made a full recovery and continued to rise. Meanwhile, equity prices for small-cap firms are little changed, on net, since early March and are modestly higher over the year to date. Equity prices of financial firms and banks plummeted as the banking sector came under stress and remained depressed relative to the beginning of the year. One-month option-implied volatility on the S&P 500 index—the VIX—spiked in early March but quickly retraced and ended the period moderately lower. The VIX is now near its lowest point since before the pandemic (figure 37). (For a discussion of financial stability issues, see the box "Developments Related to Financial Stability.")

Developments Related to Financial Stability

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. Since the previous Monetary Policy Report, three sizable domestic banks failed following substantial deposit outflows prompted by concerns over poor management of interest rate risk and liquidity risk. As stress in the banking sector materialized in March 2023, financial market volatility increased, and there were sharp declines in the equity prices of some banks that experienced sizable outflows of uninsured deposits. In order to prevent broader spillovers in the banking system, the Federal Reserve, together with the Federal Deposit Insurance Corporation and the Department of the Treasury, took decisive actions to protect bank depositors and support the continued flow of credit to households and businesses.1 Following these actions, financial markets normalized, outflows of bank deposits slowed, and the banking system as a whole remains sound and resilient. However, ongoing stresses in the banking sector may weigh on credit conditions in the period ahead and increase uncertainty about the economic outlook.

Despite notable volatility in financial markets, vulnerabilities stemming from asset valuations were about in line with history. Corporate bond spreads, measured as the difference in yields between corporate bonds and comparable-maturity Treasury securities, stayed near moderate levels. Valuation pressures in leveraged loan markets were little changed from the March report and remained in line with historical averages. Equity price growth outpaced growth in earnings forecasts since the previous report, pushing the forward price-to-earnings ratio a touch higher to a level well above its historical median. Despite weakening conditions in the commercial sector in recent months, valuations continued to be stretched in commercial as well as residential real estate properties.

With regard to vulnerabilities associated with household and business debt, the growth of nominal gross domestic product outpaced the growth of total debt of nonfinancial businesses and households; as a result, the ratio of private nonfinancial-sector debt to GDP fell further toward its pre-pandemic level (figure A). Although there are signs that business debt growth has slowed in recent months, measures of nonfinancial business leverage remained elevated relative to their historical levels. Nevertheless, large businesses maintain their ability to service debt, supported by robust earnings and a sizable share of liabilities that are relatively insensitive to changes in interest rates. The financial position of households generally remains strong. Household debt grew slower than GDP, and most of the growth was concentrated among prime-rated borrowers. Households' required debt payments relative to their disposable income increased slightly, but their debt service ratios remain at modest levels. Moreover, even in the event of higher interest rates, the extent to which households might face increasing mortgage interest expenses appears limited, as most mortgages originated in recent years were fixed rate. Nonetheless, some households remained financially stretched and more vulnerable to future shocks.

The price of U.S. bank shares came under substantial pressure following the runs by depositors on Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank.2 In international markets, Credit Suisse came under renewed pressure and agreed to a merger with UBS. Despite the official sector's intervention to support the banking system, broad bank equity prices fell sharply, with the largest declines concentrated among a set of banks characterized by balance sheet weaknesses similar to those of the failed banks—with a high concentration of uninsured deposits and large fair value losses on fixed-rate assets. The Federal Reserve will continue to monitor conditions closely and is prepared to use all its tools to support the safety and soundness of the U.S. banking system.

Despite these stresses, the broader banking system remains sound and resilient, as most banks are well capitalized and hold ample liquidity. Risk-based capital ratios increased at global systemically important banks (G-SIBs) to meet higher capital requirements stemming from an increase in their 2023 G-SIB surcharges. At other banks, these ratios decreased but nevertheless remained above regulatory requirements. Capital ratios that do not account for the riskiness of assets but do include fair value losses on available-for-sale securities in common equity edged up in the first quarter of 2023 after having declined throughout last year, especially at non–G-SIBs. Regarding liquidity, the amount of high-quality liquid assets decreased across all banks but remained high by historical standards. Banks' overall reliance on short-term wholesale funding continued to be low by historical standards. However, uninsured transactions and savings deposits remained well above pre-pandemic levels despite significant declines over the past year. SVB and Signature Bank were unusual in their heavy reliance on uninsured deposits, and most banks maintained a much more balanced mix of liabilities.

In the nonbank financial sector, broker-dealer leverage has stayed near recent historically low levels. During the volatile period following the bank failures, dealers faced elevated client flows and continued to intermediate in the Treasury securities markets and support market functioning. However, long-standing concerns remained about their ability or willingness to intermediate in fixed-income markets during stress. Leverage at hedge funds remained somewhat elevated, especially at the largest funds, though the most comprehensive data for hedge funds are considerably lagged. Amid increased volatility in Treasury yields following the SVB failure, hedge funds faced large margin calls on previously built interest rate bets and unwound positions, potentially contributing to further volatility.

Structural funding vulnerabilities persist at some nonbanks. As short-term interest rates rose over the past year, assets at prime money market funds (MMFs) increased. Following the failures of SVB and Signature Bank, prime funds experienced a jump in redemptions as prime money fund and other investors reallocated toward government money funds. Although outflows from prime MMFs eased after a few days, the episode illustrated again that these funds are at risk of large redemptions during episodes of financial stress. Assets under management at open-ended bond and bank loan mutual funds declined in the second half of 2022, and measures of exposure of these funds to redemption risks remained at historically high levels. Life insurers continued to have elevated liquidity risks, as risky and illiquid assets remained a high fraction of their total assets and short-term liabilities were also elevated.

A routine survey of market contacts on salient shocks to financial stability highlights several important risks. Some survey respondents indicated that higher interest rates could test the ability of some governments, households, and businesses to service their debt, including in emerging market economies that are exposed to global financial conditions. Ongoing stresses in the banking sector could cause a contraction in the supply of credit to households and businesses, resulting in a marked slowdown in economic activity and an increase in credit losses for some financial institutions. An escalation of Russia's war against Ukraine or a worsening in other geopolitical risks could lead to a resurgence in commodity prices, with adverse spillovers to global asset markets and economic activity, further affecting macroeconomic and financial conditions in the U.S.

1. For more details, see the boxes "The Bank Stresses since March 2023" and "The Federal Reserve's Actions to Protect Bank Depositors and Support the Flow of Credit to Households and Businesses" in Board of Governors of the Federal Reserve System (2023), Financial Stability Report (Washington: Board of Governors, May), pp. 34–36 and pp. 53–54, respectively, Return to text

2. On April 28, 2023, the Federal Reserve published a report examining the factors that contributed to the failure of SVB and the role of the Federal Reserve, which was the primary federal supervisor for the bank and its holding company, Silicon Valley Bank Financial Group. See Board of Governors of the Federal Reserve System (2023), Review of the Federal Reserve's Supervision and Regulation of Silicon Valley Bank (Washington: Board of Governors, April), That same day, the Federal Deposit Insurance Corporation (FDIC) published a report examining the failure of Signature Bank, whose primary federal supervisor was the FDIC; see Federal Deposit Insurance Corporation (2023), FDIC's Supervision of Signature Bank (Washington: FDIC, April), Return to text

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Major asset markets functioned in an orderly way, but liquidity has remained low

Treasury market liquidity remained low by historical standards, consistent with ongoing economic uncertainty and high interest rate volatility. Liquidity conditions deteriorated notably in March, but they subsequently recovered and are little changed, on net, since the beginning of the year. Market depth—a measure of the availability of contracts to trade at best quoted prices—for Treasury securities remains near historically low levels, particularly for short-term Treasury securities. However, market functioning has continued to be orderly. Regarding equity market liquidity, market depth based on the S&P 500 futures improved modestly since January but remained somewhat low compared with pre-COVID levels. Corporate and municipal secondary bond markets continued to function well; transaction costs in these markets were fairly low by historical standards.

In the market for Treasury bills, yields on Treasury bills maturing in early June moved up sharply in May on mounting concerns about the debt ceiling. Those increases were reversed as the debt ceiling situation was resolved. Market participants have focused lately on the prospect for substantial Treasury bill issuance as the Treasury rebuilds the Treasury General Account.

Short-term funding market conditions remained stable

Conditions in overnight bank funding and repurchase agreement, or repo, markets remained stable. Increases in the FOMC's target range for the federal funds rate fully passed through to other overnight rates. The effective federal funds rate and other unsecured overnight rates have remained several basis points below the interest rate on reserve balances since January. The Secured Overnight Financing Rate has been at or slightly above the offering rate on the overnight reverse repurchase agreement (ON RRP) facility. There were, however, temporary dislocations in other short-term funding markets; spreads on term negotiable certificates of deposit and lower-rated nonfinancial commercial paper spiked in March but then normalized as conditions in the banking sector improved.

Government money market funds (MMFs) have seen a notable increase in assets under management (AUM) since January, driven in large part by the outflow of deposits from the banking sector. Prime funds, which have seen steady inflows over the tightening cycle, experienced mild outflows in the aftermath of the banking turmoil but have since recouped those flows and continued to grow. Weighted average maturities at prime and government MMFs remain near historical lows, likely in response to the continued increase in short-term rates and fund managers' uncertainty about the future path of interest rates. Elevated AUM, high demand for short-maturity assets at MMFs, and a limited supply of Treasury bills have all contributed to continuing elevated take-up at the Federal Reserve's ON RRP facility.

Bank credit continued to expand but at a slower pace

Growth in banks' total loan holdings slowed to about a 5 percent annualized rate in the first quarter of the year, down from a 9 percent rate in the fourth quarter of 2022, reflecting the effects of higher interest rates, tighter credit availability, and economic uncertainty. Bank credit as a share of nominal GDP continued to fall in the first quarter, but it remained elevated relative to pre-pandemic levels (figure 38). Banks reported tighter standards and weaker demand for most loan categories over the first quarter of 2023 in the April Senior Loan Officer Opinion Survey on Bank Lending Practices, continuing trends for standards and demand that have been reported since the middle of last year. Interest rates on bank loans continued to increase in the first quarter, reflecting higher short-term rates. Meanwhile, delinquency rates on bank loans remained near historical lows overall, despite increasing for consumer and real estate–backed loans. Bank profitability remained robust over the first quarter of 2023, though net interest margins edged down because of higher funding costs (figure 39). However, bank equity prices declined substantially since January, driven by declines following the emergence of strains in parts of the banking sector in March (figure 36). (For a discussion of bank credit availability, see the box "Recent Developments in Bank Lending Conditions.")

International Developments

Economic activity rebounded at the start of the year

Following a slowdown at the end of 2022, foreign activity rebounded early this year, driven in part by strong growth in China, as the lifting of COVID-19 restrictions unleashed pent-up demand and some fiscal stimulus was front-loaded. More recent indicators from China, however, suggest that momentum is slowing. Growth in emerging Asia excluding China has also picked up on strong private domestic consumption and increased tourism activity, which more than offset weakness in goods exports.

In Europe, the effects of the energy shock stemming from Russia's war against Ukraine were tempered in part by an unusually warm winter and successful adaptation efforts by businesses and households. The fading drag from energy prices as they decline from their elevated levels is now contributing to an economic recovery amid stronger consumer and business confidence. That said, in many parts of the globe, tighter monetary policy is starting to weigh on credit growth and investment.

Headline inflation abroad continued to ease, but core inflation remains sticky

Foreign headline inflation continued to fall as global energy prices have declined (figure 40). However, despite the recent fall in global agricultural commodity prices, food inflation in some regions (especially Europe) remains elevated, likely reflecting dislocations resulting from the pandemic and the war against Ukraine (figure 41). Core inflation in the foreign economies remains high, driven in part by tight labor markets and pass-through from past energy price increases into other prices.

Foreign central banks remain focused on reining in inflation

Central banks in most advanced foreign economies (AFEs) have pressed ahead with rate hikes, pointing to persistently high inflation and strong labor markets. Policy rate paths implied by market pricing suggest that many AFE central banks are expected to hike policy rates further, though most will reach a point later in the year when they will stop raising rates. In the emerging market economies (EMEs), some central banks have already paused policy rate hikes, including Brazil, Mexico, and South Korea. In light of the upside risks to inflation, most major foreign central banks emphasize that additional policy tightening may be needed to meet their objectives.

Financial conditions abroad are relatively little changed on net

Longer-term sovereign yields in the AFEs are little changed, on net, since January (figure 42). One exception is the U.K., where 10-year gilt yields increased notably on the back of accelerating core price pressures, high wage gains, and expectations shifting toward a tighter stance of monetary policy.

Major foreign equity indexes rose across advanced and emerging economies (figure 43). Euro-area corporate credit spreads narrowed slightly, consistent with the resilience of economic activity in the region. Inflows into EME-focused investment funds, which had strengthened at the beginning of the year, have slowed to near zero, while EME sovereign spreads were little changed.

Since January, the dollar was mixed against major currencies, leaving the broad dollar index—a measure of the trade-weighted value of the dollar against foreign currencies—a touch lower (figure 44). The dollar depreciated significantly against the Mexican peso amid resilient growth and tight monetary policy in Mexico. By contrast, the dollar appreciated modestly against Asian currencies amid weaker external demand in the region and widening interest rate differentials.


 2. The share of industries expanding their employment each month, on average, was 60 percent during the first half of this year, down from 69 percent in 2022 and just slightly above the 57 percent average rate observed between 1991 and 2019. Return to text

 3. For example, the (net) share of employers planning to increase payrolls in coming months, as reported by both the staffing firm ManpowerGroup and the National Federation of Independent Business, has moved down over the past year but remains elevated. Return to text

 4. The data on initial claims have been affected this year by some instances of fraudulent claims, which have been removed from the estimates after they were uncovered. In addition, the large swings in the data during the pandemic have made it more challenging to seasonally adjust claims in recent years. Return to text

 5. This labor force participation rate (LFPR) estimate and figure 13 adjust the historical data to account for the updated population estimates produced by the Census Bureau and incorporated by the BLS in its January 2022 Employment Situation report. Without making an adjustment for these updated population estimates, the LFPR would erroneously appear to have improved more since the onset of the pandemic and to be only about 3/4 percentage point below its pre-pandemic level. Return to text

 6. The population estimate refers to the civilian noninstitutional population aged 16 and older. This population estimate adjusts the historical data to account for the updated population estimates produced by the Census Bureau and incorporated by the BLS in its January 2022 Employment Situation report. Return to text

 7. The ratio of job openings to unemployment shows that there were 1.7 job openings per unemployed person in May 2023. For comparison, this ratio averaged 1.2 in 2019 and 0.6 over the 10-year period from 2010 to 2019. Return to text

 8. See the May 2023 Beige Book, available on the Board's website at to text

 9. In 2020, significant composition effects were also boosting labor productivity, as pandemic-induced employment losses were largest in lower-productivity services sectors. Employment composition looks to have largely normalized by 2021. Return to text

 10. Consistent with this view, the Beige Books published during the fall of last year reported that many employers cited concerns that their workforce was being overworked as an important reason for hiring; see the November 2022 Beige Book, available on the Board's website at to text

 11. Real gross domestic income (GDI) has been notably weaker than GDP over the past year, although both series measure the same economic concept, and any difference between the two figures reflects measurement error. GDI is reported to have declined at an annual rate of 2.3 percent in the first quarter of this year after having edged down 0.2 percent over the four quarters of 2022, in contrast to the increases in GDP and employment. Return to text

 12. The National Federation of Independent Business's member poll indicates that the share of respondents reporting credit was more difficult to obtain than three months before has been rising since late 2021. Similarly, the Senior Loan Officer Opinion Survey on Bank Lending Practices released in April showed that banks have tightened lending standards on small business loans. Return to text

 13. Revised estimates of monthly imports and exports from the annual revision to the Census Bureau's trade data, which was published after the most recent GDP report, suggest net exports made a positive contribution to GDP growth in the first quarter. Return to text

 14. For more information, see Congressional Budget Office (2020), "The Budgetary Effects of Laws Enacted in Response to the 2020 Coronavirus Pandemic, March and April 2020," June,; Congressional Budget Office (2021), "The Budgetary Effects of Major Laws Enacted in Response to the 2020–2021 Coronavirus Pandemic, December 2020 and March 2021," September,; and Congressional Budget Office (2021), "Senate Amendment 2137 to H.R. 3684, the Infrastructure Investment and Jobs Act, as Proposed on August 1, 2021," August 9, to text

 15. These measures are based on market prices for overnight index swaps for the effective federal funds rate and are not adjusted for term premiums. Return to text

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Last Update: June 29, 2023