For use at 11:00 a.m. EDT June 12, 2020 MONETARY POLICY REPORT June 12, 2020 Board of Governors of the Federal Reserve System LETTER OF TRANSMITTAL Board of Governors of the Federal Reserve System Washington, D.C., June 12, 2020 The President of the Senate The Speaker of the House of Representatives The Board of Governors is pleased to submit its Monetary Policy Report pursuant to section 2B of the Federal Reserve Act. Sincerely, Jerome H. Powell, Chair STATEMENT ON LONGER-RUN GOALS AND MONETARY POLICY STRATEGY Adopted effective January 24, 2012; as amended effective January 29, 2019 The Federal Open Market Committee (FOMC) is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society. Inflation, employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee’s policy decisions reflect its longer-run goals, its medium- term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee’s goals. The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee reaffirms its judgment that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate. The Committee would be concerned if inflation were running persistently above or below this objective. Communicating this symmetric inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee’s ability to promote maximum employment in the face of significant economic disturbances. The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee’s policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants’ estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC’s Summary of Economic Projections. For example, in the most recent projections, the median of FOMC participants’ estimates of the longer-run normal rate of unemployment was 4.4 percent. In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee’s assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate. The Committee intends to reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January. Note: The Committee did not reaffirm this statement in January 2020 in light of its ongoing review of its monetary policy strategy, tools, and communications practices. This statement is a reprint of the statement affirmed in January 2019. CONTENTS Summary ................................................................. 1 Economic and Financial Developments ......................................... 1 Monetary Policy ........................................................... 3 Special Topics ............................................................. 4 Part 1: Recent Economic and Financial Developments ..................... 5 Domestic Developments. 5 Financial Developments .................................................... 23 International Developments ................................................. 35 Part 2: Monetary Policy ................................................. 43 Part 3: Summary of Economic Projections ............................... 53 Abbreviations ...........................................................57 List of Boxes Disparities in Job Loss during the Pandemic ...................................... 8 Federal Fiscal Policy Response to COVID-19 .................................... 20 Small Businesses during the COVID-19 Crisis .................................... 24 Developments Related to Financial Stability ..................................... 30 Policy Response to COVID-19 in Foreign Economies .............................. 38 Federal Reserve Actions to Ensure Smooth Functioning of Treasury and MBS Markets ...... 45 Developments on the Federal Reserve’s Balance Sheet ............................. 50 NOTE: This report reflects information that was publicly available as of 2 p.m. EDT on June 10, 2020. Unless otherwise stated, the time series in the figures extend through, for daily data, June 9, 2020; for monthly data, May 2020; and, for quarterly data, 2020:Q1. In bar charts, except as noted, the change for a given period is measured to its final quarter from the final quarter of the preceding period. For figures 16 and 31, note that the S&P 500 Index and the Dow Jones Bank Index are products of S&P Dow Jones Indices LLC and/or its affiliates and have been licensed for use by the Board. Copyright © 2020 S&P Dow Jones Indices LLC, a division of S&P Global, and/or its affiliates. All rights reserved. Redistribution, reproduction, and/or photocopying in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spdji.com. S&P® is a registered trademark of Standard & Poor’s Financial Services LLC, and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent, and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein. 1 SUMMARY The COVID-19 outbreak is causing to a collapse in second-quarter real PCE. tremendous human and economic hardship Likewise, in the housing market, residential across the United States and around the world. sales and construction in April posted outsized The virus and the measures taken to protect declines that are close to some of the largest public health have induced a sharp decline in ever recorded, and heightened uncertainty economic activity and a surge in job losses, and weak demand have led many businesses with the unemployment rate, which had been to put investment plans on hold or cancel at a 50-year low, soaring to a postwar record them outright. These data, along with other high. Weaker demand and significantly lower information, suggest that real gross domestic oil prices are holding down consumer price product will contract at a rapid pace in the inflation. The disruptions to economic activity second quarter after tumbling at an annual rate here and abroad significantly affected financial of 5 percent in the first quarter of 2020. conditions and impaired the flow of credit to U.S. households and businesses. In response The labor market. The severe economic to these developments, the Federal Reserve repercussions of the pandemic have been quickly lowered its policy rate to close to especially visible in the labor market. Since zero to support economic activity and took February, employers have shed nearly extraordinary measures to stabilize markets 20 million jobs from payrolls, reversing almost and bolster the flow of credit to households, 10 years of job gains. The unemployment rate businesses, and communities. Financial jumped from a 50-year low of 3.5 percent conditions have improved, in part reflecting in February to a post–World War II high policy measures to support the economy and of 14.7 percent in April and then moved the flow of credit. The Federal Reserve is down to a still very elevated 13.3 percent committed to using its full range of tools to in May. The most severe job losses have support the U.S. economy in this challenging been sustained by those with lower earnings time, thereby promoting its maximum- and by the socioeconomic