Board of Governors of the Federal Reserve System

Part 1: Recent Economic and Financial Developments

Monetary Policy Report submitted to the Congress on July 5, 2019, pursuant to section 2B of the Federal Reserve Act

Domestic Developments

The labor market strengthened further during the first half of 2019 but at a slower pace than last year...

Labor market conditions have continued to strengthen so far this year but at a pace slower than last year. Total nonfarm payroll employment has averaged gains of about 165,000 per month over the first five months of 2019, according to the Bureau of Labor Statistics. This pace is slower than the average monthly gains in 2018, but it is faster than what is needed to provide jobs for net new entrants into the labor force as the working-age population grows (figure 1).¹

In April and May of this year, the unemployment rate stood at 3.6 percent, 1/4 percentage point lower than its level in December 2018 and its lowest level since 1969 (figure 2). In addition, the unemployment rate is 1/2 percentage point below the median of Federal Open Market Committee (FOMC) participants' estimates of its longer-run normal level.²

In May, the labor force participation rate (LFPR) for individuals 16 and over—that is, the share of the population either working or actively seeking work—was 62.8 percent, and it has changed little, on net, since late 2013. The aging of the population is an important contributor to an underlying downward trend in the overall participation rate. In particular, members of the baby-boom cohort are increasingly moving into their retirement years, ages when labor force participation typically falls. The flat trajectory in the overall LFPR is therefore consistent with strengthening labor market conditions; indeed, the LFPR for prime-age individuals (between 25 and 54 years old), which is much less sensitive to the effects of population aging, has been rising over the past few years (figure 3). Combining both the unemployment rate and the LFPR, the employment-to-population ratio (EPOP) for individuals 16 and over—the share of that segment of the population who are working—was 60.6 percent in May and has been gradually increasing throughout the expansion. The increase has been considerably larger for those with at least some college education than for those with no more than a high school diploma. (The box "How Have Lower-Educated Workers Fared since the Great Recession?" discusses movements in the EPOP by educational level over the current expansion.)

Other indicators are also consistent with strong labor market conditions. As reported in the Job Openings and Labor Turnover Survey (JOLTS), the average of the private-sector job openings rate over the first four months of the year was near its historical high, consistent with surveys indicating that businesses see vacancies as hard to fill. Similarly, the quits rate in the JOLTS is also near the top of its historical range, an indication that workers are being bid away from their current jobs or have become more confident that they can successfully switch jobs if they wish to. This interpretation accords well with surveys of consumers that indicate households perceive jobs as plentiful. The JOLTS layoff rate and the number of people filing initial claims for unemployment insurance benefits have both remained quite low.

. . . and unemployment rates have fallen for all major demographic groups over the past several years

Differences in unemployment rates across ethnic and racial groups have narrowed in recent years, as they typically do during economic expansions, after having widened during the recession (figure 4). However, unemployment rates for African Americans and Hispanics remain substantially above those for whites and Asians. The rise in LFPRs for prime-age individuals over the past few years has also been apparent in each of these racial and ethnic groups (figure 5).

Increases in labor compensation have picked up but remain moderate by historical standards...

Despite strong labor market conditions, the available indicators generally suggest that increases in hourly labor compensation have remained moderate. The employment cost index—a measure of both wages and the cost to employers of providing benefits—was 2-3/4 percent higher in March of 2019 relative to its year-earlier level (figure 6). Compensation per hour in the business sector—a broad-based but volatile measure of wages, salaries, and benefits—rose 1-1/2 percent over the four quarters ending in 2019:Q1, less than the annual increases over the preceding couple of years. Among measures that do not account for benefits, average hourly earnings rose 3.1 percent in May relative to 12 months earlier, a slightly faster rate of increase than during the same period of a year ago. According to the Federal Reserve Bank of Atlanta, the median 12-month wage growth of individuals reporting to the Current Population Survey increased about 3-3/4 percent in May, near the upper portion of its range over the past couple of years.³

. . . and likely have been restrained by slow growth in labor productivity over much of the expansion

These moderate rates of hourly compensation gains likely reflect the offsetting influences of a strengthening labor market and productivity growth that has been weak through much of the expansion. From 2008 to 2017, labor productivity increased a little more than 1 percent per year, on average, well below the average pace from 1996 to 2007 of nearly 3 percent and also below the average gain in the 1974–95 period (figure 7). Although considerable debate remains about the reasons for the slowdown in productivity growth over this period, the weakness may be partly attributable to the sharp pullback in capital investment during the most recent recession and the relatively slow recovery that followed. More recently, however, labor productivity rose 1-3/4 percent in 2018 and picked up further in the first quarter of 2019.⁴ While it is uncertain whether this faster rate of growth will persist, a sustained pickup in productivity growth, as well as additional labor market strengthening, would support stronger gains in labor compensation.

Price inflation has dipped below 2 percent this year

Consumer price inflation has moved down below the FOMC's objective of 2 percent this year.⁵ As measured by the 12-month change in the price index for personal consumption expenditures (PCE), inflation is estimated to have been 1.5 percent in May after being at or above 2 percent for much of 2018 (figure 8). Core PCE inflation—which excludes consumer food and energy prices that are often quite volatile, and which therefore typically provides a better indication than the total measure of where overall inflation will be in the future—also moved lower in recent months and is estimated to have been 1.6 percent over the 12 months ending in May. The slowing in core inflation to date reflects particularly low readings in the first three months of the year that appear due to idiosyncratic price declines in a number of specific categories such as apparel, used cars, and banking services and portfolio management services. Indeed, in April and May, core inflation accelerated, posting larger average monthly gains than in the first quarter.

The trimmed mean PCE price index, produced by the Federal Reserve Bank of Dallas, provides an alternative way to purge inflation of transitory influences, and it is less sensitive than the core index to idiosyncratic price movements such as those noted earlier.⁶ The 12-month change in this measure was 2 percent in May.

Oil prices rebounded through the spring but have moved down recently...

After dropping sharply late last year, the Brent price of crude oil moved up to almost $75 per barrel in mid-April, partly reflecting declines in production in Iran and Venezuela and voluntary supply cuts by other OPEC members and partner countries (figure 9). More recently, however, prices have fallen back to around $65 per barrel because of concerns about global growth. The changes in oil prices have contributed to similar movements in retail gasoline prices, which rose through early spring but have also fallen back recently.

. . . and prices of imports other than energy fell

Nonfuel import prices, before accounting for the effects of tariffs on the price of imported goods, have continued to decline from their mid-2018 peak, responding to dollar appreciation, lower foreign inflation, and declines in non-oil commodity prices (figure 10).⁷ In particular, prices of industrial metals have fallen in recent months, partly on concerns about weak global demand.

Survey-based measures of inflation expectations have been stable...

Expectations of inflation likely influence actual inflation by affecting wage- and price-setting decisions. Survey-based measures of inflation expectations at medium- and longer-term horizons have remained generally stable over the past year. In the Survey of Professional Forecasters, conducted by the Federal Reserve Bank of Philadelphia, the median expectation for the annual rate of increase in the PCE price index over the next 10 years has been very close to 2 percent for the past several years (figure 11). In the University of Michigan Surveys of Consumers, the median value for inflation expectations over the next 5 to 10 years has fluctuated around 2-1/2 percent since the end of 2016, though this level is about 1/4 percentage point lower than had prevailed through 2014. In the Survey of Consumer Expectations, conducted by the Federal Reserve Bank of New York, the median of respondents' expected inflation rate three years hence has fluctuated between 2-1/2 percent and 3 percent over the past five years.

. . . while market-based measures of inflation compensation have come down since the first half of 2018

Inflation expectations can also be gauged by market-based measures of inflation compensation. However, the inference is not straightforward, because market-based measures can be importantly affected by changes in premiums that provide compensation for bearing inflation and liquidity risks. Measures of longer-term inflation compensation—derived either from differences between yields on nominal Treasury securities and those on comparable-maturity Treasury Inflation-Protected Securities (TIPS) or from inflation swaps—tend to fall when markets are volatile because of the incorporation of liquidity risks. Such declines occurred around the turn of the year and again in May and June, when market volatility picked up again. Despite the fluctuations this year, these measures of inflation compensation remain notably below levels that prevailed in the summer of 2018 (figure 12).⁸ The TIPS-based measure of 5-to-10-year-forward inflation compensation and the analogous measure from inflation swaps are now about 1-3/4 percent and 2 percent, respectively, with both measures below their respective ranges that prevailed for most of the 10 years before the start of the notable declines in mid-2014.⁹

Real gross domestic product growth was strong in the first quarter, but there are recent signs of slowing

Real gross domestic product (GDP) rose at an annual rate of 3 percent in 2018 (figure 13). In the first quarter, real GDP again moved up at an annual rate of around 3 percent. However, there are indications that growth will moderate in the second quarter.¹⁰ Net exports and business inventories provided a sizable boost to first-quarter GDP growth, but their contributions appear to have reversed in the months following. Notably, private domestic final purchases—that is, final purchases by households and businesses, which tend to provide a better indication of future GDP growth than most other components of overall spending—posted only a modest increase in the first quarter. The slowing that occurred in consumer spending appears to have been temporary, but the slowing in business fixed investment appears to be more persistent. Manufacturing output fell in the first quarter, and it moved down further in April before posting a small gain in May. Although lower production levels of motor vehicles and aircraft were important contributors to the weakness, the recent declines in manufacturing were broad based.¹¹ Nevertheless, the economic expansion continues to be abetted by steady job gains, increases in household wealth, expansionary fiscal policy, and still-supportive domestic financial conditions, including moderate borrowing costs and easy access to credit for many households and businesses.

Growth in business fixed investment has softened after strong gains in 2018

Investment spending by businesses rose rapidly in 2018 but appears to have decelerated sharply this year. In the first quarter, growth slowed to an annual rate of 4-1/2 percent, while new orders for nondefense capital goods, excluding the volatile aircraft category, have declined modestly, on balance, in recent months (figure 14). In addition, forward-looking indicators of business spending such as capital spending plans have deteriorated amid downbeat business sentiment and profit expectations from industry analysts, reportedly reflecting trade tensions and concerns about global growth.

By contrast, activity in the housing sector had been declining but recently shows signs of stabilizing

Residential investment fell in 2018 and declined further in the first quarter. More recently, the pace of construction activity appears to have stabilized as housing starts for single-family and multifamily housing units rose, on average, in April and May (figure 15). Existing home sales moved higher as well over the same period, while new home sales moved down a bit following a sizable increase in the first quarter (figure 16). Consumers' perceptions of homebuying conditions and housing affordability have improved, which is consistent with the declines in mortgage rates this year and the slowing in growth of home prices (figure 17).

Ongoing improvements in the labor market and gains in wealth continue to support household income and consumer spending...

After increasing at a moderate pace of 2-1/2 percent in 2018 as a whole, real consumer spending slowed considerably in the first quarter (figure 18). However, incoming data suggest that consumer spending picked up in recent months, with PCE in May up at an annual rate of 2-1/2 percent relative to the average level in the fourth quarter.

Real disposable personal income (DPI), a measure of households' after-tax purchasing power, increased at a solid annual rate of 3 percent in 2018; however, so far this year, growth in real DPI has been more moderate despite strong gains in wage and salary income. With consumer spending rising more than disposable income so far this year, the personal saving rate moved down from an average of 6-1/2 percent in the fourth quarter to around6 percent in May (figure 19).

Ongoing gains in household wealth have likely continued to support consumer spending. House prices, which are of particular importance for the balance sheet positions of a large portion of households, continued to increase through May, although at a more moderate pace than in recent years (figure 20). In addition, U.S. equity prices, which fell sharply at the end of 2018, have rebounded this year. Buoyed by increases in home and equity prices, aggregate household net worth moved up to 6.8 times household income in the first quarter (figure 21).

. . . and consumer sentiment remains strong

Consumers have remained upbeat. Although the Michigan index of consumer sentiment dipped at the turn of the year, it has since rallied, and the sentiment measure from the Conference Board survey also climbed in the second quarter from its first-quarter level (figure 22). In June, both the Michigan and the Conference Board indexes of consumer sentiment were about in the middle of their ranges over the past few years.

Borrowing conditions for households remain generally favorable...

Despite increases in interest rates for consumer loans and some reported further tightening in credit card lending standards, financing conditions for consumers largely remain supportive of growth in household spending. Consumer credit expanded at a moderate pace in the first quarter, rising faster than disposable income (figure 23). Mortgage credit has continued to be readily available for households with solid credit profiles but remains noticeably tighter than before the most recent recession for borrowers with low credit scores. Standards for automotive loans have been generally stable, and overall delinquency rates for these loans were little changed in the first quarter at a moderate level. Financing conditions in the student loan market remain firm, with over 90 percent of such credit being extended by the federal government. After peaking in 2013, delinquencies on such loans have been gradually declining, reflecting in part the continued improvements in the labor market.

. . . while corporate financing conditions tightened somewhat relative to last year but remained accommodative overall

Aggregate flows of credit to large nonfinancial firms remained strong in the first quarter, supported in part by relatively low interest rates and accommodative financing conditions (figure 24). The gross issuance of corporate bonds, which had fallen substantially in December, rebounded in the first quarter as market volatility receded. After increasing notably in late 2018, spreads on both investment- and speculative-grade corporate bonds over comparable-maturity Treasury securities have both declined, on net, this year as investors' risk appetite seems to have recovered. In April, respondents to the Senior Loan Officer Opinion Survey on Bank Lending Practices, or SLOOS, reported that demand for commercial and industrial loans weakened in the first quarter even as lending standards remained unchanged and terms for such loans eased.¹² However, banks reported tightening lending standards on all categories of commercial real estate loans. Meanwhile, financing conditions for small businesses have remained generally accommodative, but credit growth has been subdued.

Net exports supported GDP growth in the first quarter

After being a small drag on U.S. real GDP growth last year, net exports, which can have sizable swings from quarter to quarter, added about 1 percentage point to the rate of growth in the first quarter. Real U.S. exports increased at an annual rate of about 5-1/2 percent, as exports of agricultural products and automobiles expanded robustly. Real imports fell 2 percent following solid increases in 2018 (figure 25). Nominal goods trade data through May suggest that exports edged down in the second quarter, while imports were about flat. The available data suggest that the trade deficit and the current account in the first half of the year were little changed as a percent of GDP from 2018 (figure 26).

Federal fiscal policy actions boosted economic growth in 2018 but had a smaller effect on first-quarter real GDP because of the partial government shutdown...

Fiscal policy at the federal level boosted GDP growth in 2018 because of lower personal and business income taxes from the Tax Cuts and Jobs Act of 2017 and because of an increase in federal purchases due to the Bipartisan Budget Act of 2018.¹³ After increasing 2-3/4 percent in 2018, federal government purchases were flat in the first quarter of 2019, reflecting the effects of the partial federal government shutdown (figure 27). The government shutdown, which was in effect from December 22 through January 25, held down GDP growth in the first quarter, largely because of the lost work of furloughed federal government workers and affected federal contractors. That said, federal purchases are expected to rebound in the second quarter.

The federal unified budget deficit widened in fiscal year 2018 to around 4 percent of nominal GDP from 3-1/2 percent of GDP in 2017 because receipts moved lower, to 16 percent of GDP (figure 28). Expenditures are currently around 21 percent of GDP, slightly above the level that prevailed in the decade before the start of the 2007–09 recession. The ratio of federal debt held by the public to nominal GDP rose to around 77 percent in fiscal 2018 and was quite elevated relative to historical norms (figure 29). The Congressional Budget Office projects that this ratio will rise further over the next several years.

. . . and the fiscal position of most state and local governments is stable

The fiscal position of most state and local governments is stable, although there is a range of experiences across these governments. The revenue of state governments has grown moderately in recent quarters, as the economic expansion continues to push up income and sales tax collections. At the local level, property tax collections continue to rise, pushed higher by past house price gains. Real state and local government purchases grew modestly last year; however, outlays have surged so far this year, driven largely by a boost in construction spending. State and local infrastructure spending was weak for many years, and there appears to be demand for higher expenditures in this area. State and local government payrolls expanded slowly last year and over the first five months of 2019, and employment by these governments remains below its peak before the current expansion.

Financial Developments

The expected path of the federal funds rate over the next several years has moved down

Market-based measures of the expected path for the federal funds rate over the next several years have declined substantially since the end of 2018 (figure 30). Various factors contributed to this shift, including increased investor concerns about downside risks to the global economic outlook and rising trade tensions. In addition, investors reportedly interpreted FOMC communications over the first half of 2019 as signaling the Federal Reserve is likely to lower the target range for the federal funds rate in light of muted inflation pressures and uncertainties about the global economic outlook.

Survey-based measures of the expected path of the policy rate also shifted down relative to the levels observed at the end of 2018. According to the results of the most recent Survey of Primary Dealers and Survey of Market Participants, both conducted by the Federal Reserve Bank of New York just before the June FOMC meeting, the median of respondents' modal projections implies a declining trajectory for the target range of the federal funds rate for 2019, which flattens out in 2020. Relative to the December survey, the median of these projections moved down 50 basis points for July 2019 and 100 basis points for December 2019.¹⁴ Additionally, market-based measures of uncertainty about the policy rate approximately one to two years ahead increased, on balance, from their levels at the end of last December.

The nominal Treasury yield curve has moved down and continued to flatten

Since the end of 2018, the nominal Treasury yield curve shifted down and flattened further, with the 2-, 5-, and 10-year nominal Treasury yields all declining about 70 basis points on net (figure 31). The decrease in Treasury yields, which is consistent with the revision in market participants' expectations for the path of policy rates, largely reflects FOMC communications as well as investors' concerns about the global economic outlook and the escalation of trade disputes. Option-implied volatility on swap rates—an indicator of uncertainty about Treasury yields—has increased notably, on net, since the beginning of the year. In particular, measures of near-term interest rate uncertainty have reached the levels seen at the end of 2018.

Yields on 30-year agency mortgage-backed securities (MBS)—an important factor influencing mortgage interest rates—decreased in line with the decline in the 10-year nominal Treasury yield and remained low by historical standards (figure 32). Likewise, yields on both investment-grade and high-yield corporate debt declined significantly from the levels in late 2018 and stayed very low (figure 33). Despite widening in May, the spreads on corporate bond yields over comparable-maturity Treasury yields have narrowed, on net, over the first half of 2019 and are close to their historical medians.

Broad equity price indexes increased on net

After declining sharply at the end of 2018, broad U.S. stock market indexes have recovered, on net, over the first half of 2019 (figure 34). The broad rebound in stock prices—which included all major economic sectors—was reportedly supported by Federal Reserve communications that were perceived as more accommodative than previously anticipated. Stocks fluctuated in May and June as downside risks and trade tensions were offset by further expectations of easier monetary policy.

Measures of implied and realized stock price volatility for the S&P 500 index declined notably on net. Following the highs seen at the end of 2018, these volatility measures declined until late April, with the VIX—a measure of implied volatility—returning to near the 10th percentile of its historical distribution and with realized volatility close to the 30th percentile of its historical range (figure 35). At the beginning of May, following the escalation of trade tensions, these volatility measures increased and have remained elevated since then, but they have stayed well below the high levels of December and now stand close to their historical medians. Several measures of financial conditions that aggregate large sets of financial data into summary indexes eased considerably since the end of 2018 but have tightened a bit since the beginning of May, in line with the decline in stock prices over that month, and have remained relatively elevated since then. (For a discussion of financial stability issues, see the box "Developments Related to Financial Stability.")

Markets for Treasury securities, mortgage-backed securities, and municipal bonds have functioned well

Available indicators of Treasury market functioning have generally remained stable since the beginning of 2019, with a variety of measures—including bid-ask spreads, bid sizes, and estimates of transaction costs—displaying few signs of liquidity pressures. Liquidity conditions in the agency MBS market were also generally stable. Credit conditions in municipal bond markets remained stable as well, with yield spreads on 20‑year general obligation municipal bonds over comparable-maturity Treasury securities declining somewhat on net.

Money market rates were little changed

Rates across money markets were little changed, on balance, in the first half of 2019. Conditions in domestic short-term funding markets continued to be broadly stable since the end of 2018. Overnight secured and unsecured rates declined in line with the technical adjustment announced after the May FOMC meeting, which lowered the interests paid on required and excess reserve balances by 5 basis points. Other short-term interest rates, including those on commercial paper and negotiable certificates of deposit, were also little changed since the beginning of the year.

Bank credit continued to expand, and bank profitability remained robust

Credit provided by commercial banks to fund businesses as well as commercial and residential real estate continued to grow in 2019, albeit at a slower pace than in the second half of 2018. By contrast, consumer loan growth accelerated since the beginning of the year. In the first quarter of 2019, the pace of total bank credit expansion was about in line with that of nominal GDP, leaving the ratio of total commercial bank credit to current-dollar GDP little changed relative to last December (figure 36). Overall, measures of bank profitability remained solid in the first quarter of 2019, supported by wider net interest margins and steady loan growth (figure 37).

International Developments

Advanced foreign economies have been slowly emerging from the recent soft patch

After a significant slowdown in the second half of last year, growth picked up in many advanced foreign economies (AFEs) at the start of 2019, but at a still restrained pace (figure 38). Notwithstanding continued weakness in the manufacturing sector and softening external demand, domestic demand in the AFEs generally improved amid rising employment and wages as well as easier financial conditions. The pickup in growth also reflected temporary factors. Economic activity in the euro area was boosted by the fading effects of car production disruptions in Germany and protests in France in 2018. Growth in the United Kingdom surged as expectations of trade disruptions surrounding the original date of the United Kingdom's exit from the European Union, or Brexit, led to stockpiling by households and firms. Economic activity in Canada, by contrast, remained depressed by oil production cuts, but recent indicators point to a rebound in growth in the second quarter.

Core inflation remained low in advanced foreign economies

The rebound in energy prices earlier in the year pushed up consumer price inflation in many AFEs (figure 39). However, despite further improvement in labor market conditions, inflationary pressures remained contained, with core inflation readings notably muted in the euro area and Japan. In Canada and the United Kingdom, by contrast, core inflation rates moved close to 2 percent.

AFE central banks took a more accommodative policy stance

With activity only slowly picking up and core inflation persistently low, European Central Bank (ECB) communications took a more accommodative tone. In March, the ECB indicated that it would keep its policy rate in negative territory through at least the middle of next year and rolled out a new round of loans for euro-area banks to reduce the risk of renewed funding pressures. In June, ECB President Mario Draghi added that the ECB would introduce new stimulus measures if the economic outlook did not improve. The Bank of Canada and Bank of England signaled more-gradual increases in interest rates, given a moderation in the pace of global economic activity. The Reserve Bank of Australia in June and July cut its policy rate in response to below-target inflation and weak economic growth.

Central banks' more accommodative policy stances supported AFE asset prices

The more accommodative policy stance in major AFEs contributed to an overall easing of financial conditions in the first half of the year. Market-implied paths of policy rates and long-term interest rates on sovereign bonds have generally fallen sharply, as in the United States (figure 40). Broad stock market indexes across AFEs are up, on net, since January (figure 41). However, concerns about global growth and rising trade tensions weighed on risky asset prices over the course of May and June. Sovereign bond spreads in Italy fluctuated amid uncertainty about the country's fiscal outlook.

Economic activity in emerging Asia struggled to gain a solid footing

In China, real GDP growth picked up in the first quarter, supported in part by fiscal and monetary policy measures that targeted smaller businesses and infrastructure spending, as well as by the more favorable financial conditions amid investor optimism on a U.S.–China trade deal (figure 42). Recent activity indicators, however, suggest that the underlying momentum in the economy remains relatively subdued against the backdrop of reemerging trade tensions, global weakness in trade and manufacturing, and the Chinese authorities' continued caution about providing substantial further credit stimulus. Amid moderating global trade and activity, real GDP growth in other Asian economies in the first quarter generally remained below their 2018 pace, with growth in Korea turning negative (see the box "The Persistent Slowdown in Global Trade and Manufacturing").

Latin American economies continued to underperform

In Mexico, real GDP contracted in the first quarter following generally weak performance in the past two years. Tighter fiscal policy and disruptions from labor unrest weighed on activity amid a backdrop of softening U.S. manufacturing demand and persistent declines in petroleum production. Recent indicators suggest some improvement in the second quarter, although uncertainty regarding trade relations with the United States appears to have increased. In Brazil, real GDP also contracted in the first quarter, as a mining disaster and ongoing weakness in the Argentine economy weighed on Brazilian economic activity. Investment continued to decline, held down by uncertainty over whether Brazil's government would enact major fiscal and other economic reforms.

Financial conditions in many emerging market economies improved, on net, despite the reemergence of trade tensions

Financial conditions in many emerging market economies (EMEs) eased earlier in the year in response to the more accommodative policy stance of the Federal Reserve and major AFE central banks. However, in recent months, political uncertainties in some EMEs and renewed trade tensions between the United States and major trading partners have weighed on EME asset prices. On net, broad measures of EME sovereign bond spreads over U.S. Treasury rates are down a little, while benchmark EME equity indexes are a bit higher since the beginning of the year. Flows to dedicated EME mutual funds increased earlier in the year but turned negative in the second quarter (figure 43). While deteriorations in asset prices and capital flows have been sizable for some economies, particularly Turkey and Argentina, broad indicators of financial stress in EMEs are below those seen during other periods of significant stress in recent years.

The dollar depreciated a little

Over the first half of the year, the foreign exchange value of the U.S. dollar fluctuated but was, on net, a little lower (figure 44). Increased investor optimism about prospects for trade negotiations early this year as well as downward-revised expectations for U.S. interest rates led to a depreciation of the dollar. But the more accommodative tone of communications from major foreign central banks and safe-haven flows—in part in response to trade tensions and concerns about global growth—helped push the dollar up. In addition, the Chinese renminbi has come under some downward pressure since trade tensions escalated in recent months.

Footnotes