Board of Governors of the Federal Reserve System

Part 1: Recent Economic and Financial Developments

Monetary Policy Report submitted to the Congress on February 7, 2020, pursuant to section 2B of the Federal Reserve Act

Domestic Developments

The labor market strengthened further last year but at a slower pace than in 2018...

Payroll employment gains were solid in the second half of 2019 and averaged 176,000 per month during the year as a whole. This pace is somewhat slower than the average monthly gains in 2018, even accounting for the anticipated effects of the Bureau of Labor Statistics' upcoming benchmark revision to payroll employment (figure 1).¹ However, the pace of job gains appears to have remained faster than what is needed to provide jobs for net new entrants to the labor force as the population grows.²

Reflecting the employment gains over this period, the unemployment rate declined further in 2019 and stood at 3.5 percent in December, 0.4 percentage point below its year-earlier level and at its lowest level since 1969 (figure 2). In addition, the unemployment rate is 0.6 percentage point below the median of Federal Open Market Committee (FOMC) participants' estimates of its longer-run normal level.³

Strengthening labor market conditions are also evident in rising labor force participation rates (LFPRs)—that is, the shares of the population either working or actively seeking work. The LFPR for individuals aged 16 and over was 63.2 percent in December, above its level a year ago despite the downward pressure of about 1/4 percentage point per year associated with the aging of the population. 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 and continued to increase in 2019 (figure 3). The employment-to-population ratio for individuals aged 16 and over—that is, the share of people who are working—was 61.0 percent in December and has been increasing since 2011.

Other indicators are also consistent with strong labor market conditions, albeit with some slowing in the pace of improvement since 2018. As reported in the Job Openings and Labor Turnover Survey (JOLTS), job openings have remained plentiful, although the private-sector job openings rate has come down over the past year. Similarly, the quits rate in the JOLTS has remained 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 so wish. These data accord 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—historically, a good early indicator of economic downturns—have both remained quite low.

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

Differences in unemployment rates across ethnic and racial groups have narrowed in recent years, on net, as they typically do during economic expansions, after having widened during the 2007–09 recession (figure 4). The decline in the unemployment rate for African Americans has been particularly sizable, and its average rate in the second half of October 2019 was the lowest recorded since the data began in 1972. Although the unemployment rates for African Americans and for Hispanics remain substantially above those for whites and for Asians, those differentials in the second half of 2019 were at their narrowest levels on record. 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 remained moderate by historical standards...

Despite strong labor market conditions, the available indicators generally suggest that increases in hourly labor compensation have remained moderate, averaging about 3 percent over the past two years. These indicators include the employment cost index, a measure of both wages and the cost to employers of providing benefits; compensation per hour in the business sector, a broad-based but volatile measure of wages, salaries, and benefits; and average hourly earnings from the payroll survey, a monthly index that is timely but does not account for benefits (figure 6). The median 12-month wage growth of individuals reporting to the Current Population Survey calculated by the Federal Reserve Bank of Atlanta, which tends to be higher than broader-based measures of wage growth, remains near the upper portion of its range over the past couple of years.⁴ Interestingly, wage growth over the past few years has been strongest for workers in relatively low-paying jobs, suggesting that the strong labor market is having a more pronounced benefit for these workers.

. . . 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 2018, 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, including on research and development, during the most recent recession and the relatively slow recovery that followed. More recently, labor productivity is estimated to have increased 1.5 percent over the four quarters ending in 2019:Q3—a small improvement from the preceding year, especially given the volatility of the productivity data, but still moderate relative to earlier periods. While it is uncertain whether productivity growth will continue to improve, a sustained pickup in productivity growth, as well as additional labor market strengthening, would support stronger gains in labor compensation.

Inflation was below 2 percent last year

After having been close to the FOMC's objective of 2 percent in 2018, inflation moved back below 2 percent last year, where it has been for most of the time since the end of the most recent recession. The 12-month change in the price index for personal consumption expenditures (PCE) was 1.6 percent in December 2019, as was the 12-month measure of inflation that excludes food and energy items (so-called core inflation), which historically has been a better indicator of where inflation will be in the future than the overall index (figure 8). Both measures are down from the rates recorded a year ago; the slowing partly results from particularly low readings in the monthly price data in the first quarter of 2019, which appear to reflect idiosyncratic price declines in a number of specific categories such as apparel, used cars, banking services, and portfolio management services. Indeed, core inflation picked up after the first quarter and was at an average annual rate of 1.9 percent over the remainder of the year.

The trimmed mean PCE price index, calculated by the Federal Reserve Bank of Dallas, also suggests a transitory element to inflation readings early last year. The trimmed mean 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.⁵ The 12-month change in this measure was about the same in December 2019 as it was in 2018.

Oil prices fluctuated in 2019

After falling from more than $80 per barrel to less than $60 per barrel in late 2018, the Brent spot price of crude oil fluctuated between $60 and $70 for most of 2019. Prices generally moved up in the second half of last year, supported by expectations of supply cuts in OPEC member countries and, later on, diminished concerns about the global outlook (figure 9). Prices also spiked briefly in early January over tensions with Iran. In recent weeks, however, oil prices moved lower amid heightened fears that the coronavirus outbreak that started in China might weigh on economic growth and the demand for oil. Despite these fluctuations in oil prices, retail gasoline prices generally edged lower since mid-2019. For 2019 as a whole, consumer energy prices rose modestly more than the core index. Meanwhile, food prices posted only a small increase in 2019, held down by soft prices for farm commodities, and contributed very little to overall consumer price inflation.

Reported 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 lower foreign inflation and declines in non-oil commodity prices (figure 10).⁶ After declining in the first half of 2019, prices of industrial metals appear to have bottomed out in recent months, consistent with increased optimism about global demand following positive trade developments.

Survey-based measures of inflation expectations have been broadly 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 broadly 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 within a narrow range around 2-1/2 percent since the end of 2016, though this level is between 1/4 and 1/2 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 moved lower, on net, in the second half of last year and averaged 2.5 percent, 1/4 percentage point below its average over the preceding three years.

. . . and market-based measures of inflation compensation have also been little changed

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—have been little changed, on net, since the middle of 2019, with both measures below their respective ranges that persisted for most of the 10 years before the start of notable declines in mid-2014 (figure 12).⁷ 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.⁸

Growth of gross domestic product was moderate in the second half of 2019...

Real gross domestic product (GDP) is reported to have increased at a moderate average annual rate of 2.1 percent in the second half of 2019, although growth was somewhat slower than in the first half of the year and in 2018 (figure 13). Consumer spending rose at a moderate pace, on average, and residential investment turned up after having declined since the end of 2017. In contrast, business fixed investment declined in the second half of last year, reflecting a number of factors that likely include uncertainty regarding trade tensions and the weak global growth outlook. Those factors also continued to weigh on manufacturing output, which declined over the first half of 2019 and has moved roughly sideways since then. (See the box "Manufacturing and U.S. Business Cycles.") Despite those headwinds, the economic expansion continues to be supported by steady job gains, increases in household wealth, expansionary fiscal policy, and supportive domestic financial conditions that include moderate borrowing costs and easy access to credit for many households and businesses.

. . . and downside risks to the outlook receded somewhat

Downside risks to the economic outlook seem to have receded somewhat in the latter part of 2019. Labor market conditions and economic growth in the United States have been resilient to the global headwinds in 2019, and conflicts over trade policy diminished somewhat toward the end of the year. Economic growth abroad also shows signs of stabilizing, though the coronavirus outbreak presents a more recent risk. Reflecting these factors as well as more accommodative monetary policy stances in the United States and some foreign economies, financial conditions eased somewhat over the second half of the year. Statistical models designed to gauge the probability of recession using various indicators, including the Treasury yield curve, suggest that the likelihood of a recession occurring over the next year has fallen noticeably in recent months. Similarly, as shown in Part 3, when Federal Reserve policymakers most recently presented their economic projections, in December, fewer participants judged the risks to the outlook to be tilted to the downside compared with their projections from last June.

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

Consumer spending rose at a moderate pace, on average, in the third and fourth quarters of 2019 and posted another solid gain for the year as a whole (figure 14). The growth in real PCE in recent years reflects the continued improvements in the labor market, which have supported further increases in household income. Real disposable personal income, a measure of households' after-tax purchasing power, increased 2.6 percent in 2019, a solid gain albeit below the robust increase in 2018 that was bolstered by a reduction in personal income taxes. The personal saving rate, at 7.7 percent in the fourth quarter, was little changed from the previous year (figure 15).

Spending was also supported by high household wealth...

The relatively high level of aggregate household net worth also supported consumer spending last year. House prices, which are of particular importance for the value of assets held by a large portion of households, continued to increase in 2019, although at a more moderate pace than in recent years (figure 16). In addition, U.S. equity prices, which fell sharply at the end of 2018, have rebounded since then. Equity wealth is more concentrated among high-wealth households with high propensities to save than is housing wealth, however, and may therefore provide less support for consumption. The ratio of aggregate household net worth to household income held steady through the third quarter of last year at 6.9, near its all-time high (figure 17).

. . . and consumer sentiment remains strong

Consumers have remained upbeat during the past year. The Michigan index of consumer sentiment, which declined last summer as trade tensions spiked, recovered in recent months and currently stands at a high level by historical standards. The sentiment measure from the Conference Board, which has been more stable, also suggests consumers are fairly upbeat (figure 18).

Borrowing conditions for households remain generally favorable, and borrowing costs have moved down since the middle of 2019...

Financing conditions for consumers remain supportive of growth in household spending. Interest rates on credit cards and auto loans declined, on net, during the second half of 2019, and consumer credit continued to expand at a moderate pace (figures 19). Standards and delinquency rates for these loans have been generally stable. For student loans, credit remains widely available, 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. In the mortgage market, 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.

. . . and activity in the housing sector has picked up, likely reflecting lower interest rates

Residential investment picked up in the second half of 2019 after declining for six straight quarters. Housing starts for single-family and multifamily housing units increased sharply in the second half of last year and posted appreciable gains for the year as a whole, with starts and permits for new construction rising to the highest levels in more than 10 years (figure 20). Sales of new and existing homes also increased during 2019 (figure 21). This improvement appears to have importantly reflected the reduction in mortgage interest rates; after increasing appreciably from mid-2017 through 2018, rates declined markedly last year, fully reversing those earlier increases (figure 22). Despite the lower mortgage rates, households' perceptions of homebuying conditions have remained low, likely reflecting ongoing increases in housing prices.

In contrast, business fixed investment weakened in the second half of 2019...

After increasing more than 5 percent per year in 2017 and 2018, business fixed investment—spending by businesses on structures, equipment, and intangibles such as research and development—stalled in 2019, as a moderate gain in the first quarter was offset by small declines over the rest of the year. The softness in business investment last year was evident in each of the three main components, and a portion of the weakening appears to reflect concerns over trade policy and slower foreign growth; other factors included the suspension of deliveries of the Boeing 737 Max aircraft and the continued decline in drilling and mining structures investment amid oil prices that fell back from the levels reached in 2018. Forward-looking indicators of business spending—such as orders of capital goods, surveys of business conditions and sentiment, and profit expectations from industry analysts—all appear to have stabilized in recent months but suggest that investment is likely to remain subdued (figure 23).

. . . despite corporate financing conditions that remained accommodative overall

Financing conditions for nonfinancial firms have remained accommodative amid lower interest rates. Flows of credit to large nonfinancial firms remained solid overall in the third quarter of 2019 (figure 24). The gross issuance of corporate bonds, although lower than in the first half of last year, was robust across credit categories. Yields on both investment- and speculative-grade corporate bonds continued to decrease and are near historical lows. Spreads on corporate bond yields over comparable-maturity Treasury securities have continued to narrow, on net, since the middle of last year and are at the lower end of their historical distributions. Respondents to the January Senior Loan Officer Opinion Survey on Bank Lending Practices, or SLOOS, reported that banks eased several terms on commercial and industrial (C&I) loans but that demand for C&I loans has continued to weaken, consistent with the slowdown in business investment. C&I loan growth at banks has slowed since the first half of last year, while commercial real estate loan growth has continued to be strong. Meanwhile, financing conditions for small businesses have remained generally accommodative, but credit growth has been subdued.

Net exports added to GDP growth in 2019, as exports grew little but imports declined

Real exports grew only a touch in 2019, as tariffs on U.S. exports increased and foreign growth weakened (figure 25). Real imports declined last year, in part reflecting higher tariffs on imported goods and weakness in investment and manufacturing. As a result, real net exports—after having subtracted from U.S. real GDP growth in 2018—provided a modest boost to GDP growth in 2019. Relative to 2018, the nominal trade deficit is slightly less negative, and the current account deficit is little changed as a percent of GDP (figure 26).

Federal fiscal policy actions continued to boost economic growth in 2019 while raising the federal unified budget deficit...

The effects of fiscal policy actions enacted at the federal level in earlier years continued to boost GDP growth in 2019; the Tax Cuts and Jobs Act of 2017 lowered personal and business income taxes, and rising appropriations consistent with the Bipartisan Budget Act of 2018 boosted federal purchases.⁹ In 2019, federal purchases rose 4.3 percent, well above the 2.7 percent increase of 2018 (figure 27).

The federal unified budget deficit widened further in fiscal year 2019 to 4-1/2 percent of nominal GDP from 3-3/4 percent of GDP in 2018, as expenditures moved up as a share of the economy while receipts moved sideways (figure 28). Expenditures, at 21 percent of GDP, are above the level that prevailed in the decade before the start of the 2007–09 recession, while receipts have continued to run below their average levels. The ratio of federal debt held by the public to nominal GDP rose to 79 percent in fiscal 2019 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, reflecting large and rising deficits under current fiscal policy.

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

The fiscal position of most state and local governments remains stable, although there is a range of experiences across these governments. Revenues for these governments have continued to grow in recent quarters, as the economic expansion pushes up income and sales tax collections for state governments, and past house price gains continue to push up property tax collections for local governments. Boosted by a rebound in construction spending following two years of weak growth, real purchases by state and local governments rose moderately last year but still remained quite restrained, partly reflecting budget pressures associated with pension and retiree health-care obligations. State and local government payrolls increased moderately in 2019 but have only roughly regained the peak observed before the current expansion, and real outlays for construction are more than 10 percent below their pre-recession peak. The debt of these governments as a share of the economy has continued to edge lower and currently equals around 14 percent of GDP, well below the previous peak of 21 percent following the most recent recession.

Financial Developments

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

Market-based measures of the expected path of the federal funds rate over the next several years have moved down, on net, since the middle of last year and show about a 30 basis point decrease in the federal funds rate over 2020 and a relatively flat path thereafter (figure 30). Survey-based measures of the expected path of the policy rate also shifted down from the levels observed in the middle of 2019 but indicate no change to the target range for the federal funds rate over 2020 from its level at the end of 2019. 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 in December, the median of respondents' modal projections implies a flat trajectory for the target range of the federal funds rate for the next few years.¹⁰ Additionally, market-based measures of uncertainty about the policy rate approximately one to two years ahead declined, on balance, from their levels at the end of last June and are close to their average level in recent years.

U.S. nominal Treasury yields decreased on net

After moving significantly lower over the first half of 2019, nominal Treasury yields also fell sharply in August, largely in response to investors' concerns regarding trade tensions between the United States and China and the global economic outlook (figure 31). Later in the year, as these concerns abated, Treasury yields rose, the yield curve steepened, and uncertainty about near-term Treasury yields—measured by option-implied volatility on short- and longer-dated swap rates—declined. However, in the second half of January, investors' concerns about the implications of the coronavirus outbreak for the economic outlook weighed on Treasury yields and led to a flattening of the yield curve as well as some increase in uncertainty about near-term Treasury yields. Since the middle of last year, Treasury yields ended lower on net.

Consistent with changes in the yields on nominal Treasury securities, yields on 30-year agency mortgage-backed securities (MBS)—an important determinant of mortgage interest rates— decreased, on balance, since the middle of last year and remained low by historical standards (figure 32). Meanwhile, yields on both investment- and speculative-grade corporate bonds continued to decline and also stayed low by historical standards (figure 33). Spreads on corporate bond yields over comparable-maturity Treasury yields narrowed moderately, on net, over the second half of 2019 and remained in the lower end of their historical distribution.

Broad equity price indexes increased notably

Equity prices fluctuated in August and September along with investors' concerns about trade developments and the economic outlook. Later in 2019 and into 2020, as these concerns abated, equity prices rose substantially and were reportedly boosted by greater certainty among investors that monetary policy would remain accommodative in the near term (figure 34). Gains were spread across most major economic sectors, with the exception of the energy sector, for which stock prices declined markedly. Measures of implied and realized stock price volatility for the S&P 500 index—the VIX and the 20-day realized volatility—increased in August to fairly elevated levels but declined later in the year (figure 35). (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

While available indicators of Treasury market functioning have generally remained stable since the first half of 2019—including bid-ask spreads, bid sizes, and estimates of transaction costs—some, such as measures of market depth, have decreased. However, the decline in measures of market depth has reportedly not led to any concerns about Treasury market liquidity. 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 notably and standing near historically low levels.

Money market rates moved down in line with decreases in the FOMC's target range, except for some notable volatility in mid-September

Decreases in the FOMC's target range for the federal funds rate in July, September, and October transmitted effectively through money markets, with yields on a broad set of money market instruments moving lower in response to the FOMC's policy actions.

The effective federal funds rate moved nearly in parity with the interest rate paid on reserves and was closely tracked by the overnight Eurodollar rate. Other short-term interest rates, including those on commercial paper and negotiable certificates of deposit, also moved down in line with decreases in the policy rate. Domestic short-term funding markets were volatile in mid-September—amid large flows related to corporate tax payments and settlement of Treasury securities—and experienced significant tightening of conditions. The effective federal funds rate rose above the target range on September 17 but then moved back within the target range following the Federal Reserve's open market operations, which eased pressures in money markets (see the box "Money Market Developments and Monetary Policy Implementation" in Part 2).

Bank credit continued to expand, and bank profitability remained robust

Aggregate credit provided by commercial banks continued to expand through the second half of 2019, as the strength in commercial real estate and residential real estate loan growth, helped by falling interest rates, more than offset the slowdown in C&I and consumer loans. In the second half of last year, the pace of 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 from its value last June (figure 36). Overall, measures of bank profitability ticked down a bit in the third quarter because of narrower net interest margins but remain near their post-crisis highs (figure 37).

International Developments

Growth in advanced foreign economies weakened, but it appears to be stabilizing

Real GDP growth in several advanced foreign economies (AFEs) appears to have stepped down in the second half of the year (figure 38). However, incoming data suggest that the slowdown in the AFEs may have bottomed out. Household spending has generally remained resilient, sustained by low unemployment rates and rising wages. Financial conditions have improved further, supported in part by accommodative monetary policy actions. The protracted slump in global manufacturing, which weighed on external demand across the AFEs, is showing tentative signs of nearing an end. In the euro area, where manufacturing activity was particularly weak, recent indicators suggest that growth may be steadying. In Japan, real GDP appears to have contracted sharply at the end of 2019, following a consumption tax hike in October, but its effects are likely to be transitory. In the United Kingdom, Brexit-related uncertainty weighed on economic activity throughout 2019; around the turn of the year, U.K. and European Union authorities took the necessary steps to prevent a disorderly Brexit from occurring on January 31, 2020, but they still need to negotiate a new trade arrangement.

Inflationary pressures remained subdued in many advanced foreign economies

Against a backdrop of slower economic growth, consumer prices in many AFEs continued to rise at a subdued pace, especially in the euro area and Japan (figure 39). Canada remains an exception, as inflation there hovered around 2 percent.

Central banks in several advanced foreign economies provided accommodation

In response to subdued growth and below-target inflation, the European Central Bank introduced a new stimulus package in September of last year, including a deposit rate cut of 10 basis points to negative 0.5 percent, a restart of its Asset Purchase Programme, and more favorable terms for its targeted longer-term refinancing operations. Similarly, the Reserve Bank of Australia and the Reserve Bank of New Zealand reduced their policy rates in the second half of last year, citing concerns about the global outlook. The Bank of Canada, the Bank of England, and the Bank of Japan kept their policy rates unchanged, although communications by their officials took a more dovish tone, emphasizing increased downside risks to the global economy. In contrast, Sweden's Riksbank and Norway's Norges Bank increased their policy rates, citing favorable macroeconomic conditions and concerns about growing financial imbalances.

Financial conditions in advanced foreign economies eased further

Notwithstanding slowing global growth and bouts of political tensions, financial conditions in the AFEs, on balance, eased further in the second half of 2019, supported by accommodative central bank actions, progress on trade negotiations between the United States and China, and diminished fears of a hard Brexit. Long-term interest rates in many AFEs remained well below the levels seen at the end of 2018 (figure 40). Equity prices, as well as prices of other risky assets, increased moderately (figure 41). Sovereign bond spreads over German bund yields for euro-area peripheral countries narrowed slightly. In recent weeks, however, equity and bond markets gave up some of their gains as uncertainty about the economic effects of the coronavirus weighed on investors' sentiment.

Growth slowed markedly in many emerging market economies, but there are tentative signs of stabilization

Chinese GDP growth slowed further in the second half of 2019 against the backdrop of increased tariffs on Chinese exports, global weakness in trade and manufacturing, and authorities' deleveraging campaign that continued to exert a drag on the economy (figure 42). However, recent data suggest that China's economic activity picked up at the end of last year, in part supported by some fiscal and monetary policy stimulus and some easing of trade tensions. In emerging Asia excluding China, economic growth was dragged down by a sharp contraction in Hong Kong, where social and political unrest resulted in severe economic disruptions, and by weakness in India, where an ongoing credit crunch continues to weigh on activity. In several other Asian economies, GDP growth held steady but at a lackluster pace amid headwinds from moderating global growth. GDP growth in Korea, Taiwan, and the Philippines rebounded in the last quarter of 2019, consistent with signs of stabilization in the global manufacturing cycle, especially in the high-tech sector. However, the recent emergence of the coronavirus could lead to disruptions in China that spill over to other Asian countries and, more generally, to the rest of the global economy.

Many Latin American economies continued to underperform. Economic stagnation persisted in Mexico, reflecting both domestic factors—including market concerns about economic policies—and external factors, notably, renewed weakness in U.S. manufacturing production. Severe social unrest in several countries—including Chile, Ecuador, and Bolivia—disrupted economic activity. Argentina's financial crisis continued, while Venezuela's economy likely continued to contract. Growth in Brazil, in contrast, edged up as aggregate demand continued to recover, supported by further reductions in policy interest rates.

Financial conditions in emerging market economies fluctuated but, on net, eased somewhat

Notwithstanding social and political tensions as well as concerns about the global outlook, financial conditions in the emerging market economies (EMEs) eased somewhat in the second half of 2019. Conditions were supported by the accommodative actions of the FOMC and several foreign central banks and, later in the year, by progress in the negotiations between the United States and its major trading partners as well as improved prospects about global growth. EME equity prices generally increased, especially for Brazil (figure 43). And measures of EME sovereign bond spreads over U.S. Treasury yields generally decreased (figure 44). Political tensions in Hong Kong contributed to an underperformance of Chinese risky assets. After several months of withdrawals, flows to dedicated EME mutual funds resumed in the fourth quarter of 2019, consistent with the improved sentiment toward global prospects (figure 45). However, in reaction to the emergence of the coronavirus, in late January equity and bond markets gave up some of their gains.

The dollar fluctuated but is, on balance, little changed

The foreign exchange value of the U.S. dollar fluctuated but is, on balance, little changed compared with last July (figure 46). While concerns about global growth and trade tensions contributed to the appreciation of the dollar over the summer, monetary policy easing by the Federal Reserve and progress on U.S.–China trade negotiations led to a depreciation of the dollar, especially with respect to the Chinese renminbi. The British pound appreciated notably against the dollar as fears of a disorderly Brexit diminished.

Note: On February 7, 2020, the "Developments Related to Financial Stability" section was updated to reflect the correct versions of charts C and D.

Footnotes