that financial conditions were easier. this needed to be offset by a somewhat higher fed funds rate target. financial conditions also appear to have become more important in terms of their influence on business cycles. on the one hand, the fed funds rate has been more stable and the range of the fed funds rate over the cycle has been smaller. however, on the other hand, relative to what has happened to the fed funds rate target, financial conditions have become more volatile. the hypothesis that ed mckelvey and i put forward in 1997 in response to evidence of the so - called “ great moderation ” seems to be well supported by the past two economic downturns and their aftermaths : put simply, longer stretches of economic growth imply greater leverage and complacency and thus, greater financial problems when recessions do occur. in brief, longer u. s. business cycles logically lead to four linked consequences – more financial leverage, longer bouts of balance sheet repair, more subdued recoveries and longer periods of decline in inflation and interest rates during the early stages of recovery. 2 if the economy is more stable, then market participants will have more appetite for risk. this works fine during the expansion stage, when growth is relatively stable. however, when a recession finally arrives, it is a bigger shock than when recessions were more frequent. this surprise results in a more substantial adjustment in financial conditions. ironically, the increased stability of the business cycle during the expansion phase appears to increase the volatility and importance of financial conditions when recessions do occur. at this stage, incorporating indicators of financial conditions into forecasting and into evaluating the conduct of monetary policy probably requires relying on constructing a “ rough and ready ” index. macroeconomic models – especially dynamic stochastic general equilibrium models – do not incorporate robust financial sectors. instead, these models have implicitly assumed that the monetary transmission mechanism and the financial intermediation process always works smoothly and predictably. 3 see the brave new business cycle : no recession in sight, william dudley and edward mckelvey, january 1997, goldman sachs economic research group. adding financial intermediation to these models has become a very active area of research. see, for example, the recent work of vasco curdia and michael woodford in “ credit spreads and monetary policy, ” federal reserve bank of new york staff report no. 385. events of the past decade confirm that financial conditions matter and that the fed funds rate is not a sufficient statistic with

you agree to our terms of use and privacy statement. you can learn more about how we use cookies by reviewing our privacy statement. specifically, i currently expect real gdp growth in the united states to be below one percent this year, and then to rebound slightly to around 1 - 1 / 2 percent next year. with overall growth slowing to below its trend level, i expect the unemployment rate to move up from its very low current level, reaching somewhat above 4 percent next year. economic conditions in puerto rico similar to the mainland, employment in puerto rico has rebounded quickly and strongly. before the pandemic, the economy was just showing signs of emerging from a decade - and - a - half - long economic slump, during which both the population and employment had fallen by about 16 percent. then, in the spring of 2020, employment tumbled another 14 percent, a far steeper decline than after hurricane maria in 2017. the subsequent turnaround has been astounding. today, total employment is up 5 percent from pre - pandemic levels and is at a nine - year high, and the unemployment rate is at a record low. the recovery has been broad - based, but we've seen particular strength in certain industries like professional business services, transportation and warehousing, and manufacturing. tourism rebounded significantly too, with hotel occupancy rates reaching above 75 percent. soaring inflation all in all, maximum employment has been achieved. but inflation remains unacceptably high, and we are far from the fed's longer - run inflation goal of 2 percent. since early last year, inflation has increased rapidly to levels many of you have not seen in your lifetimes. this experience is not unique to the united states ; nearly all countries around the world are seeing rising costs, and central banks everywhere are working to contain them. the rise in inflation has been extraordinary. in december 2020, overall inflation, as measured by the 12 - month percent change in the personal consumption expenditures ( pce ) price index, was 1. 3 percent. in may of this year, it was 6. 3 percent. a significant portion of this sharp rise reflects global increases in food and energy prices. but, even excluding those costs, the " core " inflation rate has increased from 1. 5 percent a year and a half ago to 4. 7 percent today. it's more than just numbers. high inflation is incredibly harmful, especially to those that can least afford to shoulder the escala