ECONOMIC REPORT OF THE PRESIDENT

Figure 2-v
State and Local Pensions, Unfunded Liabilities, 1950–2015
Percent of Total Annual State and Local Receipts
100
80
60
40
2015:Q3
20
0
-20
-40
-60
1950 1960 1970 1980 1990 2000 2010 2020
Source: Federal Reserve Board; Haver Analytics.
only gradual increases in the federal funds rate; the federal funds rate is likely
to remain, for some time, below levels that are expected to prevail in the
longer run” (FOMC 2015).
Over the course of 2015, forecasts for the year-end federal funds rate
from both monetary policymakers and financial markets were revised down,
as shown in Figure 2-6, implying a later date of “lift off” and fewer rate
increases in 2015. By the time the FOMC voted to raise rates in December,
financial markets had largely anticipated the increase. Moreover, “lift off”
had already largely been incorporated in many investors’ expectations about
longer-term interest rates, stock prices, and the dollar. Accordingly, changes
in yields on 10-year Treasury notes (Figure 2-37) and 30-year mortgage rates
were small in the immediate wake of “lift off.”
The size of the Federal Reserve’s balance sheet at the end of 2015
was $4.4 trillion—more than five times its size in 2007, reflecting several
large-scale asset purchase programs (quantitative easing) from 2008 to 2014,
which are estimated to have lowered long-term interest rates by about a
percentage point (Engen et al. 2015 and the references therein). Moreover,
the Federal Reserve believes the larger stock of Federal Reserve asset holdings
has continued to influence long-term interest rates even after the end
64 | Chapter 2