ECONOMIC REPORT OF THE PRESIDENT

udget pressures (Box 2-1).2 In 2016, State and local government purchases
were about 60-percent larger than Federal purchases and three-times larger
than Federal nondefense purchases (Figure 2-4). The roughly 90,000 state
and local governments employ roughly 13 percent of nonfarm workers,
and added about 159 thousand jobs in the twelve months ended November
2016. Changes in State and local purchases can be as important as changes
in Federal purchases.
Monetary Policy
In December 2015, the Federal Open Market Committee (FOMC)
increased the target range for the federal funds rate by 0.25 percentage point,
ending seven years with the effective federal funds rate maintained at a level
just above the zero lower bound. The FOMC’s decision to tighten monetary
policy was based on its judgment that labor markets had improved considerably
and that it was reasonably confident that inflation would move up over
the medium term to its 2-percent objective. Through the first 11 months
of 2016, the FOMC did not raise the target range for the federal funds rate.
As was the case in previous years, the Federal Reserve’s realized pace
of raising rates in 2016 was below the median forecasted pace of FOMC
participants at the close of the previous year. In December 2015, the median
of FOMC participant projections was four 25-basis point rate hikes in 2016.
In March 2016, the median forecast of the federal funds rate from FOMC
participants for the end of 2016 fell to 0.9 percent, implying just two hikes
in 2016. Throughout 2016, the FOMC continued to maintain the target
range for the federal funds rate at between 0.25 and 0.50 percent, as inflation
remained below target, U.S. economic growth was subdued, global growth
prospects remained weak, and some financial market turmoil emerged in
early 2016. Britain’s vote to leave the European Union in June introduced
more uncertainty about global growth and financial conditions. Throughout
the year, the market-implied federal funds rate for the end of 2016 was
below the median forecast of FOMC participants at the time. Importantly,
the FOMC emphasized throughout the year that monetary policy is not on
a “preset path”3 and that the projections of FOMC participants are only an
indication of what they view as the most likely path of interest rates given
beliefs on the future path of the economy.
2 Forty-nine out of fifty states have constitutions or statutes mandating a balanced budget and
many local governments have similar provisions (National Conference of State Legislatures
2010). This does not prevent them from running deficits. Many of those balanced budget
statutes apply only to the operating budget, while deficits may be allowed on their capital
accounts. Also, spending from “rainy day funds” appears as a deficit on the government
balance sheet in the national income and product accounts.
3 See Transcript of Chair Yellen’s Press Conference, September 21, 2016 (Yellen 2016a).
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