July 2002 Monetary Policy Report

The report now projects stronger 2002 GDP growth and expects the economy to reduce underutilized resources, while noting the FOMC shifted to balanced risks. It highlights equity declines from accounting irregularities and a weaker dollar boosting exports, replacing earlier concerns about bank loan tightening and foreign-led recovery. It also emphasizes energy-driven inflation and cautious lenders, while noting limited household financial stress.

Inflation

• The report now highlights a surge in energy prices boosting overall inflation in early 2002, whereas the previous report attributed inflation decline to a sharp drop in energy prices. Read the section
  Quotes

  Previous report: “Inflation declined last year, pulled down by a sharp drop in energy prices.”  ·  “Inflation declined in 2001 largely because of a steep drop in energy prices.”

  This report: “Overall inflation was boosted by a surge in energy prices in March and April, but energy prices have since retreated a bit.”  ·  “A jump in energy prices in the spring pushed up overall inflation in the first part of 2002, but core inflation remained subdued.”  ·  “Energy prices rose sharply in March and April but have turned down more recently.”

Economic activity

• The report now expects the economy to expand rapidly enough to reduce underutilized resources, whereas the previous report said the recovery would not cut into that margin. Read the section
  Quotes

  Previous report: “Federal Reserve policymakers are expecting the economy to begin to recover this year from the mild downturn experienced in 2001, but the pace of expansion is not projected to be sufficient to cut into the margin of underutilized resources.”

  This report: “expect the economy to expand rapidly enough over the next six quarters to erode current margins of underutilized capital and labor resources.”

Financial conditions

• The report now highlights equity price declines due to corporate accounting irregularities, whereas the previous report focused on bank loan tightening and increased risk spreads. Read the section
  Quotes

  Previous report: “Banks have continued to tighten terms and standards on loans, and risk spreads have increased a little this year.”

  This report: “ongoing disclosures of corporate accounting irregularities and lapses in corporate governance, have pulled down equity prices appreciably on balance this year.”

• The report now describes lenders as more cautious and selective, whereas the previous report noted financing conditions worsened somewhat but did not emphasize lender caution. Read the section
  Quotes

  Previous report: “financing conditions worsened somewhat, on balance, given weaker equity values, higher borrowing costs for risky firms, and some tightening of banks' lending standards.”

  This report: “But, in addition, lenders became more cautious and selective, especially for borrowers of marginal credit quality.”

• The report now notes that financial market participants have marked down expectations of the expansion, whereas the previous report saw signs of recovery beginning. Read the section
  Quotes

  Previous report: “Nevertheless, by early this year some signs appeared that the economy was beginning to mend.”

  This report: “As judged by declines in most interest rates over the first half of the year, financial market participants have marked down their expectation of the vigor of the economic expansion.”  ·  “But Treasury yields and equity prices more than rolled back those increases on renewed questions about the strength of the rebound in the economy, including growing uncertainty regarding prospective corporate profits and concerns about escalating geopolitical tensions and about the governance and transparency of U.S. corporations.”

Financial stability

• The report now states financial stress among households has been limited, whereas the previous report noted noticeable deterioration in credit quality. Read the section
  Quotes

  Previous report: “Measures of household credit quality deteriorated noticeably last year.”

  This report: “The decline in stock prices in the first half of 2002 reduced household wealth, and the debt-service burden remained high, but financial stress among households to date has been limited.”

International

• The report now says foreign growth and a weaker dollar should bolster U.S. exports, replacing the earlier view that foreign output would follow, not lead, a U.S. rebound. Read the section
  Quotes

  Previous report: “Activity abroad remains subdued, and a rebound of foreign output is likely to follow, not lead, a rebound in the United States.”

  This report: “Foreign economic growth has strengthened and, together with a decline in the foreign exchange value of the dollar, should bolster U.S. exports.”

Projections

• The report now projects 2002 real GDP growth of 3-1/2 to 3-3/4 percent, up from the previous 2-1/2 to 3 percent. Read the section
  Quotes

  Previous report: “The central tendency of the real GDP growth forecasts made by the members of the Board of Governors and the Federal Reserve Bank presidents is 2-1/2 percent to 3 percent”

  This report: “The central tendency of the forecasts for the increase in real GDP over the four quarters of 2002 is 3-1/2 percent to 3-3/4 percent, and the central tendency for real GDP growth in 2003 is 3-1/2 percent to 4 percent.”

• The report now notes that by March the FOMC considered risks to its objectives balanced, replacing the earlier assessment of risks tilted toward economic weakness. Read the section
  Quotes

  Previous report: “the FOMC left its target for the federal funds rate unchanged in January. However, reflecting a concern that growth could be weaker than the economy's potential for a time, the FOMC retained its assessment that the risks were tilted unacceptably toward economic weakness.”

  This report: “the FOMC announced that it considered the risks to achieving its long-run objectives as now being balanced over the foreseeable future.”

These points are generated automatically by comparing the two reports' text, and each quote is checked against the report it's cited from.