July 2005 Monetary Policy Report

The report now describes higher core inflation and unit labor costs, with lower unemployment projections and a narrowing budget deficit. It also notes accommodative financial conditions, increased riskier mortgage use, and slower foreign growth, while the FOMC's policy stance is not addressed.

Inflation

• The report now describes core inflation as having risen to about 2 percent in the first half of 2005, up from 1.5 percent in 2004, whereas the previous report described it as well contained. Read the section
  Quotes

  Previous report: “core consumer price inflation (that is, excluding food and energy) remained well contained”

  This report: “core inflation increased from an annual rate of 1-1/2 percent in 2004 to about 2 percent between the fourth quarter of 2004 and May 2005.”

• The report now reports unit labor costs rising 4.25 percent over the four quarters ending in the first quarter of 2005, a sharp reversal from the 1 percent decline noted in the previous report. Read the section
  Quotes

  Previous report: “Finally, the deceleration in labor productivity boosted unit labor costs after two years of declines; nevertheless, last year's 1 percent rise in unit labor costs was quite modest.”

  This report: “unit labor costs rose 4-1/4 percent over the four quarters ending in the first quarter of 2005 after having declined 1 percent over the preceding four quarters.”

Labor market

• The report now reports the unemployment rate at 5 percent in June 2005, down from 5.25 percent in January 2005. Read the section
  Quotes

  Previous report: “Private payrolls, which turned up in late 2003, rose 170,000 per month last year, on average, and the unemployment rate declined below 5-1/2 percent by year-end and to 5-1/4 percent in January 2005--the lowest rates since 2001.”

  This report: “The jobless rate stood at 5 percent in June, the lowest level since September 2001.”

Economic activity

• The report now describes the federal budget deficit narrowing to $336 billion over the twelve months ending in June, whereas the previous report had it widening to $412 billion in fiscal 2004. Read the section
  Quotes

  Previous report: “The unified budget deficit widened from $378 billion in fiscal 2003 to $412 billion in fiscal 2004.”

  This report: “Over the twelve months ending in June, the unified budget recorded a deficit of $336 billion, $99 billion less than during the comparable period last year.”

Financial conditions

• The report now describes financial conditions as generally accommodative in the first half of 2005, whereas the previous report said they supported growth in 2004. Read the section
  Quotes

  Previous report: “Domestic financial conditions were supportive of economic growth in 2004.”

  This report: “Financial market conditions remained generally accommodative during the first half of 2005, as Treasury and private interest rates stayed low.”

• The report now notes that risk spreads on speculative-grade debt widened after the downgrades of Ford and General Motors, whereas the previous report said they fell more noticeably than investment-grade spreads. Read the section
  Quotes

  Previous report: “Risk spreads on investment-grade corporate debt declined a touch, and those on speculative-grade debt fell more noticeably.”

  This report: “Risk spreads on speculative-grade debt had become very tight by the end of the first quarter, but they subsequently rose, on balance, after the downgrades of Ford and General Motors; current levels suggest more-typical compensation for default risk.”

• The report now says M2 growth slowed to a 2-1/2 percent annual rate in the first half of 2005, down from the 5-1/4 percent pace reported for 2004. Read the section
  Quotes

  Previous report: “On balance, M2 growth from the fourth quarter of 2003 to the fourth quarter of 2004 was about 5-1/4 percent.”

  This report: “In the first half of 2005, M2 grew at a 2-1/2 percent annual rate--probably slower than nominal GDP and down from a 5-1/4 percent pace last year.”

Financial stability

• The report now highlights increased use of riskier mortgage products, including adjustable-rate and interest-only loans, as a potential challenge to lenders and borrowers. Read the section
  Quotes

  This report: “Recently there has been increased use of potentially riskier types of mortgages, including adjustable-rate and interest-only loans, which could pose challenges to both lenders and borrowers.”

International

• The report now describes foreign economic activity as expanding less rapidly this year than in the second half of 2004, whereas the previous report noted faster expansion in 2004. Read the section
  Quotes

  Previous report: “Foreign economic activity expanded in 2004 at a faster pace than in the preceding three years.”

  This report: “Foreign economic activity has expanded a bit less rapidly this year than in the second half of 2004, as measured by an export-weighted average of growth among U.S. trading partners.”

Projections

• The report now projects the unemployment rate to average 5 percent in both 2005 and 2006, lower than the previous report's 5.25 percent for 2005 and 5 to 5.25 percent for 2006. Read the section
  Quotes

  Previous report: “The civilian unemployment rate is expected to average about 5-1/4 percent in the fourth quarter of 2005.”  ·  “they expect the unemployment rate to edge down to between 5 percent and 5-1/4 percent.”

  This report: “The civilian unemployment rate is expected to average 5 percent in both the fourth quarter of 2005 and the fourth quarter of 2006.”

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