February 2007 Monetary Policy Report

The report now describes core inflation as easing but still high, with long-term expectations well anchored, while highlighting subprime mortgage delinquencies and record household debt. It notes the housing downturn has not spilled over significantly, and the FOMC left policy unchanged at its final four meetings. Financial conditions are seen as supportive, with equity gains and smaller Treasury yield increases.

Inflation

• The report now describes core inflation as having eased somewhat but remaining undesirably high, whereas the previous report emphasized elevated pressures and intensification. Read the section
  Quotes

  Previous report: “Thus far in 2006, inflation pressures have been elevated.”  ·  “inflationary pressures had intensified as core consumer prices rose more rapidly in March than in earlier months.”

  This report: “On balance, core inflation was a bit higher over the four quarters of 2006 than in 2005.”  ·  “Core inflation also eased somewhat, albeit to a rate above its year-earlier level.”  ·  “current rates remained undesirably high”

• The report now states long-term inflation expectations are well anchored, while the previous report noted contained expectations with some measures rising in April. Read the section
  Quotes

  Previous report: “Nevertheless, measures of inflation expectations remained contained, and the rate of increase in labor costs was subdued, having been held down by strong gains in productivity and moderate increases in labor compensation.”  ·  “Inflation expectations, as measured by some surveys and by comparisons of yields on nominal and inflation-indexed Treasury securities, also rose in April. The Committee still judged those expectations to be contained”

  This report: “Measures of long-term inflation expectations, however, remained well anchored.”

Economic activity

• The report now says the housing downturn has not spilled over significantly to consumer spending and the construction drag will diminish, whereas the previous report warned of a more pronounced downturn weakening demand. Read the section
  Quotes

  Previous report: “If the softening in the demand for housing and in real estate values becomes more pronounced, the resulting drop in construction activity and the erosion of household wealth could weaken aggregate demand noticeably.”  ·  “A slowing in activity now appears to be under way in the housing sector, where home sales and residential construction have receded from the elevated levels of last summer.”

  This report: “the Committee judged that the downturn had not spilled over significantly to consumer spending.”  ·  “the drag on economic growth from declining construction activity is expected to diminish later this year.”

• The report now describes economic activity as slowing in late 2006, whereas the previous report saw only a moderating pace, with the slowdown now attributed to housing and motor vehicles. Read the section
  Quotes

  Previous report: “the incoming information on real activity has suggested that the pace of the expansion is moderating, with the deceleration in spending most apparent in the household sector.”

  This report: “During the rest of the year, however, economic activity slowed to a pace somewhat below the average rate of recent years.”  ·  “Real GDP is reported to have increased at an average annual rate of 2-3/4 percent over the final three quarters of 2006, down from the average 3-1/4 percent pace in 2004 and 2005.”  ·  “The slowdown principally was the result of the contraction in residential construction, which intensified later in the year, and the marked decline in production of light motor vehicles in the second half of the year as manufacturers took steps to trim dealers' inventories.”

Financial conditions

• The report now reports smaller increases in Treasury yields (about 40 and 30 basis points for two- and ten-year) compared with the previous 70 basis point rise. Read the section
  Quotes

  Previous report: “Yields on nominal Treasury coupon securities rose about 70 basis points, on net, through early July”

  This report: “yields on two- and ten-year nominal Treasury securities increased about 40 and 30 basis points respectively.”

• The report now reports broad equity indexes soared 10-20 percent in 2006, whereas previously they had advanced then reversed gains. Read the section
  Quotes

  Previous report: “Equity prices advanced until mid-May but then reversed those gains.”

  This report: “Broad equity indexes soared 10 percent to 20 percent in 2006, boosted by strong growth in corporate earnings.”

• The report now says investors expect only slight easing over the next two years, whereas previously they expected easing after year-end. Read the section
  Quotes

  Previous report: “market participants currently appear to expect the target federal funds rate to ease after the end of the year.”

  This report: “Investors now expect the FOMC to ease policy only slightly over the next two years.”

Financial stability

• The report now highlights marked increases in delinquencies on subprime variable-rate mortgages, whereas the previous report only noted low average delinquency rates. Read the section
  Quotes

  Previous report: “Household balance sheets remain generally sound; although some pockets of distress have surfaced, average delinquency rates on mortgages and other consumer debt are still low.”

  This report: “Delinquency rates on consumer loans and on most types of mortgages remained low, although they increased markedly for subprime mortgages with variable interest rates.”

• The report now highlights a record-high household financial obligations ratio and a marked rise in subprime ARM delinquencies, whereas the previous report only noted a slight rise and limited distress. Read the section
  Quotes

  Previous report: “The ratio of household financial obligations to disposable income rose 0.1 percentage point in the first quarter to about 18-3/4 percent, narrowly exceeding the top of its historical range.”  ·  “the evidence points to only limited pockets of financial distress in the household sector. Delinquency rates on residential mortgages were low by historical standards in the first quarter”

  This report: “the household financial obligations ratio continued its upward trend of the past decade to reach a record high.”  ·  “Delinquency rates on subprime residential mortgages with variable interest rates have increased markedly; still, delinquency rates on other mortgages and consumer loans have remained low.”

Monetary policy

• The report now notes the FOMC left policy unchanged at its final four meetings and continues examining communication changes, whereas the previous report mentioned cumulative policy effects and beginning communication discussions. Read the section
  Quotes

  Previous report: “the Committee was aware that the cumulative effects of past monetary policy actions on economic activity could turn out to be larger than expected.”  ·  “decided to begin its consideration of communication issues at its August meeting and to lengthen meetings later this year to allow a fuller discussion of these issues.”

  This report: “the FOMC left the stance of policy unchanged at its final four meetings of 2006”  ·  “the FOMC has worked to improve the transparency of its decisionmaking process, and the Committee continues to examine whether further changes would improve its communications with the public.”

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