February 2008 Monetary Policy Report

The report now describes a weakened labor market, higher inflation, and severe financial market strains, including tighter credit and reduced risk appetite. It also notes slower foreign growth and a shift in policy rates, with the FOMC cutting rates substantially.

Inflation

• The report now states headline PCE inflation rose to 3.5 percent in 2007, a higher level than the previous report's description of a pickup due to energy and food prices. Read the section
  Quotes

  Previous report: “Overall inflation, however, picked up as a result of sizable increases in energy and food prices. At the same time, core inflation (which excludes the direct effects of movements in energy and food prices) held at about the same rate as in 2006.”

  This report: “Overall consumer price inflation, as measured by the price index for personal consumption expenditures (PCE), stepped up to 3-1/2 percent over the four quarters of 2007”

Labor market

• The report now describes the labor market as weakened, with private-sector payroll growth slowing markedly, whereas the previous report noted steady job gains and unemployment at 4-1/2 percent. Read the section
  Quotes

  Previous report: “Activity continued to increase moderately, on average, over the period; businesses added jobs at a steady pace; and the unemployment rate remained at 4-1/2 percent.”

  This report: “growth in private-sector payrolls slowed markedly in late 2007 and January 2008.”

Economic activity

• The report now emphasizes a slowdown in major foreign economies since summer 2007, with financial strains and softening housing markets, whereas the previous report described above-trend growth. Read the section
  Quotes

  Previous report: “The major foreign industrial economies experienced above-trend growth in the first quarter of this year.”

  This report: “Economic activity in the major advanced foreign economies posted relatively strong growth over the first three quarters of 2007, and labor markets tightened. However, evidence of a slowdown has accumulated since the summer.”  ·  “Financial market strains appear to be weighing on growth in the major economies. Surveys of banks have revealed a tightening of credit standards for both households and businesses.”  ·  “Both consumer and business confidence have slid since August, and readings from surveys of economic activity have declined. Retail sales have slowed”  ·  “housing markets in a number of countries that until recently had been robust--including Ireland, Spain, and the United Kingdom--have softened”

Financial conditions

• The report now describes severe financial market strains from subprime losses, central bank liquidity interventions, and a substantial FOMC rate cut, replacing the earlier supportive conditions. Read the section
  Quotes

  This report: “Rising delinquencies on subprime mortgages led to large losses on related structured credit products, sparking concerns about the structures of other financial products and reducing investors' appetite for risk.”  ·  “Consequently, the Federal Reserve and other central banks intervened to support liquidity and functioning in those markets.”  ·  “Amid a deteriorating economic outlook, and with downside risks increasing, Treasury yields declined markedly, and the Federal Open Market Committee cut the federal funds rate substantially.”  ·  “Meanwhile, risk spreads in a wide variety of credit markets increased considerably, and equity prices tumbled.”

• The report now notes that corporate credit spreads have risen substantially, with speculative-grade spreads up almost 300 basis points, whereas previously they were near historical lows. Read the section
  Quotes

  Previous report: “In spite of the recent rise, spreads on lower-quality corporate credits remain near the low end of their historical ranges”

  This report: “spreads on AA-rated and BBB-rated bonds have risen about 90 and 130 basis points respectively.”  ·  “their spreads have shot up almost 300 basis points.”

• The report now describes bank profits as declining significantly in 2007, with return on assets and equity at levels not seen since the early 1990s, whereas previously profits were solid. Read the section
  Quotes

  Previous report: “Commercial bank profitability declined somewhat in the first quarter of 2007 but remained solid.”

  This report: “Bank profits declined significantly in 2007 as fallout from the subprime mortgage crisis and related financial disruptions caused trading income to plunge and loss provisions to more than double from the previous year.”

• The report now notes that broad equity indexes ended 2007 with gains of 3 to 6 percent, down from the earlier 8-1/2 to 12 percent increase through mid-July. Read the section
  Quotes

  Previous report: “Broad equity indexes increased between 8-1/2 percent and 12 percent, on net, through mid-July.”

  This report: “Broad equity indexes logged increases of around 10 percent over the first half of 2007 but then lost ground over the second half; they ended the year with gains of 3 percent to 6 percent.”

Financial stability

• The report now describes the subprime mortgage problems as exposing weaknesses in other financial markets and posing challenges to financial institutions, rather than as a contained episode of volatility. Read the section
  Quotes

  Previous report: “In late February and early March, financial market volatility increased sharply amid a pullback from riskier assets that was reportedly spurred by a variety of factors, including a sharp dip in the Chinese equity market, mounting concerns about conditions in the subprime-mortgage sector, and some softer-than-expected U.S. economic data.”

  This report: “The ongoing erosion in the credit quality of subprime residential mortgages, particularly adjustable-rate mortgages, has exposed weaknesses in other financial markets and posed challenges to financial institutions.”

• The report now notes a decline in investor risk appetite, causing high volatility and reduced liquidity, a new concern not mentioned in the previous report. Read the section
  Quotes

  This report: “The loss of confidence reduced investors' overall willingness to bear risk and caused them to reassess the soundness of the structures of other financial products.”

Monetary policy

• The report now notes major foreign central banks have cut or held policy rates since late 2007, replacing earlier descriptions of tightening in the UK, Canada, and euro area. Read the section
  Quotes

  Previous report: “monetary policy was tightened three times this year in the United Kingdom (by 25 basis points each time) after two increases in the policy rate last year. The Bank of Canada also recently raised its policy rate 25 basis points.”  ·  “the Bank continued to tighten monetary policy during the first half of this year, implementing two more increases of 25 basis points in its policy rates.”

  This report: “major foreign central banks either have cut official policy rates or have remained on hold since late 2007--a change from earlier market expectations of further rate increases”  ·  “The Bank of Canada and the Bank of England lowered their targets for their respective overnight rates.”  ·  “The European Central Bank and the Bank of Japan have kept their policy rates at 4 percent and 0.5 percent respectively.”

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