July 2008 Monetary Policy Report

The report now describes a weaker labor market, elevated inflation, and deteriorating financial conditions, while noting the Federal Reserve's emergency actions to support Bear Stearns and Fannie Mae and Freddie Mac. It also reflects aggressive monetary easing and a shift in inflation expectations, with output growth projected below trend for the rest of 2008.

Inflation

• The report now says overall consumer price inflation remained elevated in the first half of 2008, whereas the previous report noted a step-up to 3.5 percent in 2007. Read the section
  Quotes

  Previous 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”

  This report: “Overall consumer price inflation, as measured by the price index for personal consumption expenditures, remained elevated in the first half of 2008, largely because of the sharp increases in the prices of many commodities.”

• The report now notes that some longer-term inflation expectations have risen, whereas the previous report described them as well contained. Read the section
  Quotes

  Previous report: “The preliminary February result for median five- to ten-year inflation expectations in the Reuters/University of Michigan survey, at 3.0 percent, was around the middle of the narrow range that has prevailed for the past few years.”

  This report: “Probably in response to the sizable rise in headline price indexes, some indicators of longer-term inflation expectations have risen in recent months.”

• The report now expects total inflation to rise further in coming months and be elevated for 2008, whereas the previous report projected overall inflation to decline over the coming year. Read the section
  Quotes

  Previous report: “Overall PCE inflation was projected to decline from its current elevated rate over the coming year, largely reflecting the assumption that energy and food prices would flatten out.”

  This report: “total inflation was expected to rise further in coming months and to be elevated for 2008 as a whole.”

Labor market

• The report now describes private-sector payrolls as declining at an average monthly pace of 94,000 in the first half of 2008, whereas the previous report noted a marked slowdown in growth. Read the section
  Quotes

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

  This report: “Private-sector payroll employment declined at an average monthly pace of 94,000, and the unemployment rate rose to 5-1/2 percent.”

Economic activity

• The report now says output growth will be appreciably below trend for the rest of 2008, whereas the previous report said this for all of 2008. Read the section
  Quotes

  Previous report: “the projections ... suggest that FOMC participants expected that output would grow at a pace appreciably below its trend rate in 2008, owing primarily to a deepening of the housing contraction and a tightening in the availability of household and business credit”

  This report: “output would expand at a pace appreciably below its trend rate”

Financial conditions

• The report now notes that financial market conditions deteriorated sharply in the first quarter but improved somewhat in the second quarter, whereas the previous report only described tighter credit conditions. Read the section
  Quotes

  Previous report: “banks became more conservative in deploying their liquidity and balance sheet capacity, leading to tighter credit conditions for some businesses and households.”

  This report: “financial market conditions deteriorated sharply further toward the end of the first quarter--a development that threatened to severely impair the functioning of the overall financial system and to hinder economic growth.”  ·  “Over the second quarter, financial market conditions improved somewhat--credit spreads generally narrowed, liquidity pressures ebbed, and financial institutions made progress in raising new capital. Still, asset prices continue to be volatile, and many financial markets and institutions remain under considerable stress.”

Financial stability

• The report now describes the Federal Reserve's emergency financing to facilitate the acquisition of Bear Stearns by JPMorgan Chase, a topic not mentioned in the previous report. Read the section
  Quotes

  This report: “the Federal Reserve determined that it should invoke emergency authorities to provide special financing to facilitate the acquisition of Bear Stearns by JPMorgan Chase & Co.”

• The report now mentions a temporary arrangement to extend credit to Fannie Mae and Freddie Mac if necessary, which was not in the previous report. Read the section
  Quotes

  This report: “the Board of Governors established a temporary arrangement that allows the Federal Reserve to extend credit to Fannie Mae and Freddie Mac, if necessary.”

Monetary policy

• The report now states the FOMC reduced the target federal funds rate by 225 basis points in the first four months of 2008, whereas the previous report noted a 125 basis point cut in January. Read the section
  Quotes

  Previous report: “the FOMC cut an additional 125 basis points from the target in January--75 basis points on January 22 and 50 basis points at its regularly scheduled meeting on January 29-30.”

  This report: “After cutting the target federal funds rate 100 basis points in the second half of 2007, the FOMC reduced rates another 225 basis points over the first four months of 2008.”

• The report now says investors expect the next policy move to be up, whereas the previous report expected about 100 basis points of additional easing. Read the section
  Quotes

  Previous report: “Investors currently expect about 100 basis points of additional easing by the end of 2008.”

  This report: “Looking forward, however, investors now expect that the next policy move will be up, and a small degree of tightening has been priced in by the end of 2008.”

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