February 2009 Monetary Policy Report

The report now describes a marked economic weakening and labor market deterioration, with inflation turning negative. It notes the FOMC's easing to a 0-1/4 percent target range and persistent financial stress, including Lehman's bankruptcy and rising foreclosures. Projections now see downside inflation risks and a prolonged recovery.

Inflation

• The report now says inflation pressures diminished appreciably and overall inflation turned negative in the fourth quarter, a reversal from the earlier emphasis on elevated inflation. Read the section
  Quotes

  Previous 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.”

  This report: “inflation pressures diminished appreciably as prices of energy and other commodities dropped sharply, the margin of resource slack in the economy widened, and the foreign exchange value of the dollar strengthened.”  ·  “overall inflation, as measured by the price index for personal consumption expenditures, turned negative in the fourth quarter of 2008; over the first three quarters of the year, overall inflation had averaged nearly 4-1/2 percent at an annual rate”

Labor market

• The report now highlights a significant worsening in labor market conditions after early autumn, with unemployment at its highest since the early 1990s, replacing the earlier description of steady job losses. Read the section
  Quotes

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

  This report: “the unemployment rate has risen to its highest level since the early 1990s”

• The report now projects a substantial increase in the unemployment rate, whereas the previous report expected a reversal of some of the increase by 2010. Read the section
  Quotes

  Previous report: “output growth further ahead was projected to pick up sufficiently to begin to reverse some of the increase in the unemployment rate by 2010.”

  This report: “the unemployment rate would increase substantially”

Economic activity

• The report now describes the economy as weakening markedly in the second half of 2008, rather than remaining sluggish in the first half. Read the section
  Quotes

  Previous report: “The U.S. economy remained sluggish in the first half of 2008, and steep increases in commodity prices boosted consumer price inflation.”

  This report: “The U.S. economy weakened markedly in the second half of 2008 as the turmoil in financial markets intensified, credit conditions tightened further, and asset values continued to slump.”

• The report now describes the recovery as unusually gradual and prolonged, a point not mentioned in the previous report. Read the section
  Quotes

  This report: “participants generally expected that the recovery would be unusually gradual and prolonged”

Financial stability

• The report now says measures restored some stability but significant stress persists, whereas the previous report noted improvement in the second quarter with strains persisting. Read the section
  Quotes

  Previous 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.”

  This report: “significant stress persists in most markets, and financial institutions remain under considerable pressure; as a result, the flow of credit to households and businesses continues to be impaired.”

• The report now highlights Lehman Brothers' bankruptcy as a key event, whereas the previous report focused on Bear Stearns' acquisition. Read the section
  Quotes

  Previous report: “Financial strains increased significantly during the first quarter, leading to a liquidity crisis in March at The Bear Stearns Companies, Inc., a major investment bank, and to its subsequent acquisition by JPMorgan Chase & Co.”

  This report: “Eventually, with no other firm willing to acquire it and with its borrowing capacity limited by a lack of collateral, Lehman Brothers filed for bankruptcy on September 15.”

• The report now highlights that more than 2 million homes entered foreclosure in 2008, up from 1-1/2 million in 2007, and that subprime serious delinquency reached 25 percent in November 2008. Read the section
  Quotes

  Previous report: “Continuing the upward trend that began in late 2006, about 550,000 loans began the foreclosure process in the first quarter of 2008--more than double the average quarterly rate from 2003 to 2005.”

  This report: “in November 2008, 25 percent of subprime mortgages were seriously delinquent”  ·  “more than 2 million homes entered the foreclosure process in 2008, compared with foreclosure starts of 1-1/2 million in 2007”

Monetary policy

• The report now notes the FOMC lowered the federal funds rate to a target range of 0 to 1/4 percent in December, after earlier reporting a 225 basis point cut in the first four months. Read the section
  Quotes

  Previous 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.”

  This report: “at its December meeting, the Committee established a target range for the federal funds rate of 0 to 1/4 percent”

Projections

• The report now says nearly all participants saw inflation risks as balanced or tilted to the downside, replacing the earlier view of upside risks. Read the section
  Quotes

  Previous report: “They also see prospects for inflation as unusually uncertain, and they view the risks surrounding their forecasts for inflation as skewed to the upside.”

  This report: “Most participants viewed the risks to growth as skewed to the downside, and nearly all saw the risks to the inflation outlook as either balanced or tilted to the downside.”

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