July 2015 Monetary Policy Report

The report now replaces 'patient' guidance with a conditional liftoff, anticipates a 2015 rate increase, and notes lower projected rate paths. It highlights fixed-income valuation pressures and bond market liquidity concerns, while describing higher longer-term rates and a stronger dollar's drag on net exports.

Inflation

• The report now says market-based inflation compensation has moved up from earlier lows but remains below last summer's levels, whereas the previous report only noted a decline since last summer. Read the section
  Quotes

  Previous report: “Survey-based measures of longer-term inflation expectations have remained stable; however market-based measures of inflation compensation have declined since last summer.”

  This report: “Meanwhile, survey-based measures of longer-run inflation expectations have remained relatively stable; market-based measures of inflation compensation have moved up somewhat from their lows earlier this year but remain below levels that prevailed until last summer.”

Labor market

• The report now projects the unemployment rate reaching its longer-run normal level by end-2017, a year later than the previous report's end-2016 projection. Read the section
  Quotes

  Previous report: “Most participants projected that the unemployment rate will continue to decline in 2015 and 2016, and all participants projected that the unemployment rate will be at or below their individual judgments of its longer-run normal level by the end of 2016.”

  This report: “Participants generally expected that the unemployment rate would continue to decline in 2015 and 2016, and that the unemployment rate would be at or below their individual judgments of its longer-run normal level by the end of 2017.”

Financial conditions

• The report now says yields on 10- and 30-year Treasuries are above their end-2014 levels, whereas previously they had declined 40 and 60 basis points since June 2014. Read the section
  Quotes

  Previous report: “the yields on 10- and 30-year nominal Treasury securities declined about 40 basis points and 60 basis points, respectively, from their levels at the end of June 2014.”

  This report: “On net, yields on 10- and 30-year nominal Treasury securities are 16 basis points and 43 basis points, respectively, above their levels at the end of 2014.”

Financial stability

• The report now highlights notable valuation pressures in fixed-income markets, a new emphasis not present in the previous report's moderate vulnerability assessment. Read the section
  Quotes

  Previous report: “The vulnerability of the U.S. financial system to financial instability has remained moderate, primarily reflecting low-to-moderate levels of leverage and maturity transformation.”

  This report: “Capital and liquidity positions at the largest banking firms have remained strong, maturity transformation outside the banking system has continued to trend lower, and debt growth by the household sector has been modest. Valuation pressures in many fixed-income markets, while having eased, have remained notable.”

• The report now includes a new discussion of bond market liquidity, noting dealers report deterioration over five years and market participants worry about liquidity under stress. Read the section
  Quotes

  This report: “Market participants have expressed a concern that liquidity, especially in fixed-income markets, is now more likely to deteriorate significantly even under moderate stress.”  ·  “over four-fifths and about two-fifths of the dealer respondents characterized current liquidity and market functioning in the secondary markets for nominal Treasury securities and corporate bonds, respectively, as having deteriorated over the past five years.”

International

• The report now emphasizes the dollar's appreciation from mid-2014 to March as a drag on U.S. net exports and import prices, a consequence not mentioned before. Read the section
  Quotes

  Previous report: “The broad nominal value of the dollar has increased markedly since the middle of 2014, with the U.S. dollar appreciating against almost all currencies”

  This report: “The divergence of policy expectations was accompanied by a significant increase in the foreign exchange value of the dollar from mid-2014 to March of this year. That dollar appreciation has likely contributed to the drag that U.S. net exports have exerted on U.S. economic growth in recent quarters. In addition, the rise in the dollar's value has lowered U.S. import prices and thus put downward pressure on U.S. consumer price inflation.”

Monetary policy

• The report now states the FOMC anticipates raising the target range upon further labor market improvement and confidence in inflation, replacing the previous 'patient' language. Read the section
  Quotes

  Previous report: “the Committee indicated in its two most recent postmeeting statements that it can be patient in beginning to normalize the stance of monetary policy.”

  This report: “Since its April meeting, the Committee has stated it anticipates that raising the target range for the federal funds rate will be appropriate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”

• The report now anticipates beginning to raise the federal funds rate in 2015, whereas the previous report judged keeping it exceptionally low into 2015. Read the section
  Quotes

  Previous report: “All participants judged that economic conditions would warrant maintaining the current exceptionally low level of the federal funds rate into 2015.”

  This report: “As shown in figure 2, all but two participants anticipated that further improvement in economic conditions and the economic outlook would make it appropriate to begin raising the target range for the federal funds rate in 2015.”

• The report now says market-based expectations for the policy rate path shifted downward and the initial increase was pushed to end-2015, whereas previously the path flattened with timing about unchanged. Read the section
  Quotes

  Previous report: “On balance, market-based measures of the expected (or mean) path of the federal funds rate through late 2017 have flattened, but the expected timing of the initial increase in the federal funds rate from its current target range was about unchanged.”

  This report: “market participants' expectations for the path of policy rates over the next several years shifted downward in the first half of 2015.”  ·  “The expected timing of the initial increase in the federal funds rate has been pushed out from mid-2015 toward the end of the year”

Projections

• Median federal funds rate projections for end-2016 and end-2017 are now 1.63 and 2.88 percent, each 25 basis points lower than March, whereas previous report had 2.50 percent for 2016. Read the section
  Quotes

  Previous report: “The median values of the federal funds rate at the end of 2015 and 2016 fell 25 basis points and 38 basis points relative to September, to 1.13 percent and 2.50 percent, respectively”

  This report: “The median projections for the ends of 2016 and 2017 were 1.63 percent and 2.88 percent, respectively--both 25 basis points lower than in March.”

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