July 2017 Monetary Policy Report

The report now describes slower first-quarter growth, inflation briefly hitting 2 percent before falling back, and lower market-based inflation compensation. It adds new details on the balance sheet normalization program, including a plan to begin this year, and notes increased valuation pressures without higher leverage. Foreign activity strengthened and the dollar depreciated.

Inflation

• The report now describes inflation as having briefly hit the 2 percent target before falling back to 1.4 percent, whereas previously it was below target but rising. Read the section
  Quotes

  Previous report: “The 12-month change in the price index for overall personal consumption expenditures (PCE) was 1.6 percent in December--still below the Committee’s 2 percent objective but up noticeably from 2015...”  ·  “The 12-month change in the index excluding food and energy prices (the core PCE price index) was 1.7 percent last year.”

  This report: “consumer price inflation briefly reached the FOMC's 2 percent objective earlier this year before falling back to 1.4 percent in May”  ·  “Core inflation, which typically provides a better indication than the headline measure of where overall inflation will be in the future, also was 1.4 percent over the 12 months ending in May, a slightly slower rate than a year earlier.”

• The report now says market-based inflation compensation has fallen back this year, with TIPS-based forward compensation at 1-3/4 percent, down from nearly 2 percent. Read the section
  Quotes

  Previous report: “TIPS-based inflation compensation (5 to 10 years forward), after declining to very low levels through the middle of 2016, has risen to nearly 2 percent”

  This report: “Measures of longer-term inflation compensation--derived either from differences between yields on nominal Treasury securities and those on comparable Treasury Inflation-Protected Securities (TIPS) or from inflation swaps--have fallen back somewhat this year after having moved up in late 2016”  ·  “The TIPS-based measure of 5-to-10-year-forward inflation compensation is now 1-3/4 percent”

Economic activity

• The report now notes first-quarter GDP growth of about 1-1/2 percent, down from the 2-3/4 percent pace in the second half of 2016. Read the section
  Quotes

  Previous report: “Much of the step-up reflects the stabilization of inventory investment, which held down GDP growth considerably in the first half of last year, as well as a pickup in government purchases of goods and services.”

  This report: “After having moved up at an annual rate of 2-3/4 percent in the second half of 2016, real gross domestic product (GDP) is reported to have increased about 1-1/2 percent in the first quarter of this year”

Financial stability

• The report now notes that valuation pressures and investor risk appetite increased further, but without increased leverage or borrowing in the nonfinancial sector. Read the section
  Quotes

  This report: “Valuation pressures across a range of assets and several indicators of investor risk appetite have increased further since mid-February. However, these developments in asset markets have not been accompanied by increased leverage in the financial sector, according to available metrics, or increased borrowing in the nonfinancial sector.”

• Valuation pressures are now said to have increased further across a range of assets, whereas previously they were rising in some classes. Read the section
  Quotes

  Previous report: “Valuation pressures in some asset classes have been rising, particularly late last year.”

  This report: “Valuation pressures have increased further across a range of assets, including Treasury securities, equities, corporate bonds, and commercial real estate (CRE).”

International

• The report now mentions that foreign activity has strengthened and the broad dollar index depreciated modestly, a topic not addressed in the previous report. Read the section
  Quotes

  This report: “Economic growth has also been supported by recent strength in foreign activity. ... The broad U.S. dollar index depreciated modestly against foreign currencies.”

• The report now notes the broad dollar index depreciated about 5 percent since the start of the year, reversing the previous report's 4 percent appreciation since June. Read the section
  Quotes

  Previous report: “The dollar has strengthened since June, with the broad dollar index--a measure of the trade-weighted value of the dollar against foreign currencies--rising about 4 percent on balance (figure 39).”

  This report: “the broad dollar index--a measure of the trade-weighted value of the dollar against foreign currencies--has depreciated about 5 percent, on balance”

Monetary policy

• The report now includes details on the balance sheet normalization program, including the June Addendum and the expectation to begin implementation this year, which were not in the previous report. Read the section
  Quotes

  This report: “the FOMC issued an Addendum to the Policy Normalization Principles and Plans that provides additional details regarding the approach the FOMC intends to follow to reduce the Federal Reserve's holdings of Treasury and agency securities in a gradual and predictable manner.”  ·  “The Committee currently expects to begin implementing the balance sheet normalization program this year provided that the economy evolves broadly as anticipated.”

• The report now details a plan to gradually reduce securities holdings by reinvesting principal payments only when they exceed rising caps, with specific initial caps for Treasury and agency securities. Read the section
  Quotes

  This report: “The Committee intends to gradually reduce the Federal Reserve's securities holdings by decreasing its reinvestment of the principal payments it receives from the securities held in the System Open Market Account.”  ·  “For payments of principal that the Federal Reserve receives from maturing Treasury securities, the Committee anticipates that the cap will be $6 billion per month initially and will increase in steps of $6 billion at three-month intervals over 12 months until it reaches $30 billion per month.”  ·  “For payments of principal that the Federal Reserve receives from its holdings of agency debt and mortgage-backed securities, the Committee anticipates that the cap will be $4 billion per month initially and will increase in steps of $4 billion at three-month intervals over 12 months until it reaches $20 billion per month.”

• The report now states the Committee expects to begin the balance sheet reduction program this year if the economy evolves as anticipated, a new forward guidance not in the previous report. Read the section
  Quotes

  This report: “The Committee currently expects that, provided the economy evolves broadly as anticipated, it would likely begin to implement the program this year.”

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