US: Beige Book

Wed Jan 14 13:00:00 CST 2015

The latest Beige Book indicated that economic activity continued to expand at a "modest" or "moderate" pace of growth. Business contacts expect somewhat faster growth over the coming months. Consumer spending increased in most Districts, with generally modest year-over-year gains in retail sales. Auto sales showed moderate to strong growth. Travel and tourism picked up during the reporting period. The pace of growth of demand for nonfinancial services varied widely across Districts and across sectors, but appeared to be moderate on balance. Manufacturing activity expanded in most Districts. Single-family residential real estate sales and construction were largely flat on balance across the Districts, while commercial real estate activity expanded.

Payrolls in a variety of sectors expanded moderately during the reporting period. Significant wage pressures were largely limited to workers with specialized technical skills. Prices increased slightly, on balance, in most Districts.

Manufacturing activity expanded in most Districts. Philadelphia reported that manufacturing activity grew at a modest pace during the current reporting period, with a slight slowdown relative to the previous period.

Single-family residential real estate sales and construction were largely flat on balance across the Districts. Commercial real estate activity expanded in most Districts.
Demand for business and consumer credit grew during the reporting period. Credit quality generally remained good, with overall reductions in loan delinquencies.

Overall, the Beige Book indicates that economic growth continues at a moderate pace but with wage and price inflation sluggish. The Beige Book does not give the Fed any reason to rush normalization of policy rates.

This book is produced roughly two weeks before the monetary policy meetings of the Federal Open Market Committee. On each occasion, a different Fed district bank compiles anecdotal evidence on economic conditions from each of the 12 Federal Reserve districts.

This report on economic conditions is used at FOMC meetings, where the Fed sets interest rate policy. These meetings occur roughly every six weeks and are the single most influential event for the markets. Market participants speculate for weeks in advance about the possibility of an interest rate change that could be announced upon the end of these meetings. If the outcome is different from expectations, the impact on the markets can be dramatic and far-reaching.

If the Beige Book portrays an overheating economy or inflationary pressures, the Fed may be more inclined to raise interest rates in order to moderate the economic pace. Conversely, if the Beige Book portrays economic difficulties or recessionary conditions, the Fed may see the need to lower interest rates in order to stimulate activity. Since the past recession, traders worry about the impact of the Beige Book on the timing of tapering quantitative easing.

Since the Beige Book is released two weeks before each FOMC meeting, investors can see for themselves at least one of the many indicators which Fed officials will use to determine interest rate policy, and can position their portfolios accordingly.

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