US: Beige Book

Wed Mar 04 13:00:00 CST 2015

The Beige Book describes the economy as continuing "moderate expansion." Inflation is seen as flat or slightly increasing at most. Consumer spending is up most Districts. This is a positive as contacts were generally optimistic about near-term sales. Automobile sales rose in most Districts during the reporting period.

Wage pressures are moderate, seen mainly in specialized jobs. Job growth is stable or slightly expanded. Home sales are somewhat up but mixed across Districts.

Manufacturing generally increased since the previous survey, although the rate of growth varied across the Districts and sectors. Residential real estate conditions were mixed across the Districts. Home sales and prices increased in most Districts; construction activity was mixed, with some Districts reporting disruptions due to severe weather. The outlook is seen as positive.

Overall, the Beige Book indicates only modestly positive growth. Likely, there will be no rush by the Fed to raise rates. Basically, odds are that the Fed will nudge up the first increase in policy rates later this year.

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.

Eight times a year