US: Beige Book

Wed Jul 15 13:00:00 CDT 2015

The Beige Book, prepared for the Fed policy meeting on July 29, is not pointing to a liftoff for the Fed's rate hike. Ten of 12 Fed districts are reporting only moderate to modest growth with two others, Cleveland and Boston, reporting no more than steady or improving growth. Wage inflation is not an issue with most districts reporting only modest pressures. Still, there are pockets of labor market tightness in four of the districts with lending activity and real estate generally on the climb through most districts as are auto sales and tourism. But weakness in the energy sector is an offset, concentrated in four districts including Dallas, as is export weakness tied to the rising dollar. This is a mixed to slightly soft report which does not point at all to robust strength.

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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