US: Beige Book

Wed Sep 02 13:00:00 CDT 2015

The Beige Book, prepared for the September 17 FOMC meeting, is not underscoring any urgency for a rate hike. Eleven of 12 districts report only moderate to modest growth with the Cleveland district reporting only slight growth. This compares with 10 districts in the July Beige Book which reported moderate to modest growth. Most districts describe labor demand as no more than modest to moderate and most describe actual job growth as no better than slight or modest. But there are isolated areas of labor shortages and four districts report a rise in wages for specific industries. Inflation is described as stable with only slight upward pressure across districts.

The sample period for the report ended on August 24, capturing the beginning of global market volatility. Several districts cited China as a factor slowing down demand. Still manufacturing, boosted by the auto sector, is described as mostly positive though two districts, New York and Kansas City, report contraction. The strong dollar is cited by five districts as a negative for manufacturing. Farm conditions are described as mixed.

Housing is a clear positive in the report, with sales and prices rising in every district. Construction is described as strong. Retail sales are also positive and are continuing to expand in most districts. Loan demand is generally described as rising. There's no significant immediate reaction to the report.

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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