US: Beige Book

Wed Oct 14 13:00:00 CDT 2015

The Beige Book, which was prepared for the October 27 & 28 FOMC meeting, is perhaps slightly on the negative side and won't be raising any last minute talk of a month-end rate hike. Only three of 12 districts are describing growth as "moderate", and that's as good as it gets. Six are using the word "modest" with two reports of immediate slowing and even one report of contraction from the energy-hit Kansas City district. A direct comparison with the last Beige Book is difficult given the report's textual nature but some slowing, perhaps only on the margin, would be a fair description.

The factory sector is described as mixed and generally lower from the last report with the negative effects of the strong dollar widely cited. Growth in consumer spending is described as moderate but with auto spending showing special strength. Home sales and home prices are showing wide increases with the banking sector described as positive. Agriculture is described as mixed. Labor markets, in what is no surprise and a plus for the hawks, are described as tightening. But wage growth is largely described as subdued and other inflation readings as stable and little changed.

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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