US: Beige Book

Wed Dec 02 13:00:00 CST 2015

The Beige Book, prepared for the December 15 & 16 FOMC meeting, depicts a healthy economy and does not stand in the way of liftoff. Labor markets are described as tightening "modestly" with wage pressures "stable to increasing". Consumer spending is rising in all 12 districts with housing improving at a moderate pace and home prices up modestly. Manufacturing, however, is in the negative column, hit by the strong dollar and low commodity prices. Nine of the 12 districts report either modest or moderate growth and only Boston reports slowing. In sum, the economy may not be roaring but, based on this description, is strong enough to warrant normalization of monetary policy.

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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