US: Beige Book

Wed Apr 13 13:00:00 CDT 2016

An extension of modest to moderate economic growth is the call from today's Beige Book which was prepared for the FOMC meeting later this month. Consumer spending is described as moderate with construction and real estate continuing to expand. An important plus is the labor market which the Beige Book said continues to grow. Another plus is the hard-hit factory sector where activity is described as increasing. Price pressures are described as low and, despite the uptick for oil, they continue to weigh on energy and mining output. On the positive side are isolated reports of wage pressures. This report is in line with expectations and, despite hints of higher wages, will not turn up the heat for a Federal Reserve rate hike.

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