US: Beige Book

Wed Oct 18 13:00:00 CDT 2017

The pace of economic growth remains modest to moderate which is also the general outlook, results of what is a soft assessment from the Beige Book. And unlike the last Beige Book in September, the October edition does not highlight increases in wage pressure. But it does describe labor conditions as remaining "tight" though wage growth is described as "modest." Inflation in general is described as no hotter than "mild".

Though most of the 12 districts report gains for retail sales, this report continues to describe consumer spending as no better than mixed. Noting that manufacturing is being held down by strength in the dollar and resulting weakness in exports, the sector gets a downgrade from slightly better as described in the last Beige Book back to mixed. On the plus side, the report notes signs of stabilization in energy, a sector that has held down manufacturing for the past two years. It said residential real estate expanded further despite low inventories and that commercial activity improved as well, though noting that uncertainty surrounding the November election continued to hold back expectations for sales and construction.

There is little market reaction to today's report which does not raise any urgency for a rate hike. The report was prepared by the Dallas Fed for the November 1 and 2 FOMC. Responses were gathered before October 7.

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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