US: Beige Book

January 18, 2017 01:00 CST

The Beige Book offers a broad but anecdotal survey of the economy, in this case the 7-week period ending January 9. And though the verdict is unchanged, that is moderate to modest economic growth, the outlook is suddenly upbeat. The report says firms across the nation are optimistic about 2017 and cites expectations for increasing tightness in the labor market and increasing wage pressure to go with it.

Yet a rising outlook alone may not be enough to persuade policy makers to raise rates at the coming FOMC meeting. Both housing and capital investment plans are described as mixed and holiday sales as disappointing for some. And inflation won't be a factor for higher rates either, as price pressures are described as only slight to modest. Today's Beige Book was prepared for the January 31 & February 1 meeting.

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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