US: Beige Book

November 29, 2017 01:00 CST

Despite overtones of emerging strength, modest to moderate is once again, as it has been all year, the Beige Book's assessment of economic growth. The chief plus is job growth which gets an upgrade to the modest-to-moderate ranking from only modest in the October Beige Book. The labor market continues to be described as tight and, as in October, the report warns that worker shortages are constraining business growth.

Hurricane-related price pressures are cited including higher rebuilding costs. The report notes pass through of increased transportation costs and rising wage and benefit pressures are also cited.

Consumer spending was downgraded in the last Beige Book to slow growth and in this report is described as flat (the report's cut-off date came before Black Friday). Loan demand is described as steady to moderate. Growth in the factory sector is described as wide but moderate with commercial real estate up slightly.

This report is definitely no weaker than the last report but is still restrained in its description of economic growth. Whether no more than modest to moderate, growth has nevertheless been very solid and the risk of emerging wage-push inflation have expectations very strong for a rate hike at the mid-month meeting.

Compiled by the St Louis Fed for the December 12 & 13 FOMC, the report's cut-off date was November 17.

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