US: Beige Book

Wed May 30 13:00:00 CDT 2018

The moderate-to-modest theme for the Beige Book has been upgraded slightly, with "moderate" alone making the headline for May's edition. And moderate is the description of inflation in most of the 12 districts with modest, however, the description for some. Yet the news on wages, described as remaining modest, won't be adding urgency to what nevertheless is expected to be a rate hike at the June FOMC.

But a shortage of skilled labor at all levels does point to wage pressures at least eventually. Employment in general is in the modest-to-moderate camp in most of the districts.

In fact there is plenty of less-than-robust news in this report. Consumer spending, labeled as "soft," gets a clear downgrade with auto sales said to be flat and with other retail sales said to be "moderating somewhat." Manufacturing is said to be picking up with housing modest and nonresidential construction moderate.

Dallas was in the robust category in January's Beige Book but then fell back to the moderate grade in March and April but is now at the "solid" level for May's report. The upgrade in Dallas, however, is offset by a downgrade for St. Louis which is now in the slight growth column.

Tariffs are repeatedly cited as an inflationary risk with the report noting general uncertainty regarding trade policy especially with China. Cut-off date was May 21 for today's report which was compiled by the Cleveland Fed for the June 12 & 13 FOMC.

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