In the Beige Book for the period of last November to early January, economic activity was on net about unchanged. The five districts that reported growth (Richmond, Atlanta, Minneapolis, Dallas, and San Francisco) described it as slight, gradual, or modest. Two districts said growth was flat or unchanged (Boston, St. Louis). Four reported slight declines in growth (Philadelphia, Cleveland, Chicago, Kansas City). An outright contraction was reported by New York due to a plunge in manufacturing activity. The report said,"On balance, contacts generally expected little growth in the months ahead."

Economic activity continues to feel the impact of inflation and lower purchasing power on the part of consumers. Businesses and consumers in interest rate sensitive sectors like real estate and automotive are slower. However, employment"continued to grow at a modest to moderate pace for most Districts," the report said. Businesses are hesitant to lose experienced workers"even as demand for their goods and services slowed and planned to reduce headcount through attrition if needed." Essentially this is the reverse of a jobless recovery with a layoff-less slowdown."With persistently tight labor markets, wage pressures remained elevated across Districts, though five Reserve Banks reported that these pressures had eased somewhat."

The report said,"Selling prices increased at a modest or moderate pace in most Districts, though many said that the pace of increases had slowed from that of recent reporting periods. Manufacturers in many Districts reported continued easing in freight costs and prices for commodities, including steel and lumber, though some said input costs remained elevated." Retailers are having challenges in passing on higher costs to consumers, and are also facing some inventory accumulation. The report noted,"On balance, contacts across Districts said they expected future price growth to moderate further in the year ahead."

When Fed policymakers meet on January 31-February 1, the FOMC will have to balance a subpar economic performance against the gains in taming inflation and keeping inflation expectations anchored. So far the labor market has not exhibited significant impacts from the economic slowdown with labor broadly in short supply. Given the economic data available since the end of the survey period of January 9, it seems likely that the FOMC will lean more toward a 25 basis point rate hike than a 50 basis point increase in the fed funds target range.

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.


Frequency
Eight times a year