The Fed's Beige Book showed continued overall improvement in economic conditions across the 12 districts for a second report in a row, although for most it was slim. Only one district (Philadelphia) continues to characterize its regional economy as in contraction, and that was deemed slight. Four districts say that activity is steady, stable, or flat (New York, Cleveland, St. Louis, and Kansas City). Seven districts termed growth as slight or modest (Boston, Richmond, Atlanta, Chicago, Minneapolis, Dallas, and San Francisco). With 58 percent of districts reporting at least some growth, this was the most positive tone since the report released early in March, and the second best since the report in July 2022. The risk of recession appears to be ebbing, although underlying economic conditions remain uncertain and with little upward momentum.

The report was consistent with Fed policymakers' outlook for below trend growth. The report said,"Contacts from most Districts indicated economic growth was modest during July and August," but with hints of slower consumer spending, new manufacturing orders stable or down, and demand has"waned". Demand for new housing especially affordable housing is not being met in part due to"higher financing costs and rising insurance premiums".

Also consistent with Fed policymakers' expectations are labor market conditions. The report said,"Job growth was subdued across the nation," although"imbalances persisted". Skilled workers remain in limited supply. The report noted,"Growth in labor cost pressures was elevated in most Districts, often exceeding expectations during the first half of the year". However, wage growth is expected to"slow broadly in the near term".

For inflation,"Most Districts reported price growth slowed overall, decelerating faster in manufacturing and consumer-good sectors". Among the non-housing services prices that are resistant to efforts to bring price increases lower is property insurance in several districts. Businesses are also struggling to pass through higher prices and maintain profit margins.

There is enough positive information in the current Beige Book to reinforce the economic data in favor of a pause in rate hikes at the September 19-20 FOMC 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.


Frequency
Eight times a year