The Beige Book shows a rebound in economic activity since the prior two reports, decisively bringing the overall economy back into expansion and easing the risk of a recession on the near horizon. In the current report, 10 of 12 districts reported growth. Seven districts reported slight growth or used similar language (New York, Philadelphia, Richmond, Atlanta, Chicago, St. Louis, and Minneapolis) and three said growth was modest or moderate (Cleveland, Kansas City, and Dallas). This compares to a mere 3 districts that reported some level of economic expansion in the prior two reports. One district said growth was"down a bit" (Boston) and one was stable (San Francisco).

This is a positive development as the FOMC prepares to meet on December 17-18. An economy is at least mild expansion appears able to support current restrictive monetary policy as the FOMC determines the best path to ensure that disinflation progresses further, and maximum employment is maintained. At present, FOMC participants are navigating roughly balanced risks to price stability and the labor market.

The Beige Book noted,"Employment levels were flat or up only slightly across Districts." If hiring is"subdued", layoffs are"also reportedly low". Taken together, it suggests that while the labor market has cooled, businesses are reluctant to cut current workers who could be hard to replace later. If the broad churn in the labor market in search of higher compensation has subsided, wage growth is still good for some workers. The Beige Book said,"Job growth and wage growth for entry-level positions and skilled trades were an exception, rising robustly and expected to grow further through next year."

Inflation is lessening over time. The current Beige Book said,"Prices rose only at a modest pace across Federal Reserve Districts." At present,"Both consumer-oriented and business-oriented contacts reported greater difficulty passing costs on to customers. Input prices were said to be rising faster than selling prices for most businesses, resulting in declining profit margins." There are indications of price sensitivity that is making it more difficult to pass through higher costs. Importantly,"Contacts indicated they expect the current pace of price growth to persist, but businesses in several Districts indicated tariffs pose a significant upside risk to inflation." If inflation expectations become stuck and foresee that inflation will not return to the Fed's 2 percent objective, it could mean policymakers will lean more heavily on the inflation risks when determining the policy outlook.

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