Highlights
Three months into the Middle East conflict, economic activity expanded at a"slight to moderate pace" in ten Fed Districts, an improvement from the"slight to modest pace" reported by eight districts in the previous Beige Book. Philadelphia reported a"slight decline" and San Francisco reported no change on net.
Looking ahead,"business outlooks for the next six months were reported to have little change in anticipated growth, as elevated uncertainty and signs of weakening consumer spending weighed on sentiment."
Most districts also reported"little to no change" in employment in a"low-hire, low-fire environment". Employment was characterized as"steady to slightly up" in the previous Beige Book report."That said, Districts reported more frequent wage adjustments and cost-of-living increases to manage increasing fuel and other household cost pressures," the report said, after"modest to moderate" wage growth in the previous report.
On the inflation front, the report will likely feed the more hawkish narrative among some FOMC participants, as prices"increased at a moderate to strong pace overall, with most Districts reporting higher inflation than the previous report", based on answers collected on or before May 27, Price growth"mostly remained moderate overall" in the previous report.
The Minutes of the April FOMC meeting released in May signaled participants' concerns about the risk of a persistently above-target inflation: The vast majority of participants noted an increased risk that inflation would take longer to return to the Committee's 2 percent objective than they had previously expected.
In the Beige book, businesses cited energy-related costs due to the Middle-East conflict that spilled over into shipping, packaging, groceries, and fertilizer. These costs rose faster than selling prices, raising concerns about margins. Still,"The ability to pass on higher costs remained mixed across sectors, particularly among consumer-facing firms".
Consumer spending was described as"mixed" after"increasing slightly" in the previous Beige Book that was based on responses collected on or before April 6. While higher-income households showed resilience and were"less sensitive to price increase", those in the middle-income group were squeezing more life out of every dollar before deciding to spend it. Low-income consumers showed"greater financial strain".
While banking conditions were reported as"stable", residential mortgages and consumer loan delinquencies rose in several districts.
In manufacturing, activity increased at a"modest to strong pace" in nine districts. In energy, the outlook was decribed as"highly uncertain", the report said,"leading producers to hold off on materially expanding activity."
Definition
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.
Description
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