In the latest Federal Reserve Beige Book, which is a collection of economic anecdotes from all over the United States, there’s evidence of modest growth and persistent inflationary pressures.
The Fed released a report on Wednesday that summarized observations made by the twelve regional banks of the Fed between November 22nd and today.
The report shows that, while economic activity in the majority of regions has increased slightly since the beginning of October, it also paints a more nuanced image about the economic environment.
Employment growth’subdued’, but persistent inflation
Beige Book states that the Fed is influenced by employment growth, which remains a “subdued” factor.
While inflation is rising slowly, it continues to be higher than the Fed’s target of 2%.
In the report, the change over a 12-month period in the Personal Consumption Expenditures (PCE), excluding energy and food (food) index is cited as remaining in a range of 2,6% – 2.8% since May.
This key indicator of inflation remains above the Fed’s comfortable zone.
Business optimism amid uncertainty
The Beige Book shows a trend that is worth noting despite the persisting inflationary pressures. “Business contacts are optimistic about the demand in the coming months,” it says.
The positive attitude amongst businesses indicates a level of optimism about future economic prospects.
The Fed is likely to make policy changes based on this optimistic outlook.
What will the Federal Reserve do next?
Findings from the Beige Book will have a significant impact on Federal Reserve’s rate setting meeting scheduled for two weeks.
Financial markets anticipate a quarter-percentage-point rate cut, despite inflation remaining higher than desired.
The Fed must strike a balance between reducing inflationary risk and supporting economic growth.
After reductions between September and November, the current rate of policy is in the range 4.50% to 4.75%.
Employment report: Labor market cooling gradually
This report acknowledges that the job market is “gradually cooling”, but overall remains strong.
The upcoming jobs report for November (due on Friday) is expected to show a bounce-back in the payroll numbers after the disappointing October figures. Hurricanes and Boeing’s strike were factors.
The unemployment rate will rise to 4,2%, up from the current 4.1%.
Indirectly, the report refers to the debate that is ongoing among Fed policymakers about the “neutral interest rate”, i.e. the level where rates of interest cease to have a significant impact on economic activity.
As of September, most policymakers believed that this neutral rate was no more than 3.5%.
To avoid unnecessarily slowing down economic growth, the Fed keeps its policy rate below this neutral threshold for as long as possible.
The key messages from the Fed’s survey could change as new information becomes available.
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