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Comment: Fed’s Beige Book paints a picture of widespread modest expansion, a tight labor market, modest wage and benefit increases, and mild inflation

The Fed’s Beige Book covered the period between early April and late May. On net, the tone of the report was narrowly more positive overall than in the prior edition.  It may be a little hard to discern with three Districts nudging up their assessment of conditions and three moving lower. However, the upward moves for Boston (from bare expansion to modest-to-moderate), New York (slight to moderate), and Philadelphia (slight to modest) were probably stronger than the downward slide for Richmond (modest from moderate), St. Louis (unchanged from slight), and Minneapolis (slight from modest).

Years ago there was a sense that the views of the District compiling the report tended to color the overall tone. That has faded over time. It is probably not significant, but perhaps worth mentioning that this time the report was done by the Minneapolis Fed whose President Neel Kashkari is one of the policymakers more likely to support an insurance rate cut since activity in the Minneapolis District reported slower growth. Also, the neighboring St. Louis District was the only one to not report at least some growth, and its President James Bullard has come closest to saying that the Fed ought to lower rates.

Markets have been upping their expectations for a rate cut by the FOMC – some anticipating as many as three reductions in short-term rates this year.  The current Beige Book is not supportive of that outlook. The anecdotal evidence of the compilation tends to move closely with the overall economy. It may not put a hard number on growth, but it does signal turning points for the economy. At present, 92% of Districts report at least mild growth; a strong signal of a downturn is when growth declines to a 70% or less share of Districts three reports in a row.

The labor market was said to have “continued to increase nationwide, with most Districts reporting modest or moderate job growth and other reporting slight growth.” Districts reported labor markets were tight with “shortages of both high- and low-skill workers.” There were upward pressures on wages “across a wide range of occupations and induced improvements in benefits to attract more workers and to improve retention of existing employees.” Wage growth was said to be “modest or moderate” and “remained relatively subdued given low unemployment rates.”

Price pressures continued to be deemed “modest” with input cost increases generally “in the modest-to-moderate range”.

Implications for the June 18-19 FOMC meeting:

It is probable that the FOMC will discuss implementing an “insurance” rate cut at the upcoming meeting, but it is highly doubtful it will announce one. While policymakers would naturally prefer that growth be more robust, it is hardly absent in the assessment across the 12 Districts. On the price stability side of the dual mandate, upward price pressures are mild and the Beige Book does not suggest that the trend has fundamentally changed as might have been inferred from the recent lower readings in the PCE deflator, but not the CPI. Inflation expectations have also risen after recent lows, giving the FOMC less reason for concern about the credibility of its 2% inflation objective. As for growth and the employment, these remain quite strong and broad-based across skill levels.

Various Fed policymakers – including Chair Powell – have indicated that they are monitoring economic developments and the signals from yields in bond markets. However, with the exception of St. Louis Fed President Bullard, none of them have suggested a rate cut may be warranted soon. The Beige Book adds to the evidence that the US economy is faring reasonably well as it navigates some of the more elevated risks. If a downturn is on the horizon, it is not in the immediate future. The FOMC consensus should remain patient until the data is clearer and outstanding geopolitical issues – or some portion of them – are resolved.

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