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Comment: Fed’s Beige Book suggests prior rate cuts did the job and Fed can now can take a break

The Fed’s Beige Book took the temperature of economic conditions across the 12 Districts for the period from mid-November through early January. For the first time since April 2019, all Districts reported at least some growth. The assessments do not show consistency in activity as they range from a narrow edge higher to an outright solid performance. However, there was a sense of upward momentum and more stability for economic activity than has been present since the abrupt slowdown late in 2018 and the disruptions associated with the government shutdown that dominated conditions in the first couple of months of 2019.

Most Districts reported activity in similar terms to the previous Beige Book or some improvement. The exception was the Philadelphia District which put growth as “slight” in the most recent report after “modest” in the previous one. Conditions were about unchanged for Boston at modest-to-moderate and were remained modest for Cleveland, Atlanta, Minneapolis, and San Francisco. Activity remained moderate for Richmond. Activity improved somewhat for Chicago which said growth was “modest” after “slight” in the prior report and Kansas City said activity “edged up” after being flat in the last compilation. The surprise was from the Dallas District which put growth as “solid” after “moderate”.

The report said that employment was “steady to rising modestly in most Districts” and that labor markets remained “tight throughout the nation”. The report also said that most Districts found “widespread labor shortages” were a constraint for job growth and in some places were limiting business expansion. Manufacturing was feeling the pinch of the mild recession in that sector and was cutting jobs or slowing hiring. Transportation and energy were also experiencing spots of job cuts. Wages growth was deemed “modest or moderate” in most Districts. For workers in minimum wages jobs, “there were scattered reports of wage increases from year-end hikes”. Some businesses were also using “benefits, incentives, training programs, and automation to reduce vacancies.”

Signs of upward inflation pressure were limited and “at a modest pace during the reporting period” for prices and input costs. Higher costs related to tariffs were getting passed through – at least partially – to consumers via retail and also in construction. The reported noted, “There were scattered reports of declining prices in some manufacturing industries, as well as in the energy sector.” There were a few hints that prices were expected “to continue to rise in the months ahead.”

When the FOMC meets on January 28-29, the information in this Beige Book will offer plenty of justification for a pause in further rate cuts as well as evidence that the three cuts in July, September, and October had done their work and helped engineer a soft landing for the economy after elevated risks and uncertainties had increased the possibility of recession. In terms of the dual mandate, the strength in the labor market is sufficient to counsel not adding any more stimulus, especially with some expectation that inflation would pick up somewhat in the coming months.

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