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Comment: Fed’s Beige Book shows more uncertainty in the outlook even as modest growth persisted

The Fed’s Beige Book for the period of early January through late February put most Districts on the spectrum of modest-to-moderate growth. Unlike the previous Beige Book, growth was not as consistently strong with 83% of Districts reporting expansion rather than 100%. However, on net conditions do not appear to be much changed. Rather, two Districts had activity stall while four actually improved.

New York upgraded activity to moderate over modest, Philadelphia upgraded activity to modest from slight, and Atlanta and Minneapolis upped their assessment to moderate from modest.

Dallas had a downgrade to moderate from modest, while Richmond slipped to modest from moderate. St. Louis and Kansas City were lower at unchanged from growth that was slight or “edged up” in the previous report.

Boston continued to report expansion, although it did not characterize it. Cleveland, Chicago, and San Francisco all reported growth as modest, the same as last time.

The impacts of the coronavirus were clearly present in the anecdotal evidence about economic conditions. As of the end of the survey on February 24, mostly these were spotty. The Beige Book said, “There were indications that the coronavirus was negatively impacting travel and tourism in the U.S. Manufacturing activity expanded in most parts of the country; however, some supply chain delays were reported as a result of the coronavirus and several Districts said that producers feared further disruptions in the coming weeks.”

The activity summary concluded, “Outlooks for the near-term were mostly for modest growth with the coronavirus and the upcoming presidential election cited as potential risks.” This suggested that the FOMC thought some insurance was needed to ensure that a modest pace of growth could be maintained if there were more serious impacts.

While policymakers have consistently said that the labor market is strong, a lack of available workers is starting to reduce the pace of hiring. The Beige Book said, “Employment increased at a slight to moderate pace, overall, with hiring constrained by a tight labor market.” This is causing some delays in projects in construction. Employers are opting to convert temporary jobs to permanent ones “in order to attract talent”. Wages continued to growth “at a modest to moderate rate in most Districts” without any expectation that this will change in the near future. “Firms reported that the tight labor market and minimum wage increases were putting upward pressure on wages” as well as on increases in benefits to attract and retain workers.

Selling prices continued to rise modestly, “as well as in nonlabor input prices”, the report said. Expectations are that the Phase One trade deal with China would reduce some costs, “but some still struggled with tariffs and were concerned about how the coronavirus might affect prices.” Energy prices remained softer due to “weak demand from China because of the coronavirus.”

The tone of the Beige Book has enough uncertainty that it will engender expectations for another rate cut possibly at the March 17-18 meeting. I think that is probably too soon unless developments worsen appreciably. The FOMC will not want to add in too much monetary policy accommodation that might have to be withdrawn in the near term. The 50 basis point cut on March 3 was big and in close enough proximity to the next meeting that it should serve for now as a signal that the Fed is paying attention and willing to act. The March 3 press briefing by Chair Powell and G7 statement also suggested that the Fed expects fiscal authorities to step up and provide stimulus rather than letting the central bank do all the work.

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