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Comment: Fed’s Beige Book reflected increased severity of economic downturn

The Fed’s Beige Book for the period between early April and mid-May had all 12 Districts describing various levels of contraction – most of them severe in tone. The report attributed the declines to “disruptions associated with the COVID-19 pandemic”. Although conditions and the cause were unsurprising, it is dispiriting to see how thoroughly the economy has been affected. As for the future, the report said, “Although many contacts expressed hope that overall activity would pick-up as businesses reopened, the outlook remained highly uncertain and most contacts were pessimistic about the potential pace of recovery.”

This is the second Beige Book in a row that reflected no District with growth and the composition suggested that the severity of the downturn increased. On May 21, Vice Chair Richard Clarida said the current recession probably began in March and the Beige Book results are consistent with this.

The Beige Book noted that “Employment continued to decrease in all Districts, including steep losses in most Districts, as social distancing and business closures affected employment at many firms.” Even if these measures are lifted, there are concerns about the ability to ramp up activity again. The report continued, “Contacts cited challenges in bringing employees back to work, including workers’ health concerns, limited access to childcare, and generous unemployment insurance benefits.” Wages actually improved for a few narrow sectors, at least temporarily “for essential staff or to compete with unemployment insurance.”

Inflation has eased from already tame levels. “Pricing pressures varied but were steady to down modestly on balance,” the report said. Discounting was noted for unwanted goods and services like “apparel, hotel rooms, and airfare.” On the other hand, “Supply chain disruptions and strong demand led to higher prices for some grocery items including meat and fresh fruit. One District reported that firms faced additional costs related to safety protocols and social distancing compliance, while another District noted that the costs of personal protective equipment had risen due to strong demand.” Overall inflation pressures are probably going to remain muted, especially after production and supply improves for PPE items.

The Beige Book was prepared for the June 9-10 FOMC meeting. It will help policymakers in formulating their Summary of Economic Projections (SEP) which will be the first after the one published in December 2019. The FOMC declined to put together a forecast for the March 2020 quarterly update due to too many risks to the outlook and insufficient current data. While the FOMC will have much more data and a far better idea of the severity of the initial impacts of the pandemic, the uncertainties will remain unusually prominent. It is likely the FOMC will highlight that while all forecasts have an element of uncertainty, this time around needs particular caution in forming any longer term conclusions about possible paths for monetary policy. It is also probable that the FOMC is not yet ready to shift from focusing on the current crisis into providing stimulus to power a recovery.

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