Fed Beige Book Review- Will the Fed do 25 or 50 on 9/18?

It is widely expected that the Federal Reserve will cut rates at its September 18 meeting, with Chair Jerome Powell indicating that there is room to ease given how much rates exceed the neutral level. The key question for market participants now is whether the Fed will lower rates by 25 or 50 basis points. This has led investors to scrutinize every piece of economic data. Today, the Fed released its Beige Book, which, while not as influential as Friday’s BLS report or the September 11 CPI data, offers valuable insight into the Fed’s perspective ahead of those critical reports.

The Beige Book is an essential report published by the Federal Reserve eight times a year, providing a snapshot of current economic conditions across the 12 Federal Reserve districts. It offers valuable qualitative data gathered from business leaders, economists, and market participants, providing insights into trends in employment, inflation, consumer spending, and overall economic activity. Unlike other economic reports that focus on quantitative data, the Beige Book emphasizes anecdotal evidence, giving policymakers a nuanced understanding of economic conditions ahead of major decisions on interest rates and monetary policy. Its importance lies in offering real-time, ground-level perspectives that help shape Federal Reserve actions and influence market expectations.

Here’s a summary of the key sections from the latest Beige Book report:

Overall Economic Activity:

Economic activity showed slight growth in three Federal Reserve Districts, but nine reported flat or declining activity, up from five in the previous period. Employment levels were steady, though some firms filled only necessary positions or reduced hours and shifts. Wage growth remained modest, and price increases ranged from slight to moderate. Consumer spending declined in most Districts, with varying trends in auto sales, influenced by high interest rates and vehicle prices. Manufacturing activity continued to decline in most regions, while residential and commercial real estate activity showed mixed results. Generally, contacts expect stability or slight improvement in economic conditions, with a few Districts anticipating minor declines.

Labor Markets:

Employment levels were stable to slightly up, with five Districts reporting modest increases in hiring. However, some firms reduced shifts, left positions unfilled, or cut staff through attrition. Layoffs remained rare, but employers were becoming more selective in hiring due to concerns about demand and economic uncertainty. Competition for workers has lessened, leading to reduced pressure to raise wages, although skilled tradespeople and union workers continued to see stronger wage increases.

Prices:

Prices rose modestly overall, with three Districts reporting only slight increases in selling prices. Nonlabor input costs were generally described as modest to moderate, with some easing. Freight and insurance costs continued to rise in several regions, while cost pressures for food, lumber, and concrete moderated. Most contacts expect price and cost pressures to stabilize or ease in the coming months.

Conclusion:

The commentary strikes us as very measured, indicating that the Fed is likely to opt for a 25 basis point cut in two weeks. While we will monitor for signs of further weakening in the jobs market or rising inflation in the upcoming CPI report, the tone suggests the central bank is focused on fine-tuning its policy rather than embarking on an aggressive rate-cutting path. Although equities may react negatively at first, in the long term, investors would likely favor gradual adjustments to ease credit conditions rather than a more drastic rate cut approach aimed at preventing an imminent recession.