Beige Book Shows Stable Economy as Markets Hold Firm on December Rate Cut

The latest Federal Reserve Beige Book paints a picture of an economy that continues to walk a narrow ridge: stable, not accelerating, not collapsing, but showing signs of softening beneath the surface. Across the twelve districts, activity was described as “little changed,” with only slight declines in certain regions and modest growth in one. The key tension throughout the report is unmistakable: businesses continue to report rising cost pressures—especially tariff-related—while consumer price data has not yet fully reflected these increases. This persistent disconnect is increasingly shaping the Fed’s policy approach heading into the December and January meetings.

The labor market is loosening in slow motion rather than abruptly. A number of districts reported slightly declining employment, though largely via hiring freezes and attrition rather than broad layoffs. Workers are easier to find, except in specialized skill categories. Several districts specifically noted that artificial intelligence is beginning to displace entry-level labor or reduce the need for incremental hires. Wage growth is moderating, though still stronger in sectors like manufacturing, construction, and healthcare where skilled labor remains tight. Rising health insurance premiums are also putting upward pressure on labor costs—an inflationary force not fully captured in headline indexes.

The most structurally important commentary comes in the pricing section. Input costs rose across nearly all districts, particularly for sectors sensitive to materials, imported goods, and intermediate industrial components. Tariffs were consistently cited as contributing to cost increases. Yet the pass-through of these costs to final consumer prices remains mixed. Many firms reported absorbing the costs rather than hiking prices aggressively, leading to margin compression rather than final-goods inflation. Others are selectively raising prices only when competitive conditions allow. This is the heart of the “tariff ghost”: businesses feel inflation internally, consumers don’t feel it externally—yet.

This dynamic explains why the inflation data has not reflected the anecdotal inflation commentary from corporate America. The pricing pressure exists, but remains upstream. For now.

Consumer activity was mixed: lower-income households continue to show weakness, while high-end retail spending remains resilient. Auto dealers cited EV sales softening after expiration of federal tax credits. Travel and tourism were flat, with cautious discretionary spending. Manufacturing improved somewhat, though tariff uncertainty remains a drag. Agricultural and energy activity were described as stable but restrained—“weak prices” in oil and certain crops being a common theme.

From a sentiment standpoint, the districts reveal a subtle shift. The near-term outlook is generally stable, but forward-looking commentary tilts more cautious. Firms are not becoming alarmed—but uncertainty is creeping in. Several districts warned about slower activity ahead, especially if margins continue to get squeezed. Yet others, particularly in the manufacturing corridor, expressed growing optimism tied to the build-out of AI-driven infrastructure and commercial activity.

Against this backdrop, the bond market currently prices an 85% probability of a rate cut in December, and an 88% probability of another cut at the end of January. The Beige Book does nothing to discourage that view. If anything, it gives the Fed political cover to move forward: inflation prints have moderated, the jobs market is easing at the edges, consumer spending is tapering off, and the cost pressures reported by businesses haven’t yet translated into measured inflation.

But the deeper policy question is whether the Fed is mis-reading tariff pressures by focusing too heavily on lagging quantitative data and too lightly on real-time anecdotal cost stress. If businesses can no longer continue absorbing tariff-inflated input costs, and begin passing them through aggressively in mid-2026, the inflation readings could re-accelerate just as the Fed is easing. This is the risk several districts implicitly hint at without stating directly.

Markets, for now, are betting on the “Goldilocks interpretation”: sufficiently soft conditions for cuts, insufficient inflation to worry. The Beige Book supports that stance—for now. The real story may be whether these early signs of input-level cost strain eventually break through into consumer prices. If that surge arrives later than expected, the Fed could end up cutting into a coming inflation impulse rather than a fading one.

In summary, the Beige Book validates a December cut, supports a January cut, but leaves the second half of 2026 as an open question—one that will hinge on whether tariff-driven cost pressures remain a contained margin story or finally emerge as a consumer-facing price story.