A Federal Reserve study released on Wednesday stated that nothing has changed in the recent month and a half in terms of U.S. economic activity as prices have continued to rise modestly and labour market tightness has continued to diminish.
“The near-term outlook for the economy was generally described as stable or having slightly weaker growth,” the Federal Reserve stated in its most recent “Beige Book,” which is an assemblage of opinions, polls, and observations from its 12 districts—Boston to San Francisco—that were collected through October 6. “Overall, firms expect prices to increase the next few quarters, but at a slower rate than the previous few quarters,” the report stated.
The biggest number of regional Fed districts to see overall deterioration since January, when many pundits were predicting a recession, were five, which reported minor growth, three of which witnessed little or no change, and four of which recorded modest shrinkage.
That hasn’t happened, but the conflicting report illustrates the gap—highlighted by several policymakers—between the “hard” data they receive, which indicates an economy growing faster than average, and the anecdotes they get from their districts, which present a much more benign situation.
The report on Wednesday gave off the impression that the economy is approaching stall speed, which contrasts with a number of official data points in recent weeks that indicate the U.S. economy is expanding despite Fed interest rate rises intended to slow it down.
According to official figures, companies have increased hiring, retail sales and manufacturing are expanding faster than anticipated, and underlying consumer prices increased last month at a 4.1% annual rate—more than double the Federal Reserve’s 2% objective.
The policy rate was raised from near zero in March 2022 to a range of 5.25%–5.50% by late July of this year in an attempt to combat excessively high inflation, and it has remained there ever since. The U.S. central bankers meet in two weeks to determine the policy rate.
Given the recent increase in longer-term Treasury rates, traders are strongly wagering against any rate move at the next meeting.
Thomas Barkin, the president of the Richmond Fed, says he is concentrated on the discrepancy between his personal economic acumen and the robust macroeconomic indicators, which point to more inflation and expenditure cooling. Several districts, including his own, reported a little contraction in the previous several weeks.
The impact of tighter financial conditions was highlighted by the Kansas City Fed, whose region likewise reported lower overall economic activity. “Several bankers characterised their appetite for lending as being on a ‘loan diet’ – looking for smaller portions (smaller balances) and only healthy fare (better creditworthiness),” claimed the report.
The Cleveland Fed, one of three districts reporting no change in economic activity, observed growing constraints as pricing pressures eased and wage growth stalled. As customers appear to be tightening their belts, one store stated, ‘We will try our best to hold the queue,’ the report stated.
Among those reporting “modest” expansion, even the Dallas Fed noted some underlying weakness. “There were scattered reports of labour hoarding – businesses saying they ordinarily would release some workers because of weak sales but were holding off ‘just in case.'”
In remarks on Wednesday, Federal Reserve Governor Christopher Waller discussed the “puzzle” of robust consumer demand vs ongoing slowdowns in inflation and wage growth. Waller stated that he wants to wait and see how the data develops before deciding on the course of policy.
When Fed Chair Jerome Powell addresses the Economic Club of New York on Thursday, investors are eager to hear how he interprets it all.
As stated in the Fed research released on Wednesday, “expectations of firms for which the holiday shopping season is an important driver of sales were mixed.”