The Federal Reserve's Beige Book report, a survey derived from feet on the ground in its 12 districts, indicates the U.S. economy continues to grow and the majority of businesses remain optimistic about the near-term outlook. With its release yesterday, policymakers who oppose further rate cuts now have considerable support for their views.
The so-called Beige Book, which is based on interviews and conversations with business contacts outside the Fed system, is prepared ahead of each meeting of the Federal Open Market Committee (FOMC) and is usually released about two weeks before each scheduled FOMC meeting. It's intended to be a qualitative counterweight to the quantitative input from economic data and usually doesn’t draw much attention.
With the FOMC sharply divided on what to do at its upcoming meeting this month, however, the Beige Book's input is more significant than usual. Still, whether it can actually sway the panel from going ahead with a widely expected rate cut remains to be seen.
The overall report qualifies growth as “modest” and identifies weak points, but it paints a picture of an economy that is bubbling along in spite of trade tensions, inverted yield curves, and other headwinds.
Transportation activity, for instance, “softened” and home sales remained “constrained” because of low inventory and flat housing starts. The report, in line with this week’s decline in the Institute for Supply Management’s purchasing managers’ index, acknowledged that manufacturing was down, but only “slightly.”
Tourism activity, however, was “solid,” consumer spending was mixed with modest growth in auto sales. Leasing and lending developed positively and nonfinancial services showed progress.
The report said contacts were concerned about the eventual impact of tariffs and trade tensions, but didn’t think they were already affecting prices or economic activity. The Boston Fed report concluded that outlooks in the district, which encompasses all of New England, were “guardedly optimist to generally positive.”
In short, it doesn’t sound like people are clutching at the hope of some immediate monetary stimulus. No wonder, then, that Boston Fed chief Eric Rosengren this week repeated his conviction that the economy is “relatively strong” and doesn’t need lower interest rates.
Rosengren, who is a voting member of the FOMC this year, wants to keep the Fed’s powder dry for when action is truly needed. He dissented from the decision in July to cut the Fed’s benchmark rate by a quarter-point and indicated he is likely to vote against a rate cut this month, too.
Kansas City Fed chief Esther George, who also dissented from the July rate decision, reiterated her belief that the economy is strong and not in need of monetary stimulus at this time. At an event last week in St. Joseph, Missouri, she said that though trade uncertainty is clearly hurting farmers, consumer confidence is more than offsetting that negative impulse.
The Beige Book report from her district, which extends over seven Western states, mentioned consumer strength in retail, auto, restaurant and tourism sectors.
Richmond—which takes in the Carolinas, Virginia, Maryland and West Virginia—reported increased activity in ports, tourism and nonfinancial services. Both residential and commercial real estate were stable to improving modestly. Manufacturers and trucking companies reported declines.
Richmond Fed President Tom Barkin added his voice last week to those FOMC members who are cautious about further cuts in rates. “An option is best valued at the end of its time period rather than in the middle,” he said, indicating he would prefer to wait with more cuts.
He particularly objected to taking action because of concerns about inflation, which he doesn’t think should be part of the equation right now. He is concerned about growth, but he said he hasn’t spoken to a single firm in his district that is downsizing.
Barkin is not a voting member of the FOMC this year. As well, it’s hard to know whether the moderately optimistic tone of the Beige Book and the resistance of several policymakers to a rate cut will be enough to deter Fed Chair Jerome Powell from what markets see as his intention to cut rates again in September.