The Federal Reserve’s Beige Book on the state of the economy is released. Overall, economic activity has remained unchanged since early July, with a slight increase in activity in five regions and a slight slowdown in another five, the Beige Book showed. The outlook for future economic growth is generally weak. Meanwhile, employment growth was moderate to moderate in most regions. Overall labor market conditions remain tight. The price level remains high. Against this backdrop, Fed Vice Chairman Brainard pointed out that the Fed’s policy rate needs to be raised further. The Fed will act whenever it is necessary to contain the problem of high inflation. Fed Collins says inflation is simply too high. The Fed has raised interest rates sharply, but there is still more work to do.
Beige Book Situation Display
The report was prepared by the Federal Reserve Bank of San Francisco based on information collected on or before August 29, 2022. The document summarizes comments received from contacts outside the Fed system and is not a comment on the views of Fed officials.
Overall economic activity showed no change since early July, with five regions showing a slight increase in activity and a further five slowing down slightly. Most regions reported steady consumer spending as households continued to reduce transactions and shift spending away from discretionary to food and other essentials. Auto sales remained subdued in most regions, reflecting limited inventory and higher prices. Hotel and tourism links underscored overall solid leisure travel activity, with some reporting an increase in business and group travel. Manufacturing activity rose in some regions despite reports that supply chain disruptions and labor shortages continued to hamper production. Despite reports of strong leasing activity, residential real estate conditions weakened markedly as home sales fell in all 12 boroughs and residential construction remained constrained by a shortage of inputs. Commercial real estate activity was weak, especially demand for office space. Loan demand was mixed; while financial institutions reported generally strong demand for credit cards and commercial and industrial loans, demand for residential loans was weak amid rising mortgage rates. Demand from non-financial services firms was stable or slightly higher. Demand for transportation services is uneven, and reports on the state of agriculture vary across reporting districts. While demand for energy products is strong, production remains constrained by supply chain bottlenecks for key components. The outlook for future economic growth is generally weak.
Labor market conditions show moderate to moderate job growth in most regions. Overall labor market conditions remained tight, although nearly all regions highlighted improved labor supply conditions, particularly in manufacturing, construction and financial services. Additionally, employers noticed an overall improvement in employee retention. Wages rose in all regions, despite widespread reports of slower growth and slower wage expectations. Employers in several regions reported offering mid-year and off-cycle pay increases to offset higher living costs, with many noting that offering bonuses, flexible work arrangements and comprehensive benefits were considered necessary to attract and retain workers . Going forward, employers plan to offer workers year-end pay raises.
In terms of prices, the price level is still at a high level, but the increase in the nine districts has slowed down. Significant price increases were reported in all regions, especially for food, rent, utilities and hotel services. While manufacturing and construction input costs remain high, lower fuel prices and cooling overall demand have eased cost pressures, especially freight rates. Several regions reported lower prices for steel, lumber and copper. Most sources expect price pressure to continue at least through the end of the year.
Rate hike expectations rise
After the release of the Beige Book, Goldman Sachs expects the Fed to raise interest rates by 75 basis points this month and 50 basis points in November, compared with previous forecasts of 50 basis points and 25 basis points. Goldman Sachs said recent hawkish comments from Fed officials appeared to suggest that progress in suppressing inflation was not as consistent or rapid as they had hoped.
At the same time, Barr, vice chairman of the Federal Reserve’s financial supervision, said that he is committed to reducing inflation. The Fed’s rate decision will be driven by data, but the data so far have been conflicting. The purpose of bank capital review is to ensure an adequate level of capital adequacy.
Fed Vice Chairman Brainard said the Fed’s policy rate needs to be raised further. The Fed will act whenever it is necessary to contain the problem of high inflation. Restrictive monetary policy may be required “sometime in the future”. It would take “inflation data to stay low for several months” to be confident that inflation is falling to 2%. At some point in the tightening cycle, the risks will become more two-way. It may take some time before the full impact of tighter financial conditions on the economy is felt.
Market Impact Forecast
Peterffy Peterffy, chairman of Interactive Brokers, said the decline in U.S. stocks was not enough to reflect persistently high inflation pressures, which will prompt the Federal Reserve to keep interest rates high for some time. The S&P 500 will bottom out between 3,300 and 3,500. After bottoming, there will be “a period of time” at the bottom. “I’ve been bearish for a while, and I don’t think stocks have bottomed out because I don’t think inflation is over,” he said. Deep-seated issues like rising costs. So together they contribute to inflation.”
In addition, rising interest rate expectations prompted the crypto market to decline on September 7. As for the emerging financial sector, Fed Vice Chairman Brainard said that the encrypted financial system has the same risks as traditional finance. “I would like to see a similar regulatory system to deal with similar risks. It is difficult to legislate for the emerging financial sector. But it is very important to do so. In addition, Renard pointed out that we need to evaluate the central bank’s digital currency in the context of future finance. There may be many stablecoins in the future, and the question is whether to issue a digital dollar as well. The digital dollar will serve as a Neutral settlement layer. This will provide some resilience. So we need to think carefully about the design of the digital dollar.
The Fed will work with other regulators to create the necessary safeguards for banks’ crypto activities, said Barr, the Fed’s vice chair for financial supervision. Encryption rules should be based on the principles of the same risk, the same activity, the same regulation, no matter how the technology evolves.
As for the current state of the crypto market, cryptocurrency analysis firm CryptoQuant said that according to exchange whale ratio statistics, the current bear market still exists. It is reported that on-chain whale activity at one point increased and reached highs before the price of Bitcoin fell below $20,000. Bitcoin is currently in the $19,000 range. Whales and miners are driving this price swing. Some miners are forced to sell their BTC holdings. If the current trend continues, more whales and miners may face more selling pressure.