50 Shades of Beige

Deidra 2016-11.jpg

by Deidra Krys-Rusoff
Senior Vice President

Week in Review

U.S. factory production exceeded growth expectations and the University of Michigan consumer confidence survey came in at a 14-year high, helping U.S. stocks to break out of their four-day slump (triggered by tariffs and White House turmoil). However, it won’t be enough to turn in positive numbers for the week. The Dow Jones Index is trading off at 24,947, down about 1.50 percent. Both the S&P 500 (2752) and the NASDAQ (7482) are down about 1 percent for the week. The indices may experience some unexpected twists and turns today, due to the quarterly event known as “quadruple witching,” when options and futures contracts expire. The benchmark 10-year Treasury rallied this week, with rates dropping from 2.90 percent to 2.84 percent. The rising political concerns were a boon to the oil market, with crude headed up for the second week in a row. The U.S. greenback is ignoring the turmoil and may end the week with its fourth weekly gain. 

The Beige Book

The “Beige Book” is the short name for the Federal Reserve’s “Summary of Commentary on Current Economic Conditions by Federal Reserve District” and serves as a qualitative review of business conditions in each of the 12 regional districts. It is compiled by each Fed branch conducting interviews with local business leaders, market experts and economists and provides color on regional economic growth. It is known by the short name “Beige Book” simply because the report cover is beige. The Beige Book is released two weeks prior to each Fed meeting and is released to the public at the same time.

A Bestseller?

The Beige Book is one of the key reports that the Fed relies on for information of how the economy is performing throughout the country. If the Beige Book suggests that the economy is growing too quickly, via inflation or large job gains, the Fed may “hit the brakes” (contractionary monetary policy) or raise interest rates to slow down spending and the flow of money. If the Book suggests that the economy is slowing or stalled, the Fed may lower interest rates (expansionary monetary policy) to encourage businesses and individuals to spend more. 

The Fed was in an expansionary mode immediately after the recession which began in 2008, when interest rates were lowered to essentially zero. Rates stayed at zero until December of 2015, when they were raised 25 basis points. The Fed increased interest rates three times in 2017, up to a range of 1.25 – 1.50. 

Book Club Discussion

The Fed’s latest Beige Book report suggests slightly increasing labor market tightness, as evidenced by higher wages and expanding benefit packages. The report categorizes wage pressures as “moderate”, which is upgraded from January’s report of “modest”.  While this change is notable, it does not point to huge increases in inflation, which the Fed monitors. In fact, the Boston district noted that wage increases were not translating to substantial price increases. Overall, inflation continues to lag the Fed’s target rate of 2.0 percent. The report information was compiled before President Trump announced steel and aluminum import tariffs, which may impact prices in the next report, scheduled for release mid-April.

The latest Beige Book data provides some anecdotal evidence to help guide the Fed’s meeting next week. The Fed is expected to raise interest rates when they announce their decision on Wednesday, increasing the range to 1.50 – 1.75. 

Takeaways for the Week

  • The Beige Book is a key report for the Federal Reserve, compiling economic and market data from the 12 Fed districts around the country
  • The last Beige Book report noted increased labor market tightness, but no correlating increase in the price of goods or services

  • The Fed is expected to raise interest rates to a range of 1.50 – 1.75 on Wednesday