The latest Beige Book shows modest economic growth, slight employment gains and persistent price pressures, keeping the Federal Reserve’s September rate decision finely balanced.
US economic activity picked up modestly in recent weeks, while employment increased slightly and prices continued to rise moderately, according to the Federal Reserve’s latest Beige Book report, keeping the central bank’s policy outlook uncertain ahead of its September meeting.
The report, which draws on qualitative information collected by the Fed’s 12 regional banks, offered a mixed picture of the world’s largest economy. While the overall outlook remained positive, businesses reported growing uncertainty around energy costs, tariffs, government policy and international conflicts.
The findings come ahead of the Federal Reserve’s September 15-16 policy meeting, where policymakers are facing a difficult choice between responding to persistent inflation pressures and concerns about the broader economy.
Price pressures remain a key concern
The Beige Book showed that price pressures remained widespread, although their pace varied across regions. Price increases slowed in three of the Fed’s 12 districts, accelerated in one and remained unchanged in eight.
Businesses in several districts said rising input costs were making it harder to pass higher prices on to consumers, as customers became increasingly price-sensitive.
Energy, transportation and raw material costs — particularly metals and petrochemicals — were among the areas where companies reported elevated price pressures. Tariff-related costs were also being felt across several districts, while healthcare and insurance expenses remained significant concerns.
More from BusinessInflation was mentioned 17 times in the latest Beige Book, only slightly fewer than the 18 references in the previous report.
The Boston Fed said businesses were increasingly worried about upside risks to inflation stemming from higher energy prices and potential new tariffs. Some contacts also warned that prolonged Middle East tensions could push energy costs higher during the home-heating season.
Rate hike expectations climb
The Fed has kept its benchmark overnight interest rate in the 3.50-3.75 per cent range since December, leaving policymakers divided over the next move.
Five of the Fed’s 19 policymakers have indicated that they believe a rate increase is overdue, while several others have said they would need clearer evidence of improving inflation before continuing to support unchanged rates.
Fed Chair Kevin Warsh has also placed renewed emphasis on inflation. Speaking last week, Warsh said his predominant focus was on price pressures and indicated that he could support a rate hike if incoming data failed to provide sufficient confidence that underlying inflation was moving towards the Fed’s 2 per cent target.
Financial markets were pricing in roughly a 65 per cent probability of a rate hike at the September meeting, compared with a 35 per cent chance of rates remaining unchanged.
However, New York Fed President John Williams said policymakers still needed to assess the incoming data before making a decision.
Housing market shows signs of strain
The Beige Book also highlighted weakness in parts of the US housing market, with businesses reporting that consumers were becoming more reluctant to make major home-related purchases amid inflation and higher mortgage rates.
The New York Fed reported that a window retailer had seen sales slow as customers hesitated to invest in their homes.
The St. Louis Fed, meanwhile, reported that a contact in western Tennessee described the housing market as moving from stable to slow, with inventories rising and properties spending longer on the market.
Labour market picture remains mixed
There was little evidence in the report that broad-based wage growth was driving inflation higher, although some industries continued to face pockets of wage pressure.
A Maryland construction company told the Richmond Fed it had raised pay by 35 per cent to retain workers. Elsewhere, however, softer labour-market conditions were allowing companies to take a more cautious approach to wage increases.
A leisure and hospitality contact in the San Francisco Fed district reported more conservative wage increases because of weaker labour-market conditions and reduced competition for workers. A services company in the Cleveland district had also cut salaries for senior staff by 10% as part of wider cost-cutting efforts.
AI and data centres reshape demand
Artificial intelligence continued to feature prominently in the Fed’s assessment of the economy.
Districts reported both positive and negative effects from AI on labour demand, while demand linked to data-centre construction and defence spending remained strong even as activity in other parts of the economy weakened.
One Chicago Fed contact went so far as to say that without data-centre construction, the construction industry would be in recession.
The Beige Book also pointed to the growing economic impact of weight-loss drugs. Rising demand for protein among users of such medicines has supported the livestock sector, with the Kansas City Fed reporting increased investment in dairy-processing facilities in Kansas, as well as smaller investments in New Mexico and Nebraska.
The Beige Book data were collected on or before August 24, meaning some of the latest developments in the economy may not yet be reflected in the report.
With inflation still above the Fed’s target, energy prices vulnerable to geopolitical shocks and markets increasingly betting on tighter policy, the September meeting is shaping up to be one of the Fed’s most closely watched policy decisions in recent months.
