The Federal Reserve’s latest Beige Book, a compilation of anecdotal economic data from across the country, paints a picture of modest growth with persistent inflationary pressures.

Released on Wednesday, the report summarizes observations gathered through November 22nd from the Fed’s twelve regional banks.

While economic activity has expanded slightly since early October in most regions, the report highlights a nuanced picture of the current economic climate.

‘Subdued’ employment growth, persistent inflation

The Beige Book notes that employment growth remains “subdued,” a key factor influencing the Fed’s policy decisions.

Inflation, while rising at a modest pace, continues to exceed the Fed’s 2% target.

The report cites the 12-month change in the personal consumption expenditures (PCE) price index (excluding food and energy) remaining stubbornly in the 2.6% to 2.8% range since May.

This figure, a key measure of underlying inflation, remains well above the Fed’s comfort zone.

Business optimism amidst uncertainty

Despite the persistent inflationary pressures and subdued employment growth, the Beige Book highlights a notable trend: “Business contacts expressed optimism that demand will rise in coming months.”

This positive sentiment suggests a degree of confidence among businesses regarding future economic prospects.

This optimistic outlook is expected to influence the Fed’s policy decisions moving forward.

What is Federal Reserve’s next move?

The Beige Book’s findings will significantly impact the Federal Reserve’s upcoming rate-setting meeting in two weeks.

Financial markets anticipate a quarter-percentage-point rate cut, despite inflation remaining higher than desired.

This expectation underscores the balancing act facing the Fed: mitigating inflationary risks while supporting continued economic growth.

The current policy rate sits within the 4.50%-4.75% range following reductions in September and November.

Labor market cools gradually, employment report anticipated

The report also acknowledges the ongoing cooling of the labor market, describing it as “gradually cooling” while remaining strong overall.

Economists anticipate the upcoming November jobs report (due Friday) to reveal a rebound in payroll growth after October’s disappointing figures, which were impacted by hurricanes and a strike at Boeing.

However, the unemployment rate is projected to rise slightly to 4.2% from 4.1%.

The report indirectly references the ongoing debate among Fed policymakers regarding the “neutral rate”—the level at which interest rates cease to significantly impact economic activity.

Most policymakers estimated this neutral rate to be no higher than 3.5% as of September.

The Fed is mindful of keeping the policy rate from remaining too far above this neutral level for an extended period, to avoid unnecessarily stifling economic growth.

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