The Beige Book released by the Federal Reserve on Wednesday indicated that U.S. economic activity expanded modestly in recent weeks, with slight employment growth and moderate price increases, driven primarily by strong demand for data centers. Regarding prices, three of the 12 Federal Reserve Districts reported a slowdown in price growth, one reported an acceleration, and the remaining eight reported no change, resulting in an overall modest upward trend. On the employment front, seven districts reported slight to moderate job growth, while the other five remained largely flat.
The Federal Reserve's latest Beige Book report indicates a slight increase in U.S. economic activity, steady improvement in employment, and a moderate rise in inflation; however, significant divergence remains in market expectations regarding the path of interest rate hikes in September.
The Beige Book released by the Federal Reserve on Wednesday showed that U.S. economic activity expanded moderately in the recent period, employment saw slight growth, and price increases were contained, with demand for data centers emerging as a primary driver of growth.
Federal Reserve Chair Walsh explicitly stated last week that inflation remains the "top priority," implying that interest rate hikes remain an option if data fails to demonstrate that underlying inflation is converging toward the 2% target at a sufficient pace. This statement significantly boosted market expectations for a rate hike in September.
Current financial market pricing indicates approximately a 65% probability of a rate hike at the Federal Reserve's policy meeting on September 15–16, and about a 35% probability of rates remaining unchanged. Such high level of uncertainty is rare within such a short window preceding the meeting.
Furthermore, escalating tensions in the Middle East have driven up oil prices, which could offset the disinflationary effect of recent declines in energy prices, thereby adding further complexity to the policy outlook.
Moderate economic expansion, with simultaneous improvements in employment and inflation
According to the Beige Book report, seven of the twelve Federal Reserve District Banks reported slight to moderate employment growth, while the other five reported largely flat conditions. The data collection for the report concluded on August 24. The report stated:
"Strong labor demand was most prevalent in manufacturing, construction, and certain service sectors, whereas labor demand declined in retail and hospitality."
Regarding prices, three of the twelve Federal Reserve districts reported a slowdown in price increases, one reported an acceleration, and the remaining eight reported no change, resulting in an overall moderate upward trend. The report noted:
"Consumer-facing businesses in some districts reported increased customer price sensitivity, which limited their ability to pass on rising costs to end consumers."
The Federal Reserve’s core inflation gauge—the 12-month change in the Personal Consumption Expenditures (PCE) Price Index—has remained above the 2% policy target for approximately five and a half years. Warsh stated that the better-than-expected monthly inflation readings over the past two months are insufficient to indicate a substantive improvement in the inflation trend.
Cost pressures in manufacturing and construction are prominent.
The Beige Book report highlights several structural pressures on the cost side. The report states that "input price pressures in the manufacturing and construction sectors are significantly elevated across multiple districts, with widespread increases in energy, transportation, and raw material prices, particularly for metals and petrochemical products."
Multiple districts continue to report impacts from tariffs, and businesses have noted "significant" pressure from health insurance costs. These cost pressures contrast with end consumers’ high sensitivity to prices, placing firms in a dilemma regarding cost pass-through.
The report also indicates that the overall outlook for the coming months remains generally positive across districts, although sentiment varies by sector. "Contacts indicated that rising energy prices, policy direction, and the impact of international conflicts have introduced heightened uncertainty to the market." Escalating tensions between the United States and Iran in the Middle East, coupled with rising oil prices, have further accentuated this risk.
Divergence among policymakers persists, leaving meeting outcomes uncertain.
Within the Federal Reserve, policy divergence remains evident. It is reported that five of the 19 voting members have explicitly stated that the time for a rate hike has arrived, while several others have indicated they need to see further improvements in inflation before continuing to support holding rates steady.
The Federal Reserve has maintained the benchmark overnight interest rate in the range of 3.50% to 3.75% since last December. In an interview with CNBC on Wednesday, New York Fed President John Williams stated, "My view is that we simply need to continue observing" data trends, adopting a relatively cautious tone without sending clear signals of a rate hike.
Analysts point out that it remains uncertain whether the latest Beige Book report alone will significantly shift the policy balance. Attention will remain focused on public statements by other policymakers and key economic data releases ahead of the September meeting.
Editor/Stephen