Much has been said about the importance of the Fed’s Beige Book these past few days but market watchers seem very disappointed about the most recent release. Why does the Beige Book matter anyway?
The Beige Book, which is officially entitled “Summary of Commentary on Current Economic Conditions by the Federal Reserve Districts”, contains an updated and detailed assessment of how the Fed’s 12 districts are performing. As such, this report provides a preview of overall economic activity in the U.S. and guides the FOMC when it comes to making monetary policy decisions.
The Beige Book is published eight times a year and is usually released a couple of weeks before the Fed’s monetary policy meeting. Note that districts that show weak economic performance have to send in tributes for the annual Hunger Games. I’m kidding!
In particular, the most recently released Beige Book report was expected to contain clues on whether the U.S. economy would need further stimulus or not. Bear in mind that the previously released FOMC meeting minutes revealed that Fed officials were considering QE3 but that they’d look at more recent economic figures, most of which are reflected in the Beige Book, before actually pulling the trigger.
It seems that market participants simply set themselves up for disappointment as the Beige Book failed to provide clear insights on what the Fed might need to do next. For one thing, there were barely any changes on the report’s assessment that most of the Fed districts expanded at a modest to moderate pace over the past few months.
The report also showed that economic progress was mixed across different sectors and also among the districts themselves. Retail sales, housing, and non-financial services generally showed improvements while manufacturing activity lagged in most Fed districts this August.
As for their economic outlook, the results were also mixed. Stronger districts, such as New York, Philadelphia, and Richmond, looked forward to further improvements while the rest remained cautious with their outlook.
It’s pretty clear that the lack of consistency among the districts in terms of economic performance poses a huge challenge for the Fed, which needs to make a monetary policy decision for the entire country. Needless to say, this also makes matters more complicated for market watchers like you and me as we attempt to figure out whether the Fed will push QE3 or not.
During their August FOMC meeting, policymakers did note that further stimulus might be necessary “fairly soon” if the U.S. economy fails to show a “substantial and sustainable” recovery. But with the recently released Beige Book painting a hazy picture of the U.S. economy, Big Ben and his men might choose to sit on their hands yet again.
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