Sept 2 (Reuters) – U.S. economic activity increased modestly, employment rose slightly and prices increased moderately in recent weeks, according to a report published on Wednesday by the Federal Reserve, information that central bank policymakers will weigh alongside “hard” economic data to assess whether to raise interest rates at their September 15-16 meeting.
“The general outlook for the coming months was positive, but sentiment was mixed across sectors, with contacts reporting heightened uncertainty surrounding the effects of higher energy prices, policy, and international conflict,” the Fed said in its latest “Beige Book” report, which collects qualitative economic data from all 12 of its regional banks to give policymakers a real-time read on current conditions.
The pace of price increases slowed in three of the 12 Fed districts, increased in one, and was unchanged in eight, the report said. “Consumer-facing contacts in a few districts noted that heightened price sensitivity among customers was putting a limit on their ability to pass through input price increases.”
The Fed at its meeting in late July kept its benchmark overnight interest rate in the 3.50%-3.75% range, where it has been since December. Five of the central bank’s 19 policymakers have said they feel a rate hike is past due, and several more have said they would need to see further improvement in inflation to continue to support leaving rates unchanged.
Expectations for a rate hike this month are running high after Fed Chairman Kevin Warsh last week said his “predominant focus” was on inflation and signaled his openness to a rate hike should the data not give him confidence that underlying inflation is headed to the central bank’s 2% target “clearly and at sufficient speed.”
Inflation by the Fed’s targeted measure, the 12-month change in the Personal Consumption Expenditures Price Index, has been running above target for about 5-1/2 years. Warsh said that the better-than-expected two recent monthly readings did not suggest that the trend had meaningfully improved. At the same time, he gave no indication that his patience is necessarily wearing thin, leaving investors to pay particular attention to any hints from other policymakers about their views.
“My view is that we just have to keep watching” the data, New York Fed President John Williams told CNBC on Wednesday.
Financial markets are pricing about a 65% chance of a rate hike this month and a 35% chance of a continued hold, reflecting unusually high uncertainty so close to a meeting.
It’s not clear that the latest Beige Book report will do much to tip the scales, particularly given the volatile situation in the Middle East, where fresh U.S.-Iranian hostilities have driven up the price of oil, threatening to undo any recent easing in price pressures from higher gas prices.
“Input price pressures were notably elevated in manufacturing and construction across multiple districts, with widespread reports of price increases for energy, transportation, and raw materials, particularly metals and petrochemicals,” the Fed’s report said. Multiple districts continued to report tariff-related impacts, the report added, and firms reported “significant” healthcare and insurance cost pressures.
The data in the report was collected on or before August 24.
INFLATION WORRIES
Angst over inflation was palpable, if not obviously any worse than it had been in the previous report, which was published in mid-July.
“Contacts across industries expressed heightened uncertainty and upside risks to inflation around elevated energy prices and potential new tariffs,” the Boston Fed reported. “Many contacts cited high energy costs as a strain on consumer budgets and were concerned that the impacts could intensify during the home heating season if the conflict in the Middle East remained unresolved.”
The latest report mentioned inflation 17 times, compared with 18 times in the last report.
Observations of weakness in the housing market were rife. “A window retailer noted that sales slowed as consumers were hesitant to invest in their homes amid inflation and rising mortgage rates,” the New York Fed reported. “A contact in Western Tennessee described the housing market as transitioning from stable to slow, with inventories increasing and homes remaining on the market for longer periods,” the St. Louis Fed reported.
At the same time, there was little suggestion that wage growth was a big factor in pushing up inflation, though some districts noted pockets of pressure for specific sectors like construction and manufacturing, in which growth was also reported to be strong.
By contrast, one leisure and hospitality contact in the San Francisco Fed’s district noted that softer labor market conditions and less competition for workers had led to a “more conservative” wage increase, and one services firm in the Cleveland Fed’s district reduced salaries for top staff by 10% as part of broader cost-cutting measures.
Notably, the impact of artificial intelligence was again front and center, with districts reporting “both positive and negative effects” on labor demand. Many districts also noted increased demand for orders tied to data centers and defense spending.
(Reporting by Ann Saphir; Editing by Paul Simao)
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