Beige Book Gains Importance Amid Shutdown Delays

The Federal Reserve’s latest Beige Book indicates that overall economic activity has “changed little on balance since the previous report.” Of the 12 Fed districts, three reported slight to modest growth, five noted no change, and four experienced a slight softening – marking a shift from the last report, where zero districts said activity was contracting.

Key takeaways include a decline in consumer spending, particularly among lower-income and middle-income households. Prices continued to rise and many businesses face a difficult choice: either absorb higher input costs to stay competitive or pass them on to consumers, potentially dampening demand.

Employment levels have remained relatively stable, but more companies are beginning to reduce staff through layoffs or attrition. These job cuts are tied to softer demand, ongoing economic uncertainty, and increased investment in artificial intelligence.

What’s the bottom line?
The Beige Book, released eight times a year ahead of Federal Open Market Committee (FOMC) meetings, provides qualitative insights from all 12 Fed districts and offers a snapshot of economic conditions across the country. This edition carries added importance ahead of the upcoming FOMC meeting on October 29.

Normally, the Fed would weigh its interest rate decisions alongside key government data such as inflation and employment reports. However, with the ongoing government shutdown delaying some of those indicators, policymakers may place greater emphasis on the Beige Book’s findings to guide their next move.

Markets are currently expecting the Fed to cut its benchmark interest rate by another 25 basis points, mirroring the September cut, as signs of labor market weakness persist despite inflation remaining above the Fed’s 2% target.

As a quick reminder, when the Fed changes rates, it’s adjusting the Federal Funds Rate – a short-term rate that banks use to lend to one another. This rate doesn’t directly set mortgage rates, but it does influence them, along with other economic factors.