Fed’s Beige Book Indicates ‘Generally Weak’ Economy

The Federal Reserve said economic growth was “generally weak” in April and May as consumer spending slowed, while manufacturers in several regions passed on higher raw materials costs to their customers.Three of the 12 regional Fed banks reported “softer, weaker, or lower” growth and four found “slower, sluggish, or modest” expansion. Five areas reported business was “stable or little changed,” the central bank said in its regional Beige Book economic survey.The report indicates the economy is slowing, though avoiding a contraction, an assessment that echoes Chairman Bernanke, who said this week dangers of a deeper downturn are receding. The release didn’t sway investors from betting that the Fed will raise interest rates by year-end to stem inflation.“There is not quite the degree of softness that we saw in the previous Beige Book,” the president of DMJ Advisors LLC in Denver and author of four books on the central bank, David Jones, said. That “allows the Fed to pay greater attention to these inflation expectations” among consumers.The number of districts reporting no further deterioration in the economy more than doubled from three in the previous survey, released April 16. Yesterday’s report, which is named for the color of its cover, was based on information gathered from late April until June 2.The anecdotal reports are part of a package of analysis and data that will be used by Fed policy makers as they decide on interest rates at their meeting June 23-25.Mr. Bernanke and other officials have indicated this month that inflation is increasingly a concern, and that the slow economic growth that policy makers anticipate won’t spur further rate cuts. The Fed chief said June 9 that the rate-setting Federal Open Market Committee “will strongly resist an erosion of longer-term inflation expectations.”Fed officials cut the benchmark interest rate 2.25 percentage points in the first four months of the year, to 2%, the fastest reduction in two decades. Traders project no change at this month’s meeting, according to futures prices, and a 54% chance of an increase in August.Households have been hit by soaring fuel costs and a slump in home values. Manufacturers have fared better because of record demand for American goods and services abroad.“Consumer spending slowed since the last report as incomes were pinched by rising energy and food prices,” the Beige Book said. “Business contacts in most districts reported moderate or limited wage growth in response to some loosening of labor market conditions.”“The Fed has to be worried about the suction of purchasing power out of the wallets of Americans caused by the seemingly unending rise” in oil prices, a Princeton University professor and former Fed Board vice chairman, Alan Blinder, said. “That’s more and more purchasing power that could and should be spent on other things.”The economy expanded at a 0.9% annual pace in the first quarter, capping off the weakest six month expansion in five years, the Commerce Department reported May 29. As growth slowed, private employers cut payrolls every month since December, pushing the jobless rate up to 5.5% in May.

Fed’s Beige Book Indicates ‘Generally Weak’ Economy

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