Fed Expects Inflation To Moderate — And Has This To Say On Economic Activity

The U.S. Federal Reserve stated in its Beige Book that it expects price increases to generally moderate, just two weeks before the central bank is scheduled to hold its monetary policy meeting and likely hike interest rates by 75 basis points.

The Federal Reserve pointed out that price growth remained elevated, although some easing was seen across several districts.

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“Significant input price increases were reported in a variety of industries, though some declines in commodity, fuel, and freight costs were noted. Growth in selling prices was mixed, with stronger increases reported by some Districts and a moderation seen in others. Some contacts noted solid pricing power over the past six weeks, while others said cost pass-through was becoming more difficult as customers push back,” it said.

Why It Matters: The Beige Book is a Federal Reserve System publication about current economic conditions across the 12 Federal Reserve Districts. Stocks and bonds have equally been hammered by the Fed's rate hikes and policy path projections. The SPDR S&P 500 ETF Trust (NYSE: SPY) has lost over 22% so far this year, while the Vanguard Total Bond Market Index Fund ETF (NASDAQ: BND) has shed over 17%.

Labor Market: Several districts reported a cooling in labor demand, with some noting that businesses were hesitant to add to payrolls amid increased concerns of an economic downturn, the central bank said. Overall labor market conditions remained tight, though half of the districts noted some easing of hiring and/or retention difficulties, it added.

“Retail spending was relatively flat, reflecting lower discretionary spending, and auto dealers noted sustained sluggishness in sales stemming from limited inventories, high vehicle prices, and rising interest rates,” it said.

The Fed also said outlooks grew more pessimistic amid rising concerns about demand. “Bankers in most reporting Districts cited declines in loan volumes, partly a result of shrinking residential real estate lending. Energy activity expanded moderately, whereas agriculture reports were mixed, as drought conditions and high input costs remained a challenge,” it said.

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