Market CommentariesBeige Book Shows A Continuing Constructive Economic Outlook

The Federal Reserve has issued its periodic Beige Book economic summation within the last hour and there were no surprises that would undermine in either the economy or the stock market. In fact, minutes after the widely anticipated release came out, the equity market's gains, already rather impressive today, were solidified even further, with the day's gain in the Dow Jones Industrial Average briefly rising toward 90 points before settling back again.

According to the Beige Book, a compilation that is used by the central bank to formulate monetary policy at its next FOMC meeting (which is set for the first week of November, or just before the election), the U.S. economy was starting to show some signs of rising wage pressure in September and early October, the period under the latest Beige Book examination. The recent jobs report did show some tick up in hourly wages, in fact, and the Beige Book spoke of tight labor conditions.

Overall, however, compensation growth was still moderate, much as it has been for the duration of this long, but unimposing, economic expansion. Of course, this is a somewhat uneasy state of affairs, as it could suggest that inflation, long dormant, is starting to make an appearance, if unevenly so. Yesterday morning's report of a 0.3% increase in consumer prices last month, the largest monthly gain since April, may well be indicative of some pricing pressures. Overall, though, pricing is muted.

The wage gains, meanwhile, also seem somewhat selective, with just some Districts seeing pressures. However, for the modest part, the increases still were subdued. The lead bank, moreover, reported that most of the dozen Fed Districts saw a modest or moderate pace of economic expansion, which has been the rule for some time now. Consumer spending, meantime, was mixed, which was somewhat disappointing in the fact that some other reports show a firming in such outlays.

Meanwhile, along with the spotty gains in wages and a low unemployment rate of 5.0%, inflation in general was under control. Low inflation has been one of the factors delaying a more aggressive Fed monetary policy. As for some of the Districts, San Francisco, for example, said some small business owners were seeing the need to reinstate dropped health care policies to attract workers. In Boston, uncertainty about the election was delaying business decisions according to some observers.

Our view is that this latest Beige Book changes little. On point, the economic backdrop still seems sufficiently constructive to keep the Fed on a go-slow track. But that does not mean interest rate increases will not be forthcoming. It is just that they will likely be widely spaced and not arrive lockstep from meeting to meeting. We continue to believe that the next Fed rate hike will come at the mid-December meeting. 

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.