Fed ‘Beige Book’ Says U.S. Economy Still Steadily Growing

The Fed’s “beige book” of anecdotal U.S. economic information came out last week and guess what? It confirmed what we’ve been telling folks for many months.

The U.S. economy is entering 2020 on solid footing with continued modest expansion in the final six weeks of 2019, the Federal Reserve said Wednesday. Tighter labor markets—we stand at 50-year lows in unemployment—slow price rises and a robust holiday season, especially online, offset weakness in manufacturing, the Fed said.

It went on to say that trade uncertainty and tariffs continued to weigh on some businesses. “Expectations in the near-term outlook remained modestly favorable across the nation,” the Fed said. While it’s an important confirmation that the Fed said this, regular readers know we’ve been saying this. And if you want more on what this means, see my colleague Tom Lee’s piece, beginning page 3.

And with inflation muted, it means that a Fed change in interest rates in 2020 seems unlikely, at this point. How muted, you might ask. The consumer-price index increased 2.3% in December from a year earlier, up from the 2018 increase of 1.9%. Prices excluding food and energy also increased 2.3% in December from a year earlier, higher than in 2018 but down from 2.4% in September.

Separately, Germany is looking like another the sick man of Europe. Growth in Europe’s biggest economy fell to a six-year low in 2019, and it faced challenges in its flagship car industry, persistently slowing Chinese growth and global trade conflicts. This weighs on Europe’s outlook. With GDP growth of 0.6% last year, Germany’s economy expanded at its slowest rate since 2013—the height of the eurozone’s debt crisis—dragged down by a manufacturing contraction of 3.6%. Ouch.

The NY Fed continues to add tens of billions of dollars in temporary liquidity to financial markets, through overnight repurchase agreements, or repo, and 14-day repo intervention. This has taken Fed’s holdings from around $3.8 trillion in September to the current level of $4.1 trillion.

The Fed is reportedly considering an idea to lend money directly to hedge funds—instead of through financial or bank intermediaries—in short term cash markets, which seems fraught with political issues. More on this in future weeks. The Wall Street Journal reported that the Fed’s aim, according to analysts, is to step back from temporary efforts to quell repo-market volatility and increase financial reserves.

The CME fed futures market, which currently puts the next rate change probability in December. The U.S. Treasury 10-yr note yield was around 1.82%, flat on last week and above 1.5% in September.

Upcoming: 1/28-29 - FOMC meeting. No action expected.

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