Beige Book Shows “Slight to Modest” Economic Growth
Beige Book Shows “Slight to Modest” Economic Growth
The Fed released its final Beige Book before the presidential election this week. Offering a qualitative look at the economy on a regional basis, the Beige Book can be worth a quick read.
The most recent edition seems to affirm the thinking of many regarding the economic recovery: it has slowed.
Economic gains were described as “slight to modest” in this month’s edition. This is better than the “sharp and abrupt” contraction highlighted in the nadir of the COVID-19 pandemic. But “slight and modest” could leave something to be desired. Especially for a Fed that is not just looking to support the economic recovery but also accommodate the expansion.
So, is “slight to modest” enough to warrant a policy response out of the Fed?
“Not quite yet” seems the most natural answer to me. But with the stalemate over a new coronavirus relief package looking like it will eventually come to an end, we could see that change. If you were not aware of where the Fed stands on the stimulus debate, the economic adage of “more is better” does a decent job of explaining the Fed’s position.
But what the Fed could eventually do to further support the expansion remains to be seen. Increases in asset purchases, yield curve control (i.e. explicitly targeting interest rates along the Treasury term structure), shifting asset purchases to the longer-end of the yield curve, or a combination of the three seem possible.
One thing is for sure. The Fed’s policy interest rate is not changing anytime soon. Rates are at their effective lower bound and absent a major change in thinking, I doubt the Fed is going negative.
Hikes are equally, if not more, unlikely. Per the most recent economic projections, most FOMC participants don’t see inflation hitting the Fed’s new two percent average inflation target until 2023. And with the new policy in place of tolerating inflation above two percent to achieve an average of two percent over time, I wouldn’t be surprised if we don’t see a rate hike until 2024-2025. Wow.
The Fed’s balance sheet grew to a new all-time high this week, inching above its prior June high to $7.2 trillion. Asset purchases continue to the tune of $80 billion worth of treasury and $40 billion worth of mortgage backed securities per month. They show no signs of slowing down.
The yield on the benchmark 10-year U.S. Treasury is 0.83% up from 0.74% last week.
Next FOMC meeting is Nov. 4-5. No action expected.
