Fed Beige Book: Modestly Optimistic Outlook Across Districts

Having announced its new long-run policy goals, it has been a quiet couple of weeks for the Fed. Last week, the Labor Department reported that the unemployment rate fell to 8.4% which officially puts it below the 2008-2009 financial crisis highs around 10% and well below its COVID-19 highs around 15%. And as we move into the Fall, the outlook has shifted into what the “new normal” will be.

For Fed watchers looking to see how the Summer wrapped up, the Fed’s Beige Book is worth a quick read. This monthly publication gives a glimpse into the current economic conditions across 12 Federal Reserve Districts and although qualitative in nature, it can provide some useful information.

If there are two takeaways from the August iteration, it is that economic activity rebounds in August were generally slower than they’ve been in previous months and the outlook for most regions was modestly optimistic. Not the biggest surprise.

If I had to guess, the two most repeated words in this edition were “modest” and “mixed”. Bright spots such as residential construction, manufacturing continued to show strong recoveries in August while hard hit areas such as commercial construction/real estate, agriculture, and energy continued to struggle. I’d expect a similar mixed dynamic to persist into the Fall.

At a Senate Banking Committee hearing on Wednesday, policymakers searched for new ways to breathe life into the Fed’s Main Street Lending Program. This program, which aims to provide cheap lending to companies that entered the pandemic recession in good shape, still has limited traction with only $1.2BN of its $600BN of its lending capacity having been extended as of as last week

A loan by loan breakdown of the program showed that 118 companies had gotten funds with businesses in construction, real estate, arts and entertainment and manufacturing making up some of the largest shares. However, many borrowers and lenders have chosen not to use the program because they still have access to cheaper loans or because the lending terms are restrictive.

And, as the Fed does so well, it reminded us that its ability to lend is not a panacea for a wounded economy and that it too needs help sometimes. Eric Rosengren, President of the Federal Reserve Bank of Boston, made this pretty clear last week saying that many of the “problems being faced are by low-income individuals and by very small businesses where it may be more appropriate to do grants than loans. For those types of programs, it requires fiscal policy.”

The yield on the benchmark 10-year U.S. Treasury is 0.67% down from 0.72% last week.

Next FOMC meeting is Sept. 15-16. No action expected.

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