Beige Book Shows Slowing Growth, Hot Water Over Trading
The Fed released its Beige Book, which is published 8 times each year. The document is primarily anecdotal information on economic conditions by district. Given, the different specialization in regional economies it is a nuanced look at the US economy at a more granular level and we always find it to be useful information.
Many critics of Powell’s most recent speech that focused on bolstering the transitory narrative pointed out that despite his dismissal, the Beige Book had been picking up anecdotal evidence of businesses experiencing inflation. This most recent release saw more of that as well, and also saw economic growth slowing as a result of the Delta variant, particularly in industries most susceptible to adverse healthcare developments.
The firm specified that the majority of the pullback was in dining out, travel and tourism in most of the districts. Many large events and conferences that had been planned have had to be cancelled due to the Delta variant. Some large regional employers have cancelled the full physical return to the office as well.
Supply chain problems were evident across most districts. This likely held back growth in some areas like in the sales of automobiles and homes. The ongoing chip shortage continues to hamper planned levels of productivity for OEMs. There was also a low supply of homes for sale in some regions. Many companies expressed great concern at rising prices in the coming months.
The labor shortage continues. Many rental and restaurant owners in the Philadelphia region reported picking up shifts behind the counter because of an inability to fill positions. Unfortunately, some businesses also reported that the belligerence of customers seems to be increasing as well. Prices for meat rose 8.5%.
If Federal Reserve doves were hoping for a reprieve on hot inflation numbers, they certainly didn’t get it. The producer price index came in slightly above estimates at a record level of 8.3% y/y and .7% m/m. The numbers aren’t as bad when you exclude food, energy, and trade services, however, the core PPI still would have risen to 6.3% y/y which would have been the highest increase in the last seven years.
The persistent inflation and slowing growth from the Delta variant have led to an increasing among of market commentators suggesting the stagflation (stagnant growth rates simultaneously with high inflation) may be an increasing risk to the economy. Some may not have noticed that the New York Fed opted not to re-estimate its Nowcast GDP forecast due to large outliers in the data.
A chorus of Fed commentary from both the dovish and hawkish columns suggests that the committee is getting ready to announce tapering by the end of the year and to potentially complete it around the mid-way point of 2022. Fed officials are in the thick of forming a consensus of when to start the wind-down of post-crisis accommodative policy. Expect contours of the plan to begin developing. Watch the dot plot for any changes to when officials expect to raise rates.
Boston Fed President Eric Rosengren and Dallas Fed Robert Kaplan faced public outcry from as diverse a crowd as typical Fed skeptics to Senator Elizabeth Warren. Though both men insist that all their trades were in line with the relevant ethical codes, they have said they will sell all individual stock holdings by September 30th to respond to the widespread ethical concerns expressed.
Many people may not be aware that Federal Reserve Banks are private institutions, and therefore, their leadership is not subject to the same restrictions as elected or other public officials are subject to. Nonetheless, some of the trades themselves raised eyebrows as some were in asset groups clearly affected by Fed decision making.
For example, Kaplan who is a former Goldman Sachs executive traded the iShares Floating Rate Bond Fund which is heavily influenced by Fed policy. Similarly, Rosengren publicly warned about the risks to commercial real estate but traded in and out of REITs. While these trades probably don’t have any liability associated with them in any tangible sense for the two men, it is certainly raising calls for increased accountability at the level of the Federal Reserve regional banks.
The Federal Reserve Board also published a paper on September 9th describing the landscape of partnerships between community banks and FinTech companies. Many leading FinTech firms piggy-back onto partnerships with community banks to enjoy some of the benefits of their charters and lower interchange fees. This is a must-read for anyone interested in the FinTech landscape.
Asset purchases continued at a pace of $40 billion a month for MBS and $80 billion a month for Treasuries. The benchmark yield on the 10 year is 1.343%.
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