Beige Book: Economy posts 'slight to modest' gains

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Economic activity was growing at a “slight to modest” rate through most of the nation, the Federal Reserve’s Beige Book, released on Wednesday, suggested.

The manufacturing sector saw “moderate” growth, while residential real estate saw “steady demand for new and existing homes," but low inventories held back the sector.

Consumer spending rose, although some areas saw retail sales "leveling off." Tourism showed "a slight uptick."

Despite “a considerable degree of uncertainty,” those surveyed were “generally optimistic or positive” about the outlook.

"Economic activity continued to increase across all districts, with the pace of growth characterized as slight to modest in most districts," according to the Federal Reserve's Beige Book.

“Most districts continued reporting tight labor markets, attributing it to workers' health and childcare concerns, with many firms consequently offering increased schedule flexibility; a few districts, however, noted some firms were finding it easier to hire workers,” the report said. “Wages increased slightly in most districts, often tied to firms' difficulty finding workers, especially for low-wage or high-demand jobs. Some firms reported returning wages (and raises) to normal levels, but many reported more stable wages.”

Prices climbed “modestly” since the September report, as "input costs generally increased faster than consumer prices,” but some industries, such as "construction, manufacturing, retail, and wholesale" raised prices for consumers, the Fed said.

Brainard sees need for fiscal support
Without fiscal assistance, the recession will become "entrenched," with disastrous economic results, Federal Reserve Board Gov. Lael Brainard said Wednesday.

“Apart from the course of the virus itself, the most significant downside risk to my outlook would be the failure of additional fiscal support to materialize,” she said, according to prepared text released by the Fed. “Too little support would lead to a slower and weaker recovery. Premature withdrawal of fiscal support would risk allowing recessionary dynamics to become entrenched, holding back employment and spending, increasing scarring from extended unemployment spells, leading more businesses to shutter, and ultimately harming productive capacity.”

Federal Reserve Board Gov. Lael Brainard

Easy monetary policy will also be needed to transform the K-shaped recovery she sees into a “broad-based and inclusive recovery.”

Since consumers fuel the economy, Brainard worries about spending levels, since many households are "cash-constrained" as the result of lost jobs or layoffs. “With unemployment and reduced hours likely to persist, many of these households are unlikely to be able to sustain recent levels of consumption without additional fiscal support as well as extended loan forbearance and eviction moratoriums.”

The government needs to help “replace lost incomes" to spur recovery, she said.

Mester says further work needed
The Fed's new strategy is a "work in progress" that will require communication and understanding of the connection between financial stability and monetary policy, according to Federal Reserve Bank of Cleveland President Loretta Mester.

I strongly believe that clear policy communications are an important part of effective monetary policymaking," she said according to prepared text released by the Fed. "When the public has a better understanding of the goals and rationale for monetary policy decisions, they are better able to hold policymakers accountable for their actions. Clear communication also makes monetary policy itself more effective by providing the public with information about the economic outlook and aligning the public’s expectations about future policy actions.”

Loretta Mester, president of the Federal Reserve Bank of Cleveland

In a low neutral rate environment, such as the current one, accommodative monetary policy could threaten financial stability "by encouraging higher levels of borrowing and financial leverage, increased valuation pressures, and search-for-yield behavior,” she said. “How best to approach the nexus between monetary policy and financial stability in a low-interest-rate world deserves more consideration.”

Risks to stability should, in most cases, be offset with “supervisory, regulatory, and macroprudential tools,” not monetary policy, Mester said. “But in the U.S., there are few countercyclical tools and they are not designed to address vulnerabilities outside of the banking system and therefore, there may be certain circumstances where monetary policy may need to be adjusted in order to mitigate risks to financial stability,” Mester said. “But when and how to do that needs further study. In addition, more study is needed of the tradeoffs and complementarities among our three sets of relevant policies: monetary policy, macroprudential policy, and microprudential policy, which includes tools, such as capital and liquidity requirements, that work throughout the business and financial cycles.”

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Federal Reserve FOMC Monetary policy COVID-19 Coronavirus Loretta Mester Lael Brainard Federal Reserve Bank of Cleveland