Fed Beige Book Out of Regional U.S. Economic Conditions

July 17, 2019

The Beige Book, covering the period from mid-May to early July¬† identifies modest growth, a positive economic outlook, stable-to-diminishing price pressure, but also “widespread concerns about the possible negative impact of trade-related uncertainty.” This publication, which is prepared prior to each of the eight scheduled policy reviews by the FOMC, offers no contradicting opinions to dissuade market participants from the prevailing view that the federal funds rate could be cut at the late July meeting.

Not long ago, growth was being characterized at between modest and moderate, but this report found moderate growth prevailing only in the Dallas and San Francisco Federal Reserve districts. In two rust belt districts — Chicago and Cleveland — activity was flat, and growth in the other eight districts was either modest or slight. On the inflation front, wage pressures had risen somewhat, but companies are having a hard time passing either that incremental cost or the impact of Trumpian tariffs onto customers by raising prices. Consequently, “the rate of price inflation was stable to down slightly from the prior reporting period” and persistently still below the central bank’s medium-term target.

It’s rare for the Fed to cut rates with no sense of actual or fast-approaching recession and rarer still to do so from such a low level as 2.5%, the current federal funds target band ceiling. There was no recession on the radar in the late 1990s when on September 29, 1998, the FOMC engineered the first of three 25-basis point reductions, but the funds rate then was at 5.5%, and there were two specific extenuating circumstances. The Asian debt crisis had been percolating since mid-1997 but, more importantly, the hedge fund Long-Term Capital Management had to be bailed out by the central bank. Less restrictive monetary policy was deemed necessary to ensure that that unexpected shock to the financial system and investor confidence didn’t cause a broader systemic problem and real economic recession. The first interest rate cut in late September was followed rather quickly by a second move in mid-October and a third and final cut to 4.75% in mid-November.

The whole interest rate structure on September 29, 1998 was way higher than now. The 3-month T-bill rate was at 5.25% versus 2.14% now. The 10-year note and 30-year bond yields were at 4.58% and 5.14% compared to 2.05% and 2.57% today.

Economic circumstances, by comparison, were more closely aligned. The jobless rate was at 4.6% compared to 3.6% now, and in any case officials have a lower perceived non-inflationary long-term full-employment notion than than did then. On-year CPI inflation then of 1.6% (August 1998) was the same as now. Real GDP growth in the summer of 1998 had been 3.9% quarterly at an annualized rate and 4.1% in year-on-year terms. Those figures are actually more buoyant than for the most recent quarter of 3.1% on quarter and 3.2% on year. Employment over the year to August 1998 had advanced 2.8% in the U.S., slightly more than twice as much as over the latest 12 reported months.

In both the summer of 1998 and lately, the dollar was in upward trends and well-bid. A broadly defined trade-weighted measure of the dollar published by the St. Louis Fed puts the current dollar level about 10% above its level in late September of 1998. Monetary conditions can tighten because of higher interest rates or an appreciation of the dollar, and since imports constitute about 15% of U.S. GDP, a 10% stronger dollar now than then needs an offsetting drop in the interest rate of between 100 and 150 basis points to represent the same amount of inflation containment, all other factors being the same. Thus the spread between U.S. interest rate levels then and now translates to a smaller difference in the degree of monetary accommodation of Fed policy in September 1998 from what the current policy stance represents.

Copyright 2019, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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