Fed Says Economy Grew Modestly But Recession Worry Dims Outlook

(Bloomberg) – The US Federal Reserve issued a cautionary note on the US economy, which expanded “modestly” into early October, with slowing economic activity stoking recession concerns amid some signs of easing inflationary pressures.

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“The outlook turned more pessimistic amid growing concerns about weakening demand,” the Fed said on Wednesday in its Beige Book report, released two weeks before each Monetary Open Market Committee meeting. “Several districts reported slowing labor demand, with some noting that companies were reluctant to raise payrolls amid growing concerns about an economic downturn.”

The report was based on anecdotal information collected by the Fed’s 12 regional banks through October 7 and compiled by the Dallas Fed. The word “recession” was mentioned 13 times, compared to 10 in September’s Beige Book.

“National economic activity has grown slightly since the last report online; However, conditions varied by industry and district,” the Fed said. “Four districts saw stagnant activity and two reported declines, with slowdown or weak demand attributed to higher interest rates, inflation and supply disruptions.”

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The Fed has been aggressively raising interest rates to try to cool demand and bring down consumer inflation, which has been above 8% for seven straight months.

The central bank is on course for a fourth straight rate hike of 75 basis points in early November as policymakers battle the hottest inflation in four decades. Investors are betting that another rise of that magnitude is likely in December, with markets set to see rates close to 5% next year following disappointing inflation news.

“Some contacts noted solid pricing power over the past six weeks, while others said cost pass-on became more difficult as customers pushed back,” the report said. “Looking ahead, expectations for price increases have generally been moderate.”

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Recession concerns emerged in several parts of the country. In the Boston Fed district, for example, “the outlook turned more pessimistic as recession fears spread.” A manufacturer imposed a hiring freeze amid concerns. And in the Philadelphia area, there was “talk of a recession.”

US core consumer prices, which exclude food and energy, rose 6.6% year over year in September, the highest since 1982, according to a Labor Department report released Oct. 13. This continues a worrying pattern for policymakers , after the scale has accelerated also in August.

Overall, the job market was described as tight, although several districts reported easing wage pressures.

“Contacts expect wage growth to continue as higher wages remain essential for talent retention in the current environment,” the report said. In New York, “wage growth has shown signs of slowing” amid slower hiring and “sporadic reports of layoffs.”

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Chairman Jerome Powell and his colleagues have warned that fighting inflation is likely to cause some pain, including a higher unemployment rate. Officials have described the job market as unhealthily tight, although job growth has slowed recently. Non-farm payrolls rose by 263,000 in September and the unemployment rate fell to 3.5%, a five-decade low.

Contrary to the tone of the report, economic growth may have picked up in the third quarter, with the Atlanta Fed’s gross domestic product tracker pointing to an expansion of nearly 3% for the quarter.

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