Fed Beige Book: US Economy Faces Headwinds from Tariffs, Uncertainty

Fed Beige Book: US Economy Faces Headwinds

The Federal Reserve indicated in its latest "Beige Book" report that U.S. economic activity and employment have been largely flat in recent weeks, with prices rising modestly or slightly. This mixed report reveals the impact of tariffs and other policies of the Trump administration on households and businesses, partially explaining why a growing number of policymakers have signaled an openness to relaunching interest rate cuts this month.

The Beige Book stated that most of the Fed's twelve districts have experienced little or no change in economic activity since the last report. Respondents across districts indicated that consumer spending has remained flat or decreased. For many households, wage growth has not kept pace with rising prices.

All districts reported price increases: ten districts reported "modest or slight" inflation, while two experienced "strong input cost growth." The report noted that nearly all districts mentioned tariff-related price increases, and multiple districts' respondents indicated that the impact of tariffs on input prices was particularly significant. Additionally, respondents from businesses in the insurance, utilities, and technology sectors also reported price increases.

As the impact of tariffs gradually passes through the economy, businesses are at least partially offsetting rising costs by raising product prices. On the other hand, previously revised data showed a significant slowdown in U.S. hiring in recent months. In this context, Fed officials are trying to balance inflation risks with concerns about labor market conditions.

Eleven districts reported that overall employment levels experienced little or no net change, while one other district reported a slight decrease in employment. Half of the districts also reported a decrease in the number of immigrant workers, with the construction industry particularly affected in the New York, Richmond, St. Louis, and San Francisco districts.

The Fed stated that "respondents frequently mentioned economic uncertainty and tariffs as negative factors," and "overall, sentiment was mixed across districts. Most businesses either stated that optimism had changed little or that their respondents had diverging views on the direction of economic changes."

Even in districts that reported economic activity had expanded, businesses expressed concern about a potential reversal. The Dallas Fed reported that "business outlooks have improved, but there is widespread concern about changes in trade policy, high interest rates, and stricter immigration policies," noting that approximately 20% of businesses expect a decrease in demand for their goods and services in the next six months.

The Philadelphia Fed reported that "wage growth has not kept pace with rising prices for some entry-level employees and certain laborers, especially when businesses are adjusting employee sizes and product prices in response to tariffs," and also reported a slight expansion in economic activity within the district.

The Beige Book is a summary of U.S. economic conditions published two weeks before each Fed policy meeting. The latest report compiles survey, interview, and observation results collected by the twelve regional Federal Reserve Banks from business and community respondents through August 25.

Growing Pressure for Interest Rate Cuts

The Fed has maintained short-term interest rates in the 4.25% to 4.50% range this year. Markets widely expect the Fed to cut interest rates by 25 basis points at its meeting scheduled for September 16-17. Last month, Fed Chairman Jerome Powell indicated that increasing downside risks to the labor market could mean a need to adjust interest rates, and several Fed officials expressed similar views, further bolstering financial markets' and analysts' confidence in this expectation.

Powell pointed to signs of weakness in recent labor market data, including a report released in early August showing that monthly new jobs have averaged just 35,000 since May. He also provided a baseline expectation that tariff policies launched by Trump would only temporarily push up inflation.

The Fed chairman also stated that he believes the stability of the labor market means the central bank can "act with caution" – which was interpreted as signaling gradual interest rate cuts.

Trump has long called for immediate and substantial interest rate cuts by the Fed and has taken aggressive actions to try to reshape the Fed's board of governors to increase the likelihood that the board will comply with his requests.

Stephen Miran, Trump's nominee for the Federal Reserve Board, is scheduled to appear before the U.S. Senate Banking Committee on Thursday. Republicans are pushing to have him confirmed as quickly as possible so that he can participate in the vote at the Fed meeting this month. Miran has previously expressed support for Trump's position on interest rates and has called for the president to strengthen his control over the Fed.

Trump has also tried to remove Lisa Cook, a member of the Federal Reserve Board. Cook has been aligned with the majority of Fed policymakers on interest rates this year, supporting maintaining stable interest rates. Cook is challenging her removal through legal action and will remain in her position as a member of the board while the case is pending.

Analysts and other global central bank officials have warned that Trump's pressure on the Fed is threatening the Fed's long-standing political independence – which is widely considered vital to the Fed's ability to effectively combat inflation.

However, it remains unclear whether these actions taken by Trump will help him achieve his current desired large-scale easing monetary policy in the near term.

Two members of the Federal Reserve Board, both appointed by Trump, voted against the decision to keep interest rates unchanged at the meeting held on July 29-30, advocating for interest rate cuts, but neither indicated a need for interest rate cuts beyond the usual range.