MercoPress. South Atlantic News Agency

Fed “Beige Book” cautious about inflation

Economic activity in United States continued to expand in September helped by strong growth in four districts according to the latest Federal Reserve “Beige Book” survey of current economic conditions released Thursday.

However in the other eight districts of the Fed's twelve, growth was described as "moderate and mixed" and "cooled" in Philadelphia and Dallas.

However it was hard to find many national trends. Most districts reported stronger consumer spending, although auto and home-related sales were sluggish across much of the country.

Service-sector activity expanded in most districts, but there were pockets of weakness reported in Boston, Cleveland and Dallas. Factory conditions "generally held up well," the Fed said, although activity edged down in Philadelphia.

The Beige Book is a collection of economic data collected by the 12 Fed regional banks and is designed to give policymakers a better idea of economic activity in the weeks before they meet to set monetary policy.

The next Open Market Committee meeting is scheduled for October 24/25.

Nevertheless it is not as important as the "Green Book" which contains the Fed staff's forecast of the U.S. economy and the "Blue Book" which presents analysis of the monetary policy alternatives at the meeting.

This latest Beige Book report was compiled by the Richmond Fed bank and was based on information collected before October 2.

The report found "widespread cooling in the residential real estate market", with the majority of Fed districts reporting "lower asking prices, rising inventories of homes on the market and softening sales."

But not much spillover from the weak housing sector was recorded, although San Francisco reported layoffs for mortgage brokers and real estate agents. In general, labor market conditions appear to remain tight, with some districts noting shortages of skilled workers, according to the report.

Continuing the mixed reports, a number of districts noted rising wage pressures, but others said it was in check.

Overall, most districts reported "few signs of increased price pressure in recent weeks." Lower energy prices were a factor in many districts. There were only scattered reports that businesses were able to pass higher costs to consumers.

However minutes released this week of the September 20 Open Market Committee, which left interest rates unchanged, show a "growing concern" with inflation.

This could be indicating that the Fed might not begin cutting interest rates as expected and could even up them next year if inflation persists.

"The underlying inflation rates, if sustained, are higher than what is consistent with price stability", point out the minutes adding that uncertainty about the evolution of inflation remains strong with more chances of a higher than a lower tendency, "in spite of a cooling in the housing market".

The Fed forecasts that the US economy by 2008 will be expanding at a rate very close to its potential or even higher, "which is when inflationary pressures emerge".

The Fed last rose rates on June 29 to 5.25% and kept them unchanged in its August and September meetings