Precious Metals talking points 042122: The Fed Beige Book

By: Rhona O'Connell, Head of Market Analysis

Thu, 21 Apr 2022, 15:40

Fed Beige Book – brief overview; wage strength showing chinks?

April 2022

The Beige Book, which closely informs the U.S. Federal Open Market Committee (FOMC) policy, was released on 20^th April. This takes information from twelve Federal Reserve Bank Districts around the country and is based on data and views collected from industry; the Fed makes the point that it does not reflect the opinions of Federal Reserve officials.

The observations in the most recent book were made in the days running up to 11^th April. Overall economic activity expanded at a moderate pace since mid-February. COVID cases were on the retreat, which helped an acceleration in retail and non-financial service firms. The labour market remained tight (challenges to both hiring and retention) and this, along with supply chain issues and higher input costs, meant that although manufacturing activity was solid in most Districts, companies found it difficult to meet demand. In the property market demand was strong, but supply remained limited.

Underlining the key factor making the Fed’s job difficult is the sentence “Outlooks for future growth were clouded by the uncertainty created by recent geopolitical developments and rising prices”.

Although labour conditions were still tight, some districts reported signs of “modest improvement” in worker availability. Wage push inflation is on the cards, with “many firms” reporting significant turnover with workers leaving for higher wages and more flexible job schedules. This may be close to peaking, though as although higher wages were not really alleviating widespread job vacancies, some contacts were reporting early signs that the strong pace of wage growth had started to slow.

Higher input prices are being “swiftly” passed to customers – particularly citing steep increases in raw materials, transportation, and labour costs; these, [thus far at least] are being absorbed due to strong demand overall, but not across the board. Ukraine and COVID lockdowns in China were understandably noted as causing agricultural price spikes and supply chain disruptions respectively.

Firms in most Districts expected inflationary pressures to continue over the coming months.

The Fed balance sheet; up $4.3Tn (92%) since the start of the pandemic-led expansion.

image-20220421164307-2

Source: Bloomberg, StoneX

Meanwhile the next FOMC meeting is 3-4^th May and one of Jay Powell’s final public utterances before the usual pre-meeting black-out is today 21^st April, when he addresses an IMF panel (13:00 EST); other panellists include IMD+F Managing Director Kristalina Georgieva and Christine Lagarde of the ECB, Mia Mottley (Prime Minister of Barbados) and Sri Mulyani Indrawati, Minister of Finance of Indonesia.

So now we watch for the FOMC outcome and in particular we await a decision not just on a rate hike, but on the rate of balance sheet ruin-off. The current indication is $95Bn per month; given that the expansion since March 2020 is $4.3Tn it will be interesting to see how the Fed handles the rate of run-off and what is expected to be a reasonable equilibrium target level. At a steady $95Bn monthly, we’re looking at 46 months to get back to pre-pandemic levels (although we would obviously expect the target level to be higher than March 2020.

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