Federal Reserve Beige Book: Inflation continues to slow, people are more optimistic about the long-term outlook

There was little change in US economic activity from early September to early October, with a slight increase in business hiring, continuing the recent trend and further solidifying expectations that the Federal Reserve may choose a smaller rate cut (25 basis points) in two weeks.

The latest assessment by the Federal Reserve on the health of the economy shows that despite input prices generally exceeding sales prices, inflation pressures continue to ease, damaging corporate profit margins.

Ahead of the US presidential election on November 5th, the economy, especially inflation issues, remains a focus of concern for voters.

The Federal Reserve stated in its "Beige Book" on Wednesday that since early September, economic activity in almost all regions has remained largely unchanged, with only two regions reporting moderate growth. The survey collected opinions from business contacts of the 12 regional Federal Reserve Banks until October 11th, with the report noting that "despite rising uncertainties, contacts are slightly optimistic about the long-term outlook."

Last month, amid heightened concerns in the labor market, the Federal Reserve initiated a rate cut cycle with a rare 50 basis point cut, bringing rates to a range of 4.75%-5.00%. The Federal Reserve raised rates by 525 basis points in 2022 and 2023 to curb high inflation.

Since then, a series of better-than-expected consumer spending, job growth, and inflation data have led investors to reduce their bets on the speed and magnitude of rate cuts.

A resilient economy is supported by stable income growth and ample household savings. Despite a slowdown in labor market momentum, layoff levels remain historically low, which helps drive wage growth.

US job growth in September saw significant growth for the first time in six months, with the unemployment rate dropping to 4.1%, while retail sales last month also showed robust growth.

In the latest survey, more regions showed slight to moderate growth in the labor market, reflecting stability in the labor market.

However, demand for workers has eased. A source at a supply company in Minnesota told the Minneapolis Fed, "We used to struggle to fill a high-skilled driving position, but now there is a lot of interest in this role, I almost fell off my chair."

But there are no clear signs of deterioration, with layoffs remaining within a limited range. The San Francisco Fed stated that some employers have started recruiting for positions that have been vacant for the past year, and wage levels across the Federal Reserve districts are "generally growing at a moderate to moderate pace".

Currently, investors expect the Federal Reserve to cut rates by 25 basis points at the policy meeting on November 6-7, and to cut rates again in December by the same magnitude.

Many contacts across the country mentioned the decline in borrowing costs and the expectation of further rate cuts as reasons for their optimism, but uncertainties regarding the election, inflation outlook, and rate trends continue to trouble many. The New York Fed stated, "Due to uncertainty surrounding the presidential election, businesses remain cautious in their hiring decisions." The Federal Reserve's goal is to maintain strong economic growth, keep the unemployment rate low, and restore the inflation rate to the target level of 2%. Therefore, the Federal Reserve is still closely monitoring price pressures.

Based on the preferred PCE price index of the Federal Reserve, the year-on-year inflation growth rate in August slowed to 2.2% from 2.5% in July. However, the year-on-year growth rate of core PCE, which excludes volatile food and energy components, rose slightly to 2.7% from 2.6% in July.

The Federal Reserve's survey shows that sales prices in most regions are rising only at a slight or moderate pace, although prices of some daily food items, such as eggs and dairy products, have increased more noticeably. Consistent with previous reports, consumers are also described as more sensitive to prices.

Input prices are generally rising moderately. The report states that in multiple regions, input prices have increased more than sales prices, weakening companies' profits. The pressure from continuously rising insurance and medical costs is particularly severe