Fed Beige Book Hints at Soft Landing, November Rate Cut Expected

• News
• 2024-10-28

Inflation pressures ease, the job market remains resilient, and the US economy may hope for a soft landing.

On October 23rd local time, the Federal Reserve's Beige Book revealed that since early September, there has been little change in US economic activity, with an increase in the number of companies hiring. Inflation levels continue to remain moderate, with prices in most areas showing "slight or moderate" growth, and several regions mentioning a slowdown in wage growth.

"Overall, economic activity in almost all regions changed little, with only two regions reporting moderate growth. Reports on consumer spending were mixed, with some regions pointing to changes in consumer purchasing patterns, mainly shifting towards lower-priced substitutes. Despite rising uncertainty, respondents were more optimistic about the long-term outlook." The Federal Reserve's Beige Book paints a picture of a soft landing.

Yang Chang, chief analyst of the policy team at Zhongtai Securities Research Institute, analyzed that the Beige Book shows an increase in economic disturbances, with some companies and consumers starting to adopt a wait-and-see attitude towards short-term investments, expenditures, or hiring, which may lead to a short-term postponement of some economic activities.

The same disturbances are also reflected in other aspects. Under the influence of the Federal Reserve officials' hawkish stance, the European Central Bank's interest rate cut expectations, and the Bank of Japan's expected delay in interest rate hikes, the US dollar index continues to rise. On October 23rd, the 10-year US Treasury yield also reached a three-month high, and the US stock market experienced a correction.

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Slowing down the pace of interest rate cuts has become a foregone conclusion.

For the Federal Reserve, the soft landing signal released by the Beige Book is good news.

Yang Chang analyzed that the Beige Book shows stable US economic activity. Although the number of regions with economic activity growth decreased by one, the number of regions with employment growth increased, and inflation continued to slow down. Manufacturing activity in most regions is still declining, interest rate cuts improve the outlook for the banking industry, consumption is relatively stable, the real estate market is generally stable, and hurricanes disrupted tourism and business activities in the southeastern region.

The Federal Reserve releases eight Beige Book reports each year, providing qualitative information or "anecdotes" about the economic conditions and prospects of the 12 Federal Reserve regions across the United States, which complement the Federal Reserve's assessment of regional economic development. Yang Chang stated that the qualitative nature of the Beige Book can describe dynamic trends in the economy, which may not be easily apparent in existing economic data.Yang Chang analyzed that in terms of employment, more than half of the regions experienced slight or moderate growth, indicating a slight improvement in employment. However, the demand for workers has eased, with recruitment mainly focused on replacement rather than expansion, and wages continue to rise at a moderate to moderate pace overall.

At the same time, inflation continues to slow down, with the prices of eggs and dairy products rising more significantly, in line with the rebound in food inflation shown by the September CPI data. Insurance and healthcare costs are increasing, and in several regions, the rise in input prices is outpacing the increase in sales prices, thereby compressing corporate profit margins.

A series of recent data implies that the Federal Reserve's reduction in the magnitude of rate cuts in November is a foregone conclusion, and a substantial rate cut of 50 basis points is unlikely to reappear in the short term.

Yang Chang stated that, overall, recent quantitative economic data such as non-farm and retail sales mostly point to the resilience of the economy. The qualitative information provided by the Beige Book also shows that economic activity is temporarily stable in the short term, and people are more optimistic about the long-term outlook. The risk of a sharp economic downturn is relatively small, and a soft landing remains a highly probable event.

Against the backdrop of the US economy's resilience and rising reflation risks, Yang Chang expects the Federal Reserve to reduce the rate cut to 25 basis points in November. Looking at the subsequent rate cut path, the CME FedWatch tool shows that the market expects the Federal Reserve to cut rates 5 times/125 basis points by next June. In addition to relying on changes in economic data, policy changes brought about by the election results are also an important influencing factor.

Bank of America CEO Brian Moynihan stated that the Federal Reserve was slow to raise borrowing costs in 2022 and must avoid being too aggressive in cutting rates now. He expects the US economy to "land softly": economic growth remains strong, forcing the Federal Reserve to maintain a hawkish stance in fighting inflation for a longer period.

After the Federal Reserve's substantial rate cut of 50 basis points in September, investors have recently reduced their expectations for rapid rate cuts by the Federal Reserve. The CME FedWatch tool shows that the probability of a 25 basis point rate cut by the Federal Reserve in November is about 90%, and the probability of no change is about 10%. At the same time, there may be a meeting to pause rate cuts before the end of the year.