Thursday, 19 September 2019

What Is the Fed Beige Book and How Is It Used?

What Is the Fed Beige Book and How Is It Used?
11 Sep
6:10

Recent financial news reports have noted that despite looming concerns about a trade war with China, the U.S. economy expanded modestly from June through August 2019. In fact, many businesses remain optimistic.

Ever wondered how this information is collected and measured? The Federal Reserve gathers commentary and measures the performance of the economy using a tool called the Fed Beige Book. Here’s what you need to know about the Beige Book, including how it affects the Fed’s decisions — and you.

What is the Fed Beige Book?

Created in 1983, the Fed Beige Book is a Federal Reserve System publication that is released eight times a year to provide detailed information about the current state of the economy. It is compiled by Federal Reserve Banks from its 12 banking districts:

Each of these federal reserve banks gathers information on its district by conducting surveys with local businesses, community organizations, economists, market experts and other sources. The questions don’t ask for specific numbers; instead, they gather anecdotal information about trends, business activity, hiring and economic improvements or declines.

The Fed Beige Book includes the 12 district summaries as well as an overall national summary, characterizing conditions based on a variety of mostly qualitative data. The information gathered relays the pace of the economy at the local level, as well as the impact of national and global trends. The national summary covers three core topics: overall economic activity, employment and wages, and prices. Each district also includes topics or industry-specific reports related to their location.

The information compiled in the Fed Beige Book is divided into seven sections by economic sector:

  • Consumer spending and tourism
  • Nonfinancial services
  • Real estate and construction
  • Manufacturing and other business activities
  • Banking and finance
  • Agriculture and natural resources
  • Employment, wages and prices

The Fed Beige Book’s qualitative nature helps characterize regional economic dynamics, as well as noting trends that might not yet be quantified in the economic data. It’s used to complement statistical data collected on employment, unemployment, personal income, retail sales and real estate markets to provide a more complete picture.

How does the Federal Reserve use the Fed Beige Book?

The Fed Beige Book is given to the 12 members of the Federal Open Market Committee (FOMC) two weeks prior to their regular meetings. The group gathers eight times a year with three tasks contemplate: reviewing economic and financial conditions, determining appropriate monetary policy and assessing the risks to its long-term goals, price stability and sustainable economic growth.

The Beige Book provides information about the sectors and industries that are growing and those that are lagging — it’s especially important because many key regional economic statistics, like personal income and gross state product, only get released after experiencing a significant lag.

The FOMC uses the Beige Book to make decisions that include adjustments to the fed funds rate, the interest rate at which a bank lends funds held at the Federal Reserve to another bank overnight. Effective monetary policies by the FOMC can help stabilize prices and promote long-term economic growth and employment.

The Fed Beige Book is one of two reports the FOMC receives. The Fed Tealbook — officially called the “Report to the FOMC on Economic Conditions and Monetary Policy” — was created when two previously-distributed reports, the Bluebook and the Greenbook, were merged in 2010. The Tealbook is split into two parts: Part A contains analysis of current economic and financial conditions and projections (nationally and internationally), while Part B gives background and context on monetary policy alternatives.

How the Beige Book affects you

The Fed controls the three important monetary policies: Open market operations, the discount rate and bank reserve requirements. In particular, the FOMC is responsible for open market operations, which include adjusting the federal funds rate and the supply of cash reserves.

Changing the federal funds rate can impact short-term interest rates, foreign exchange rates, long-term interest rates and the amount of money and credit available. Those, in turn, can impact employment, output and the prices of goods and services.

A Fed Beige Book report that the economy is slowing down or stagnant could lead the FOMC to cut the federal funds rate, which can impact you in two ways. First, it can reduce the amount of interest you earn from savings and other deposit account types; banks will often lower rates within a few weeks of a funds rate cut. The second way provides a potential upside, as it can lower the interest you are charged on credit cards and for new mortgages. Most major credit card issuers lower their APRs after the Fed reduces rates, usually within one or two billing cycles. In addition, a lower federal funds rate can impact an adjustable-rate mortgage and HELOC, as they’re based on short-term rates.

The FOMC may also decide to increase the money supply in a slow economy to spur economic growth. The idea is that with more money available, businesses may choose to invest and hire more, which could mean more jobs are available.

If the Beige Book reports that is inflation high, the FOMC may decide to raise interest rates or reduce the money supply. These actions would have the opposite impact: you might pay a higher rate for a loan (especially those with adjustable rates), credit card interest rates rise and businesses may invest less, which can result in fewer job opportunities.

Beige Book FAQ

The Beige Book’s official name is “The Summary of Commentary on Current Economic Conditions by Federal Reserve District,” though its nickname comes from its beige cover.

Each Federal Reserve Bank gathers anecdotal information on current economic conditions through phone, in-person and online interviews and surveys with local businesses, community organizations, economists, market experts and other sources.

The Beige Book provides a snapshot of the local economy in 12 districts that include Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas and San Francisco. Information includes the pace of the economy at the local level, hiring statistics and the impact of national and global trends, such as exchange rates, inflation and oil prices.

The information is divided into sections that highlight seven economic sectors: consumer spending and tourism; nonfinancial services; real estate and construction; manufacturing and other business activities; banking and finance; agriculture and natural resources; and employment, wages and prices.

The anecdotal information collected in the Beige Book is used to supplement statistical data and analysis that’s gathered from Federal Reserve economists and staff. Members of the FOMC use all of the information to assess current economic conditions and make decisions on monetary policies.

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Stephanie Vozza

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Source: https://www.magnifymoney.com/blog/banking/fed-beige-book/

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