Fed Beige Book: Pace of hiring and pricing is slowing

Hiring and pricing are still increasing, but at a slower pace, according to the Federal Reserve's Beige Book.

The compilation of anecdotal evidence on the economy across the Fed’s 12 bank districts showed the labor market remained tight. The central bank’s contacts had difficulty finding workers across a wide range of skill levels and industries in April and May.

But there was evidence the labor market had “cooled some” across the various districts, with contacts reporting easier hiring in construction, transportation, and finance.

Many contacts said “they were fully staffed, and some reported they were pausing hiring or reducing headcounts due to weaker actual or prospective demand or to greater uncertainty about the economic outlook.”

Inflation rose “moderately,” according to the report, but the rate of increases slowed in many districts. Several districts noted consumers had become more sensitive to price increases.

High inflation and the end of Covid benefits continued to stress budgets for low- and moderate-income households, driving increased demand for social services, including food and housing.

Consumer spending was either steady or higher in most places, especially on leisure and hospitality. But contacts in several districts noted a rise in consumer loan delinquencies that were now closer to pre-pandemic levels.

Residential real estate activity picked up despite low inventories of homes for sale. Commercial construction and real estate activity decreased overall, with the office sector standing out as “a weak spot.”

Financial conditions “were stable or somewhat tighter” in most districts. But in the San Francisco district, which was home to four banks that failed in March and May, “uncertainty remained high.”

Lenders observed reduced demand for certain loans and increasing delinquencies in consumer loans, including auto and credit card debt. Contacts also cited tighter lending standards.

“Recent stresses in the regional banking sector negatively affected access to credit, particularly for smaller businesses.”

The latest version of the Beige Book comes just two weeks before the Fed's next policy meeting in mid-June, where officials will take this information into account when deciding whether to raise interest rates again.

It was released on the same day new labor market data showing that job openings in April rose to their highest level since January.

Federal Reserve Governor Philip Jefferson and Philadelphia Federal Reserve President Patrick Harker also suggested Wednesday that the central bank could pause in June.

Market expectations of the Fed's next move seesawed throughout the day Wednesday. Entering the day, markets had priced in a less than 60% chance of a hike in June. About 15 minutes after the new labor data was released, markets had priced in a 71% chance of a hike, according to the CME FedWatch Tool.

But once Jefferson and Harker spoke, markets then predicted the chance of a pause was now 64%.

Officials will be watching two other key pieces of data for any clues: the May jobs report due out Friday and another read on inflation via the consumer price index on the first day of the Fed's next policy meeting, June 13.

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