U.S. firms see preliminary progress on inflation and labor supply, Fed says

U.S. firms reported economic activity was unchanged in July through late August, with further softening expected over the next year even as they saw some tentative greenshoots in the ongoing battle against labor shortages and price pressures, a Federal Reserve report showed on Wednesday.

The U.S. central bank released its latest summary of feedback from business contacts nationwide as it mulls whether to proceed with a third straight 75-basis-point interest rate hike at its Sept. 20-21 policy meeting or go with a still larger-than-usual 50-basis-point rise in its bid to quash high inflation.

RECESSION FEARS

Inflation has been running at 40-year highs and more than three times the Fed’s target. While there are some positive signs that supply chain issues are improving and tight labor market conditions loosening, policymakers remain fearful higher inflation expectations could become entrenched among businesses and consumers.

They have also flagged rising risks that the aggressive series of rate hikes needed to bring inflation down may cause a recession.

In the Fed’s Chicago district, those jitters were apparent, with “many” contacts expressing concerns about the potential for a recession, while one staffing firm in the Philadelphia Fed’s district reported a slowdown in orders “approaching levels consistent with prior recessions.”

U.S. employers hired more workers than expected in August, the Labor Department reported on Friday in its closely-watched monthly jobs report, but moderate wage growth and a rise in the unemployment rate also suggested labor shortages may be easing. 

Elsewhere in the Beige Book, the Fed’s stated aim of cooling inflation without causing a sharp spike in unemployment still appeared possible.

“Generally softer economic conditions and slight relief from supply disruptions appeared to alleviate some inflationary pressures,” the Cleveland Fed district said. “Though still high, both the share of contacts reporting higher input costs and the share reporting higher selling prices dipped to their lowest levels in more than a year.”

Share this content: