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Fed's Rate Dilemma Deepens as Growth Firms and Prices Climb
The U.S. economy grew a little recently, according to the Federal Reserve.
Businesses hired slightly more people, but prices continued to rise.
Higher energy, transportation, materials and tariff costs worried many companies.
Some customers were buying fewer expensive items, such as home improvements.
The Federal Reserve must decide whether to raise interest rates or leave them unchanged.
Raising rates could help slow price increases, but it could also make borrowing harder.
Some policymakers favor a rate increase, while others want more evidence before changing rates.
The decision will be discussed at the Federal Reserve’s September meeting.
Artificial intelligence and data-center construction are helping some industries even as housing and other sectors weaken.
The latest Beige Book found modest economic growth, slight employment gains and persistent price pressures.
Inflation was mentioned 17 times, with energy, tariffs, transportation and raw-material costs among key concerns.
Five of the Fed’s 19 policymakers reportedly believe a rate increase is overdue.
Markets priced roughly a 65% chance of a September rate hike, versus 35% for unchanged rates.
Housing demand weakened in some regions, while AI and data-center construction supported parts of the economy.
- Who
- The Federal Reserve, its regional banks and policymakers, including Fed Chair Kevin Warsh and New York Fed President John Williams.
- What
- The Beige Book reported modest growth, slight employment gains, persistent price pressures and mixed sector performance ahead of a rate decision.
- Where
- Across the United States, based on information from the Federal Reserve’s 12 regional districts.
- When
- The report used information collected on or before August 24; the policy meeting is scheduled for September 15-16.
- Why
- Policymakers are weighing persistent inflation and possible energy or tariff-related price increases against signs of weakness in housing and parts of the broader economy.
Rate Hike Advocates
Caution About Changing Rates
Response to inflation
Rate Hike Advocates
Five of the Fed’s 19 policymakers have indicated that a rate increase is overdue, while Kevin Warsh has emphasized persistent price pressures and said he could support a hike if the data do not provide enough confidence that inflation is moving toward the 2% target.
Caution About Changing Rates
Several policymakers have said they need clearer evidence of improving inflation before continuing to support unchanged rates, and John Williams said incoming data still need to be assessed.
Economic risks
Rate Hike Advocates
Higher energy prices, possible new tariffs and international tensions could create additional upside risks to inflation.
Caution About Changing Rates
Higher rates could add to existing weakness in housing and other parts of the economy, where consumers are delaying major purchases and some businesses are cutting costs.
Key facts
- Economic growth
- Activity picked up modestly in recent weeks.
- Employment
- Employment increased slightly, with mixed wage conditions across industries.
- Inflation references
- Inflation appeared 17 times in the latest Beige Book, compared with 18 references previously.
- Policy rate
- The benchmark overnight interest rate has remained at 3.50-3.75% since December.
- Market expectations
- Markets priced approximately a 65% chance of a September rate hike and a 35% chance of unchanged rates.
- Housing
- Some districts reported slower home-related sales, rising inventories and longer property listing times.
- Data centers
- Strong data-center construction demand supported construction activity in some areas.
Sources
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