Fed Beige Book "Easing Employment and Inflation"... June Rate Hike Pause Outlook Rises

Amid divided opinions within the Federal Reserve (Fed) regarding whether to hold the benchmark interest rate steady at the June Federal Open Market Committee (FOMC) meeting, recent weeks have seen slight easing in U.S. employment and inflation, indicating signs of cooling.

On the 31st (local time), the Fed released its Beige Book economic report, stating that "employment increased at a slower pace than in the previous report in most regions," and "inflation also slowed in many areas." This assessment covers economic conditions from the end of April to May 22 across the 12 Federal Reserve Banks' districts. It will serve as foundational data for the upcoming FOMC regular meeting scheduled for June 13-14.

The Beige Book evaluated that there was little change in overall economic activity across the U.S. in recent weeks. Four districts reported slight increases in economic activity, six districts saw no change, and two districts experienced minor declines. Manufacturing activity remained at typical levels in most jurisdictions. The report also noted some downturn in the trucking sector amid reduced demand for transportation services.

Inflation and employment are particularly highlighted as key factors that will determine the Fed's future tightening path. The Beige Book observed that while the labor market remained strong overall, the pace of job growth slowed. Signs of cooling were detected in sectors such as construction, transportation, and finance. Reports indicated that many companies, facing increased uncertainty about economic prospects, have halted hiring or reduced staff.

Inflation continued a moderate upward trend but slowed in many regions. Most district contacts expect inflation to persist at a similar pace over the coming months. Some areas also reported increased consumer price sensitivity compared to the previous report.

Additionally, some districts confirmed a rise in consumer loan delinquencies. Concerns about debt limits and bank failures were raised in the Philadelphia and Cleveland Fed districts. However, the Beige Book added that these concerns have not yet impacted business outlooks. On the same day, the Federal Deposit Insurance Corporation (FDIC) reported that deposits fell by $427.1 billion in the first quarter of this year following the Silicon Valley Bank (SVB) incident, marking the largest outflow since 1984.

Currently, market expectations for the Fed to hold rates steady at the June FOMC have strengthened again. This follows a series of remarks from Fed officials suggesting a pause in rate hikes. Philip Jefferson, nominated as Fed Vice Chair, said on the day, "The decision to keep policy rates steady at the upcoming meeting should not be interpreted as having reached the peak rate in this tightening cycle," adding, "Skipping a rate hike will allow us to review more data before deciding on further policy tightening."

On the same day, Patrick Harker, President of the Philadelphia Fed, also stated, "We are seriously considering skipping a rate hike," and emphasized, "We need to reach a point where monetary policy is restrictive, and while it may not be now, we believe we are close to that point." He highlighted the importance of the employment report to be released this Friday and the Consumer Price Index (CPI) announced on the first day of the June FOMC meeting.

According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds futures market currently reflects about a 72% probability that the Fed will hold rates steady in June. This is a sharp increase from the 33% probability seen earlier that morning and the previous day. Conversely, the chance of an additional 0.25 percentage point hike has dropped from the mid-60% range to around 27%. Earlier that morning, the Job Openings and Labor Turnover Survey (JOLTs) showed 10.1 million job openings in April, exceeding market expectations and bolstering the possibility of a rate hike in June. This week, employment indicators such as the ADP Employment Report and the May Nonfarm Payrolls report are also scheduled for release.