Things are changing: the Beige Book, waning Fed jawbone, and the first Fed cut

The Atlanta Federal Reserve prepares what they call the “Beige Book” to summarize anecdotal economic activity in the 12 geographic Federal Reserve districts two weeks before each Fed meeting. The most recent one, released last Wednesday, showed that economic activity in 8 of the 12 districts contracted from the prior report (10/18/2023.) In quickly looking back to 2007, this is a rare condition, only seen during (or after) recessions. For this period, there haven’t been this many districts contracting outside of April and May of 2020 during the pandemic and before that, late 2008 and early 2009; towards the end of the Great Financial Crisis. Because the Beige Book summarizes what district Federal Reserve Bank Presidents are hearing, combined with broad weak economic data starting in October, may be why the Fed is sounding more dovish; relaxing their “jawbone” attempt to keep rates higher.

The Fed did seem to change their tone ever-so-slightly last week, first with Fed Governor Christopher Waller on Tuesday taking a very specific question from Nick Timiraos of the Wall Street Journal (was it prearranged?) that allowed him to explain that the Fed may cut rates within months just because inflation has fallen and without needing a recession to do so; a bold statement. This was followed by Jerome Powell on Friday, who was widely expected to push back against Waller’s comments, but committed just one sentence to doing so at the end of his speech in what could be characterized as the “disclaimers section” where he also said the Fed may still raise rates if inflation reaccelerates (this is a canned line at this point.)

Interest rates fell quite a bit last week from this and manufacturing ISM not rebounding as expected. There is now a better than even (52.8%) chance of the Fed cutting rates at their March 20th meeting as priced from Fed Funds futures. While, on its face, this sounds too soon to square with the Fed’s “higher for longer” mantra a couple months ago, think of “higher for longer” as just a method of getting more tightening from higher long-term rates without having to raise the short-term Fed Funds rate. The Beige Book hints that 2/3rds of the country is in recession. If that becomes clearer from the economic data, the Fed will end up easing sooner without ever seeing “higher for longer” through.

Anna Wong, Chief U.S. Economist at Bloomberg, wrote on Friday she and her team think a recession began in October,

“A number of economic indicators in 4Q suggest a meaningful slowdown is underway. We place greatest weight on the unemployment rate, and it’s telling us that a recession likely began in October. The unemployment rate’s signaling value is high because it’s not subject to large revisions, as other macroeconomic indicators typically are. Most importantly, over the past 70 years it has consistently been able to identify recessions in real time.”

          and,

“The dynamics that typified the beginnings of past recessions can already be seen. Among the most convincing recent signs: longer duration of unemployment, underwhelming holiday sales – which account for as much as 25% of small businesses’ annual revenues – and falling capex plans , which foreshadow a sharp drop in business investment ahead.”

She and her team also think the Fed will cut rates at their March 2024 meeting,

“We see the Fed holding rates steady until March 2024, when there will be enough data to convince officials to move for a 25-basis-point rate cut. By then, policymakers will have seen the subpar holiday data, the unemployment [rate] may have risen to 4.3% and – most important of all – inflation should be low enough to allow for a rate cut.”

Cutting interest rates in March would be fitting for the average length of Fed pauses. The average since 1950 is 6 months (excluding the four times where they turned on a dime in the Great Inflation which would lower the average.) Lowering rates in March would mean they paused for 8 months.

Economic data for October was uniformly weak. There are several big data points for November this week (service ISM, non-farm payrolls, the unemployment rate, and wages.) which will help to clarify this picture.