Federal Reserve Beige Book and How It's Used
Its Effect on the U.S. Economy
The Beige Book is a Federal Reserve survey of the nation's economic conditions. Each of its 12 banking districts discuss how fast the economy is growing in their areas. That includes how difficult or easy it is to hire. It also addresses the general pace of business activity.
The banks report on local events that impact their regions. That includes events such as port closures, strikes, and storms. They also comment on how their region's businesses are affected by national and global trends. The Beige Book discusses how exchange rates, inflation, and oil prices affect local businesses.
The banks collect information from local sources. They talk to their branch directors, business leaders, economists, and local experts. That gives the Fed powerful insights into how the economy is doing at a grassroots level.
The Beige Book provides a useful insight into which industries are growing, and which are falling off. It breaks it down into each industry. That includes manufacturing, high tech, and financial services. It also includes tourism, retail, real estate, and agriculture.
The bankers also summarize local trends in employment, wages, and prices. To read the reports for yourself, see Beige Book Reports.
How the Fed Uses the Beige Book
The Beige Book is given to the members of the Federal Open Market Committee. They receive it two weeks before each of its eight FOMC meetings. The book provides a timely yet comprehensive snapshot of the U.S. economy.
If the Beige Book reports that the economy is sluggish, then the FOMC will consider expansionary monetary policy. That means it will use its monetary policy tools to increase the money supply. When there is more money sloshing around, then businesses will invest and hire more. People will spend more, too. Both of those will spur economic growth.
If the Beige Book reports there is too much inflation, then the FOMC will hit the brakes with contractionary policy. It will raise interest rates and reduce the money supply. Banks can charge higher interest rates for loans, and businesses will invest less. High credit card rates make families spend less as well.
Since 2009, the Beige Book has reported that the economy is in the expansion phase of the business cycle. That's essentially a Goldilocks economy. It's the ideal growth rate of between 2-3 percent. Inflation has been right around the Fed's target inflation rate of 2 percent, as measured by the annual core inflation rate.
How the Beige Book Got Its Name
If you think "Beige Book" is a dull name, the real name is worse. It's officially called the "Summary of Commentary on Current Economic Conditions by Federal Reserve District." It's called the Beige Book for short because the cover is beige.
There are two other reports prepared for the FOMC meetings. They, too, are named after their covers. The Greenbook is officially called the "Current Economic and Financial Conditions." It summarizes the Fed's staff forecasts of the U.S. and global economy. It's given to the FOMC members one week before the meeting. That way, it will be more current.
It has three sections: Summary and Outlook, Recent Developments, and Supplemental Information. Here's the latest U.S. Economic Outlook taken from the Greenbook.
How the Beige Book Affects the U.S. Economy
Many economists consider the Beige Book a leading economic indicator. That's because its content influences the FOMC's decisions. The most critical of these is changes in the Fed funds rate. That is itself a leading indicator.
On the other hand, the Beige Book can also be considered a lagging indicator. It reports on what already happened in the districts. It doesn't say anything about what the Fed Districts think is going to happen.
Therefore, even though the name itself is enough to induce a yawn, the Beige Book's importance should never be underestimated. It is a valuable asset when trying to gauge the health of the U.S. economy.