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US business optimism ebbs amid headwinds

Fed's Beige Book cites financial market volatility, rising short-term rates, falling energy prices and elevated trade and political uncertainty

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Dallas Fed’s president, Robert Kaplan, suggests the Fed should pause on rate hikes for a quarter or two to suss out where the economy stands.

Washington

BUSINESSES across the United States have become less optimistic in recent months, the Federal Reserve said on Wednesday in its latest report on the economy that lends new colour to Fed chair Jerome Powell's pivot to more "patience" on interest rate hikes.

Though outlooks for the economy were generally positive, the Fed's "Beige Book" said, many of the US central bank's 12 districts said that contacts were less optimistic due to "increased financial market volatility, rising short-term interest rates, falling energy prices, and elevated trade and political uncertainty". The report offers a window into what policymakers are seeing and hearing in their own districts, information that they typically draw on when they stake out their own views of the economy at the Fed's rate-setting meetings.

"It's interesting to see that their outlook remains fairly positive despite all the concerns about a recession," said Gregory Daco, head of US macroeconomics at Oxford Economics in New York, adding that "momentum is slowing from various risks". Mr Powell in particular has said he pays close attention to such anecdotes to assess where the economy is heading before it is apparent in the data.

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The Beige Book issued before the Fed's last meeting, in December, reported that only "some" districts were seeing waning optimism. The Fed raised interest rates at that policy meeting, its fourth hike of 2018.

But with inflation showing no sign of rising above the Fed's 2 per cent target, and mounting worries about stock market turmoil, trade policy and slowing global growth, Mr Powell has said the central bank will take a "patient" approach to rate hikes this year.

And now, as the record-long government shutdown threatens growth further and the Fed begins preparing for its next policy meeting later this month, many of Mr Powell's fellow policymakers have echoed that sentiment.

"Outlooks were notably less optimistic than in the previous report," the Dallas Fed said in the report. Its president, Robert Kaplan, on Tuesday suggested the Fed should pause on rate hikes for a quarter or two to suss out where the economy stands.

The effect of the partial US government shutdown, now in its fourth week, appeared to be muted. The information for the Beige Book was gathered through Jan 7, encompassing the first two-odd weeks of the shutdown.

The only direct mention of an impact came from the Chicago Fed, which said farmers and others were facing greater uncertainty due to the slowed release of government agricultural reports. Payments to farmers impacted by tariffs were also disrupted by the shutdown.

In addition, the Cleveland, Atlanta and Dallas Feds cited negative effects from "politics" and "political uncertainty", though they were not more specific.

The report also found tight labour markets across all 12 Fed districts, with a majority reporting moderate wage gains.

"Every business is hiring and the hiring pool is shallow," an unnamed Montana retailer told the Minneapolis Fed, which added, "Very little relief in labour supply was expected." Some firms were having such a hard time finding workers for technical jobs that they lowered their educational requirements, according to the St. Louis Fed.

A majority of districts also reported modest-to-moderate price increases, with a number saying higher tariffs had driven up costs. REUTERS