US economy shows signs of downshifting as rates, inflation bite

US economic growth looks to have downshifted in recent weeks in the face of headwinds that include rising interest rates and inflation, the Federal Reserve said.

Expansion and price gains may be moderating in parts of the country as households and businesses navigate higher rates, the Russian invasion of Ukraine and ongoing disruptions from Covid-19 infections, the central bank said in its Beige Book report Wednesday (Jun 1).

"Four districts explicitly noted that the pace of growth had slowed since the prior period," it said. Business contacts in several districts reported becoming more cautious as their outlooks grew more pessimistic.

Fed officials lifted interest rates by a half point in May and signalled they are likely to make similar increases in June and July as they work to tame the hottest inflation in decades. Policymakers are aiming to reduce demand for labour, in turn cooling wage growth and helping to lower inflation, without tipping the economy into recession.

The Beige Book suggested that uncertainty about the economic outlook is causing some businesses to pull back on spending and investing. "Eight districts reported that expectations of future growth among their contacts had diminished; contacts in 3 districts specifically expressed concerns about a recession," the Fed said in the report.

While contacts in most Fed districts said they continued to see robust price increases, 3 districts said that price increases had "moderated somewhat".

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Some areas also reported some softness in the labour market. Most districts said employment rose "modestly or moderately", but the pace of job growth slowed in one district, the Fed said in the Beige Book that was based on anecdotes collected by the Fed's 12 regional banks through May 23 and compiled by the Federal Reserve Bank of Philadelphia.

Earlier Wednesday, JPMorgan Chase & Co chief executive officer Jamie Dimon warned investors that tightening monetary policy and Russia's invasion of Ukraine could create unprecedented headwinds for the economy and cautioned them to prepare for an economic "hurricane".

"That hurricane is right out there down the road coming our way," he said at a conference sponsored by AllianceBernstein Holdings. "We don't know if it's a minor one or Superstorm Sandy. You better brace yourself."

St Louis Fed President James Bullard told reporters Wednesday that it would be "natural" to see slower economic growth. "We would expect growth to be slowing to a pace that is more consistent with the longer-term potential growth rate of the US economy, which many economists put at 1.75 per cent to 2 per cent," Bullard said after a virtual presentation to the Economic Club of Memphis. "We have certainly been growing well above that over the last year or more."

A separate report released Wednesday by the Labor Department showed that US job openings fell in April from a record in the prior month but remained elevated, with roughly 2 job openings for every unemployed American. That suggests little relief for employers struggling to attract and retain workers. Another update on the labour market will come Friday, when the government releases the jobs report for May.

Atlanta Fed President Raphael Bostic said last month that the Fed could take a pause in September if inflation comes down over the summer. But Fed Governor Chris Waller said this week that he supports raising rates in half-point increments until he sees inflation coming down to the Fed's 2 per cent goal.

Policy makers will also begin shrinking the Fed's US$8.9 trillion balance sheet this month, launching a second tool to help them battle rising prices. But officials are unsure of what its effects will be on the economy and on markets. The Federal Open Market Committee holds a policy meeting on Jun 14-15. BLOOMBERG