Exciting Tea

The April Beige Book was released a couple of days ago. Textual analysis of the report suggests notable increase in optimism about US economic prospects. Overall sentiment rose to the highest level in two years. It is now back to levels of April 2022, when the effects of COVID fiscal stimulus was still making its way through the wallets and cash registers of America. The April 2024 sentiment level of 12.4 is only slightly lower than the long-term average of 15.1. This is remarkable given the historically steep rise in interest rates. If Fed districts reflect such buoyant activity, the FOMC may feel justified in relaxing its concerns about imminent slowdown. Textual analysis also suggests concern about inflation has risen, most likely reflecting reduced concern about economic activity. Collectively, there are strong reasons to suggest the Fed districts seen no reason for any change in policy. Indeed, the overall impression is the US economy is perfectly able to absorb the monetary tightening of the last two years. A prolonged period of interest rates at current levels looks possible.

The latest Beige Book is only one consideration for the FOMC, which may come to an entirely different conclusion about the direction of policy. But the latest release raises the question of how other central banks react to evident optimism about the US economy. The Beige Book suggests recent dollar strength may continue, placing downward pressure on risk assets everywhere, raising the pressure on dollar debtors and reasserting inflationary pressure on non-dollar economies. This may prove challenging. Both the ECB and BoE have strongly hinted at an imminent reduction in their official interest rates. Taken as a standalone document, the latest Beige Book release suggests sustained dollar strength and a difficult balancing act for foreign policy makers desperate to declare ‘mission accomplished’ in their fight against inflation.

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The report shows a pickup in ‘positive’ terms, and relative stability in ‘negative’ terms.

The term ‘inflation’ appears more often in the April report than the previous March edition. Though occurrence of a term does not inherently imply a value judgement with policy implications, history suggests that a rise in the mention of the term is associated with higher policy rates. The latest ‘inflation’ score calculated from the Beige Book is exactly in line with the level of July 2018, six months and 50bps before the peak in rates during that monetary cycle. Our analysis suggests Fed districts see no ‘all clear’ on inflation.

Concern about employment and unemployment has fallen.

It is interesting to sample the most important terms in the Beige Book to see how the areas of concern adjust over time. Here is the top 5 terms/words of the Beige Book determined by the standard term-frequency/inverse document frequency (tf-idf) measure. Note how the latest April 2024 Beige Book is deemed, by this measure, to place a high importance on markets and employment, consumer spending, AI, and the impact of the collapse of the Francis Scott Bridge in Baltimore. For the first time since 2020, this annual review does not include ‘COVID’ or ‘pandemic’ in the top terms.

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