Federal Reserve policymakers received a mixed economic snapshot Wednesday that shows expansion across most sectors but persistent inflation pressures that won't quit, setting the stage for potential rate increases later this year.
The central bank's latest "Beige Book" report, which surveys all 12 regional Fed banks, found businesses expect continued growth in coming months. But there's a catch. Elevated uncertainty about fuel costs and stubborn price pressures mean about half of Fed policymakers at the June 16-17 meeting projected at least one rate hike by the end of 2026.
"Contacts generally expected the economy to continue to expand in the coming months, but several districts noted elevated uncertainty in the outlook for fuel costs," the Fed said. The data was collected on or before July 6.
Inflation's Uneven Retreat
Price growth slowed or held steady across all Fed districts compared to the previous reporting period. That's progress, but it's not enough to declare victory.
"Expectations for price growth over the coming months varied across districts, with contacts in some expecting inflation to continue at its current pace, while contacts in others expected inflation to slow, in part due to falling fuel prices," the report said.
A preliminary peace agreement between the U.S. and Iran last month helped cool fuel prices and ease inflation pressures, data this week showed. But renewed hostilities this month have pushed oil prices back up and reignited inflation concerns. The report contained far fewer references to the U.S.-Israeli war against Iran than the prior survey, with hostilities in a relative lull during the data collection period and energy prices having eased somewhat.
Fed Chair Kevin Warsh hasn't revealed his own rate-path view, even as he repeatedly promised to restore price stability and said the central bank has the tools to do so. He reiterated that commitment in back-to-back appearances before lawmakers in Congress on Tuesday and Wednesday.
Labor Markets Tighten Without Wage Spiral
The job market is firming without fueling inflation through wage pressures. That's a relief for businesses managing tight margins.
"Some employers in Memphis reported that they have not increased wages over the past three months despite rising employee requests for raises," the St. Louis Fed reported. Job seekers faced fewer open positions across many occupations, though stockers, nursing assistants, heavy machinery operators, and customer service representatives had relatively better odds of finding work.
"Elevated gasoline prices were hurting many workers' budgets," the Minneapolis Fed said.
The labor market isn't contributing to inflation, the report suggested. Fed policymakers have made the same point in recent comments.
Input Costs Drive Price Pressures
Non-labor costs continue rising across services, construction, and manufacturing. Higher energy, transportation, and raw materials costs are squeezing businesses. Some contacts blamed the Middle East conflict; others pointed to tariffs.
"Consumer prices continued to rise, and a few districts said contacts saw greater price sensitivity among their customers," the report said.
The Cleveland Fed reported that builders anticipated more bidding opportunities in the near term. One contact attributed that expectation to decreased uncertainty pending a resolution of the Middle East conflict. Others cautioned that commodity price pressures from the conflict would persist as long as it continued. This week's resumption of hostilities bore out that concern.
The FIFA World Cup provided a temporary boost to districts with host cities, including Boston, Philadelphia, Miami, New York, Kansas City, and West Coast locations. The tournament was cited about a dozen times as contributing to economic activity. "Bars in Greater Boston also saw a marked uptick in beer sales, which they attributed to the World Cup," the Boston Fed reported.
Why This Matters:
The Fed faces a delicate balancing act in the months ahead. Economic expansion continues, but inflation remains above target despite some cooling. The central bank's primary mandate is price stability, and persistent cost pressures from energy markets and supply chains suggest that mission isn't complete. Half of Fed policymakers already see at least one rate hike coming later this year. That signals a recognition that premature celebration of inflation's defeat could prove costly. For businesses planning capital investments and households considering major purchases, higher borrowing costs loom. The geopolitical wildcard of Middle East tensions adds uncertainty that markets hate. If oil prices spike again, the Fed's hand will be forced toward tighter policy to prevent inflation expectations from becoming unanchored.