The Week in Review: Moderate Growth says the Fed, Disinflation in Europe


The Federal Reserve said that the U.S. economy did not see a significant change in its rate of growth in August, as the twelve regional Federal Reserve Districts all reported business ongoing but steady optimism about the rate of economic growth in their regions. The comments came in the Federal Reserve’s Beige Book report, released this Wednesday.

“Reports from the twelve Federal Reserve Districts indicated that economic activity has expanded since the previous Beige Book report; however, none of the Districts pointed to a distinct shift in the overall pace of growth,” the Federal Reserve said in its full report. While general consumer spending was seen to grow “at rates ranging from slight to moderate,” the Fed also said that most districts saw little change in growth compared to the last Beige Book report.

Moderate Growth, No Change

The Federal Reserve has been looking for continued growth in economic activity as it winds down its asset-purchasing program, which is likely to end in October. While no reacceleration of growth has been observed, many analysts believe that a moderate growth rate will satisfy Janet Yellen to continue on adopting a more hawkish monetary policy.

The Federal Reserve said that consumer spending grew at a pace “ranging from slight to moderate”, while the Fed characterized demand for nonfinancial services, particularly software and information technology, as strong. Manufacturing had mixed reports, but were overall characterized as growing. Real estate, construction, and banking and finance all saw continued improvement.

While demand seemed to be improving, the Federal Reserve also noted that “price pressures remained largely unchanged” as input prices remained stable and labor market conditions remained “relatively unchanged”, with wage pressures remaining unchanged. While weakness in the labor market has continued for some time as labor participation falls, wage growth has remained elusive.

European Conflicts on Monetary Policy

In Europe, this week saw a variety of movements both from politicians and central bankers, as surprising weakness in the central eurozone economies has encouraged central banks to reconsider their hawkish stance and focus on austerity for peripheral nations. 

The European Central Bank also announced a cut to all interest rates, including a cut to its benchmark rate to 0.05%. Additionally, ECB President Mario Draghi announced that a weaker than expected second quarter in the Eurozone had motivated the ECB to begin a quantitative easing program, in which the ECB would buy a broad portfolio of asset-backed assets to combat sluggish growth in the Eurozone.

Germany politicians have resisted a QE policy, but Draghi said “the loss in economic momentum may dampen private investment and heightened geopolitical risk could” hinder both consumer and investor confidence, which encouraged the ECB to begin a QE program.

Russia, Ukraine

Instability in eastern Ukraine eased on Wednesday when the Ukrainian and Russian Presidents agreed over the phone to a cease-fire regime, whose duration and effectiveness were immediately called into question by the Ukrainian Prime Minister Arseny Yatseniuk, who said Russian President Vladimir Putin’s real plan “is to destroy Ukraine and to restore the Soviet Union.” Barack Obama also expressed skepticism, stressing that no resolution is possible until Russia admits that it has been supporting separatist rebels throughout the conflict.

The Russian President met Ukrainian officials and rebels in Minsk on Monday, while Ukraine announced that Russia has 1,600 active troops in southeast Ukraine, both inside and outside of the Crimea region.

Russia stocks rallied on news of the cease-fire as the Russian ruble began to recover from a record low against the U.S. dollar.