Fed’s Beige Book finds economy has slowed — and so has inflation

A slew of top Fed officials have pointed to a recent slowdown in the economy as a sign that higher interest rates are working to reduce growth, ease shortages in the labor market and reduce the rate of inflation.

The economy expanded at a sharp 5.2% annual rate in the third quarter, but it’s on track to grow just 1% to 2% in the final three months of the year, according to the most recent Wall Street forecasts.

The Fed has raised its benchmark short-term interest rate to a top end of 5.5% from near zero 18 months ago. Higher borrowing costs have taken a while to slow growth, but consumers are buying fewer big-ticket items such as homes and cars. Business investment has also weakened.

Fed officials have indicated they could be done raising interest rates if the economy continues to cool off and inflation gradually decelerates.

Cleveland Federal Reserve President Loretta Mester said interest rates are in a “good place” and are well positioned to achieve the Fed’s goal of reducing inflation to its long-term goal of 2%.

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In November, the Beige Book found that six of the 12 Fed regional banks throughout the U.S. reported slight declines in economic activity. Two others were “flat to slightly down.”

The resulting slowdown was also reflected in fewer new workers being hired.

“Demand for labor continued to ease, as most districts reported flat to modest increases in overall employment,” the Beige Book said. Wages also grew a bit more slowly.

Slower economic growth and less demand for workers also helped to ease inflation.

Price increases “largely moderated” across the country, the Beige Book found, and “most districts expect moderate price increases to continue into next year.”

The rate of inflation is still above 3%, however, and it could take a while before the Fed meets its target.