Fed Policymakers Weigh Rate Hike as Economy Shows Modest Growth and Rising Prices

The Federal Reserve has released its latest 'Beige Book' report, which indicates that economic activity in the US has increased moderately over recent weeks. The report also shows that prices have risen moderately, but at a slower pace than in some of the Fed's regional districts.

According to the report, employment has risen slightly and consumer-facing contacts have noted heightened price sensitivity among customers. This is limiting their ability to pass through input price increases.

The report will be closely watched by central bank policymakers as they consider whether to raise interest rates at their September 15-16 meeting. Five of the 19 Fed policymakers have said that a rate hike is past due, while several more have expressed their need for further improvement in inflation before leaving rates unchanged.

With inflation running above target for about 5-1/2 years, and despite recent better-than-expected monthly readings, Fed Chairman Kevin Warsh has signaled his openness to a rate hike if the data does not give him confidence that underlying inflation is headed towards the central bank's 2% target 'clearly and at sufficient speed'. New York Fed President John Williams echoed this view, saying 'My view is that we just have to keep watching' the data.

Financial markets are pricing a 65% chance of a rate hike this month and a 35% chance of a continued hold, reflecting unusually high uncertainty so close to a meeting. The volatile situation in the Middle East, where fresh U.S.-Iranian hostilities have driven up the price of oil, is also casting a shadow over any recent easing in price pressures from higher gas prices.