WASHINGTON U.S. economic activity was slow in August amid slack consumer spending, the Federal Reserve said on Wednesday, while one official warned the credit crunch had offset low Fed interest rates.
"Many described business conditions as 'weak,' 'soft,' or 'subdued,'" the Fed said in its regular Beige Book, an anecdotal economic assessment compiled from reports by the 12 regional Federal Reserve banks.
"Consumer spending was reported to be slow in most Districts, with purchasing concentrated on necessary items and retrenchment in discretionary spending," the Fed said.
Rising unemployment, falling house prices and painful jumps in gasoline costs have pinched households and are expected to slow economic growth sharply in the second half of the year.
"The tax rebate impact is dead, and the hard reality of falling jobs, home prices and credit availability is coming home to roost," wrote BMO senior economist Michael Gregory.
U.S. second-quarter economic growth hit a solid annual rate of 3.3 percent, spurred by an emergency government fiscal stimulus package and buoyant export earnings, but the Fed expects this pace of activity to fade in the months ahead.
Investors interpreted the report as further evidence that the U.S. central bank would keep its benchmark interest rate on hold at 2 percent at its next meeting on September 16, as policy-makers wait for a housing slump, which sparked a financial panic, to abate.
Boston Federal Reserve Bank President Eric Rosengren separately said this headwind had neutralized the bulk of the Fed's 3.25 percentage-point interest rate easing since mid-September, indicating that he saw no current grounds for a rate hike.
"Many business borrowers and consumers are finding their access to credit has diminished, and their cost of credit has risen, despite the reductions in the federal funds rate," he said in a speech in Manchester, New Hampshire.
"Much of the easing in monetary policy to date has merely offset the tightening in credit conditions created by the financial turmoil that began last summer," he told a regional business and industry association.
Interest rate futures imply that the Fed's benchmark overnight funds rate will stay on hold through December, with a 44 percent likelihood the Fed's policy-setting committee will raise rates by a quarter-point hike at the end of January.
Rosengren's remarks contrast with hawkish warnings from some other Fed policy-makers that inflation is too high, and interest rates should be raised sooner rather than later.
Such Fed officials are concerned by inflation, which has been pushed above 5 percent by soaring energy and food prices during a time of historically low Fed rates. They fear such conditions could embed expectations for higher inflation.
Documents on Tuesday showed that directors of three regional Feds -- Kansas City, Dallas and Chicago -- sought a quarter point hike in the discount rate before the Fed's last policy meeting, on August 5. The discount rate is the rate charged banks for direct loans from the Fed.
The Beige Book noted that price pressures continued to be felt across the nation, but recent sharp falls in oil and other commodity prices were beginning to show through.
"Almost all Districts continued to report price pressures from elevated costs of energy, food, and other commodities, although some noted that there have been declines," it said.
(Editing by Neil Stempleman)