Beige Book reveals concerns: The economy is warming moderately, but tariff costs are quietly pushing up prices

The latest Beige Book from the Federal Reserve indicates that the U.S. economy is experiencing moderate warming, which is generally good news. However, a closer look at the data reveals another story: tariff costs are gradually being passed from businesses to consumers, which could become an inflationary pressure that the Fed will find difficult to ignore in the coming months. Meanwhile, concerns about the Fed’s independence are rising, adding more uncertainty to policy outlooks.

How to interpret the Beige Book data

The Federal Reserve’s Beige Book provides the latest assessment of economic activity across 12 Federal Reserve districts. Overall, there has been some improvement:

This is better than in the past three reporting periods. Previously, most districts reported “little change” in economic activity; now nearly 70% are experiencing growth, indicating the economy is indeed slowly recovering.

The outlook for the future is also somewhat optimistic, with most districts expecting slight to moderate growth in the coming months.

The real situation with employment and consumption

Employment remains generally stable. Out of the 12 districts, 8 reported no change in hiring activity, suggesting that while businesses are growing, they are not rushing to expand hiring on a large scale. This is a noteworthy signal—if the economy were truly rebounding strongly, we would expect more pronounced hiring demand.

Consumer spending has shown slight to moderate growth, mainly driven by the holiday shopping season. Once this seasonal factor subsides, whether consumption will decline again remains to be seen.

Regarding prices, most districts report moderate increases, with only two districts noting slight price rises. This suggests inflationary pressures are not significant at the moment, but there is a critical detail that is being overlooked.

Hidden inflationary pressure: passing on tariff costs

The Beige Book highlights that cost pressures caused by tariffs are a widespread issue across all districts. More importantly, as inventories built up before tariffs were imposed are depleted, companies are starting to pass additional costs onto consumers.

What does this mean?

• In the short term: Companies have absorbed tariff costs using existing inventories, so prices appear stable.
• Now: Inventories are exhausted, and companies are beginning to raise prices.
• Result: Inflationary pressures are shifting from the production side to the consumer side.

This is a crucial turning point. While prices seem to be rising gently on the surface, inflationary pressures are actually accumulating. In the coming months, consumers may feel more noticeable increases in prices.

What is the market worried about?

Related news indicates that risk aversion in the markets has recently intensified. This is not only due to economic data uncertainties but also more critically due to political pressures faced by the Federal Reserve.

Fed Chair Powell has been subpoenaed by the Department of Justice over construction cost overruns, which market participants interpret as a threat to the Fed’s independence. This has sparked concerns about a “sell US assets” trend—if the Fed’s policymaking is influenced by politics, market confidence could plummet.

Looking at asset performance, last week, net outflows from digital asset investment products reached $454 million, as investors sought safe-haven assets. Gold prices broke above $4,600, hitting new highs. These signals reflect market worries about the future.

The Fed’s dilemma

The situation presented in the Beige Book puts the Fed in a tricky position:

The economy is warming, which normally would mean no need for further rate cuts. However, the pass-through of tariff costs to consumers could push inflation higher. At the same time, the Fed faces political pressure and questions about its independence.

This severely constrains the Fed’s policy options. It cannot be too hawkish (which could risk destabilizing the recovery) nor too dovish (which could invite accusations of succumbing to political influence).

Summary

The Beige Book indeed shows the economy is experiencing moderate recovery, but behind this “moderate” label lie several hidden risks. First, employment growth is not as strong as consumer spending, indicating the recovery foundation is still fragile. Second, tariff costs are being passed from businesses to consumers, creating a new inflationary pressure that may gradually emerge over the next few months. Lastly, concerns about the Fed’s independence are rising, adding more uncertainty to policy expectations.

For investors, it is crucial to monitor two key signals: the true trajectory of economic data and whether the Fed’s independence can be maintained. Both factors will profoundly influence the market’s future direction.