Fed Latest Beige Book: Economy Grows Modestly, Inflation Pressures Rise

The U.S. Federal Reserve released its latest Beige Book on January 14, 2026, covering economic conditions across the 12 Federal Reserve Districts up to January 5. The report showed that economic activity exhibited slight to moderate growth in 8 of the 12 Districts, marking the first time in the last three cycles that growth turned positive in the majority of regions (in the previous three cycles, changes in most regions were slight). The labor market remained stable, with employment trends showing almost no change in 8 Districts; price levels rose at a moderate pace in most Districts, with only two reporting slight growth, and the year-over-year growth rate edged up from 2.9% in the third quarter of last year to 3.0%. Overall, the data reflects an improvement in the momentum of the U.S. economy, though it has not yet fully emerged from the shadow of weakness.

The main factor influencing this data performance was cost pressures resulting from tariff policies. After businesses depleted their inventories, they began to pass some of these costs on to consumers, leading to a noticeable escalation of inflationary pressure, especially toward the end of 2025. Although manufacturing activity appeared slightly weak, consumer spending driven by the holiday season remained robust, and both service sector demand and banking conditions were better than in the previous report. Furthermore, while the labor market is stable, it still faces the risk of further weakening, and tariff-induced price increases may be masking actual inflation progress. Interviews with Fed contacts across the 12 Districts showed that businesses are becoming more optimistic about the future outlook, but the cautious approach to tariff cost pass-through remains the dominant factor in current economic dynamics.

In the short term, the market anticipates that the Federal Reserve will maintain interest rates unchanged at the January 27-28 meeting. Goldman Sachs has lowered its probability forecast for a U.S. recession in 2026 to 20%, projecting that the federal funds rate might drop to 3%-3.25% by year-end. The medium-term outlook leans toward moderate growth, but requires close attention to the persistent impact of tariffs on supply chains and inflation; the Fed may view such temporary price volatility as something it can "look through." Overall, the Beige Book reinforces expectations of an economic soft landing, yet the actions of businesses passing on costs will test consumer endurance and the flexibility of the Fed's policies.