Fed's Beige Book finds muted reaction to Republican tax plan

Getty ImagesSeveral districts noted in the Beige Book there was an elevated demand for construction labor.

The Fed's verdict: The Federal Reserve said the pace of growth continues to be "modest to moderate" in its latest snapshot of the economy known as the Beige Book. The report covers late November to Jan. 8.

Most districts reported "on-going labor market tightness and challenges finding qualified workers across skills and sectors," the report said. The lack of workers was constraining growth in some instances. Despite this, wages increased at a modest pace as did prices.

What happened: The outlook for 2018 "remains optimistic for a majority of contacts across the country," the survey found. Some retailers said holiday sales were higher than expected. The real estate sector seemed to have stalled. Residential real estate was described as "constrained" while non-residential activity saw slight growth.

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Manufacturers reported modest growth and only some were increasing capital expenditures. Although there were scattered reports of firms raising wages and prices, the report did not identify any broad trend. Only in Chicago and Dallas were there reports of business excitement over the Republican tax plan. Districts along the East Coast were worried about higher taxes on consumers from the new limits on deductions for mortgage interest and property and state income taxes. Asked about consumer spending, an auto dealer in the Philadelphia district felt that "people with cash on hand ran to the municipal tax office to prepay property taxes, not buy cars."

Big picture: The report comes two weeks ahead of the Fed's next rate-setting committee meeting, at which it is widely expected to hold short-term interest rates steady. The market is growing more confident that the central bank, under the expected new leadership of Jerome Powell, will raise rates in March and at least one more time later in the year. The Fed has forecast three rate hikes as the majority think it is prudent to continue tightening ahead of expected higher inflation this year. The impact of the Republican tax plan on the economy is a wild card for Fed officials. The January Beige Book suggests that they won't have to alter their plans for gradual rate hikes.

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What are they saying: " Although the broad summary paragraph on prices notes that some districts are reporting less inflation than others, the note that some firms are finding more power to increase prices for consumers is very encouraging. Combined with the supply issues that will force rents and owners equivalent rent higher, we will see an acceleration in the inflation data during the first quarter," said Thomas Simons, senior money market economist at Jefferies.

Market reaction: The Dow Jones Industrial Average DJIA, +0.21% and the S&P 500 index SPX, +0.44% , already gaining in earlier trading, got a bit of a boost from the report.