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Fed's Beige Book finds most businesses 'optimistic' despite trade worries

U.S. economic activity expanded at a modest pace through the end of August even though worries over tariffs and trade policy persisted, according to the Federal Reserve's latest Beige Book.

The Beige Book, an anecdotal summary of Fed officials' conversations with local contacts, found that a majority of businesses "remained optimistic about the near-term outlook" for the economy despite concerns over trade tensions.

Those worries are expected to be a major part of the discussion when the Federal Open Market Committee meets again Sept. 17 and 18. Markets expect the Fed to lower rates by 25 basis points again at the meeting, which would mark the Fed's second rate cut this year.

Fed officials have been divided on whether another rate cut is necessary. Some, such as St. Louis Fed President James Bullard and Chicago Fed President Charles Evans, have supported lower rates to protect against downside risks to the U.S. economy and to boost inflation. Others, including Boston Fed President Eric Rosengren and Kansas City Fed President Esther George, have cautioned that it is too early for the Fed to ease policy and that the economy's underlying fundamentals are solid.

The Beige Book found that reports on consumer spending across the U.S. were mixed, although most districts reported modest growth in auto sales and solid tourism activity. Home sales "remained constrained" in the majority of the Fed's districts largely due to low inventories, and construction of new homes stayed flat.

Manufacturing activity was "down slightly" in recent weeks, the report found, mirroring a finding from the Institute for Supply Management that the U.S. manufacturing sector contracted for the first time since August 2016. Agricultural conditions across the U.S. also "remained weak as a result of unfavorable weather conditions, low commodity prices, and trade-related uncertainties," the report found.

Prices also grew modestly throughout the U.S. in recent weeks, the Beige Book found, with retailers and manufacturers in some districts saying they were seeing slight increases in input costs.

"Although firms in some Districts noted an ability to pass along price increases, manufacturers relayed limited ability to raise prices," the report said. "District reports on the impact of tariffs on pricing were mixed, with some Districts anticipating that the effects would not be felt for a few months."