Four of the 12 Federal Reserve districts reported slowereconomic growth while eight others said the expansion held steadyamid “uncertainty” stemming from the U.S. fiscal deadlock, thecentral bank said today.

Growth remained “modest to moderate” as consumer spendingmaintained gains and business investment grew, the Fed said todayin its Beige Book business survey. The report provides policymakers anecdotal accounts from the Fed districts two weeks beforethey meet to set monetary policy.

Employment growth “remained modest” in September, and price andwage pressures “were again limited,” the central bank said based oninformation gathered through Oct. 7, after the partial governmentshutdown began Oct. 1. Many contacts “noted an increase inuncertainty due largely to the federal government shutdown anddebt-ceiling debate,” the Fed said. “Retailers generally remainedoptimistic about the holiday shopping season.”

Policy makers, scheduled to gather Oct. 29-30, are trying togauge the strength of the U.S. expansion without federal economicdata suspended after the government closing. Private measures ofhomebuilder and consumer confidence suggest the shutdown and apolitical impasse over raising the nation's $16.7 trillionborrowing limit damped household and business optimism.

The leaders of the U.S. Senate from both parties reached anagreement to end the fiscal deadlock and to increase U.S. borrowingauthority, and Republican leader Mitch McConnell said they want topass the deal today. House Republicans signaled today that theywill allow it to pass.

The yield on the 10-year Treasury note fell five basis points to2.67 percent at 2:09 p.m. in New York. The Standard & Poor's500 Index headed for its third-highest close on record, adding 1.2percent to 1,718.10. The benchmark gauge of U.S. equities hasadvanced this month and is up 20 percent this year even amid thefiscal deadlock.

Businesses contacted by the Fed for the survey “generallyremained cautiously optimistic in their outlook for future economicactivity,” according to the report.

The concern about the shutdown was widespread across industriesand regions, according to the Fed's report. Among manufacturers“there was little immediate disruption from the federal governmentshutdown” although “contacts were worried about the potentialimpact if the closing became prolonged.”

Background Checks

In the New York Fed district, an employment agency said “thegovernment shutdown has hampered efforts to do background checks onprospective employees, whereas another contact indicates this hasnot been problematic thus far.”

Among retailers in the Philadelphia district “optimistic salesexpectations” relied on the assumption that “the federal governmentshutdown does not extend beyond two weeks.”

The Minneapolis Fed noted tourism activity was “solid” even asgovernment-funded tourism destinations were closed.

The Philadelphia, Richmond, Chicago, and Kansas City reservebank districts reported that “growth slowed some,” while the othereight noted “similar growth rates in economic activity” as they sawduring the previous reporting period.

The FOMC on Sept. 18 surprised investors after a two-day meetingby refraining from tapering $85 billion in monthly bond purchases.Economists predicted before the gathering that the committee woulddial down monthly Treasury purchases by $5 billion whilemaintaining buying of mortgage-backed securities, according to aBloomberg News survey.

The fiscal deadlock and suspension of economic reports mean theFed probably won't start reducing bond purchases until next year,said Bluford Putnam, chief economist at CME Group Inc., theChicago-based owner of the world's largest futures market.

“It's really low probability that the Fed would make any changein policy during a period of such uncertainty,” said Putnam, aformer economist at the Federal Reserve Bank of New York. He cuthis fourth-quarter estimate for annualized growth to 1 percent from2 percent because of the government closing.

“We haven't had any employment data for a while and when wefinally get some it's not going to have any quality,” he said,citing the lapse in data gathering and publication.

The FOMC has pumped up its balance sheet to $3.76 trillion andpledged to press on with so-called quantitative easing until thejob market improves “substantially.” The unemployment rate was 7.3percent in August according to the latest payroll report availablebefore the government suspended operations.

Growth Rate

The world's largest economy expanded at a 2.5 percent annualizedpace in the second quarter, beating economist estimates, aftergrowing at a 1.1 percent pace in the first quarter.

Still, the outlook of U.S. consumers fell in October to anine-month low, with the Thomson Reuters/University of Michiganpreliminary consumer sentiment index declining to 75.2 this monthfrom 77.5 in September.

Mortgage rates close to a two-year high are slowing gains inreal estate, an engine for the current expansion. The averageinterest rate on a 30-year fixed home loan was 4.23 percent lastweek, according to Freddie Mac, compared with 3.35 percent inMay.

Directors at the 12 Fed district banks said last month “ongoingdomestic fiscal constraints and uncertainties” pose risks to theeconomy, according to minutes released yesterday summarizing thediscussions.

As the biggest U.S. companies begin to report results for thethird quarter, firms including Wells Fargo & Co., the largestU.S. home lender, have cited risks to the outlook from the budgetimpasse.

“A prolonged government shutdown and potential debt ceilingbreach is unnecessary and troublesome and will likely create newneeds for our customers and their families,” Wells Fargo ChiefExecutive Officer John Stumpf said in an Oct. 11 conference callwith analysts.

Confidence among U.S. homebuilders fell more than forecast inOctober to a four-month low. The National Association of HomeBuilders/Wells Fargo index of builder sentiment decreased to 55this month from a revised 57 in September that was weaker thaninitially estimated, the Washington-based group reported today.

The median forecast in a Bloomberg survey called for a declineto 57. Readings above 50 mean more builders view conditions as goodthan poor.

The previous Beige Book report, released Sept. 4, said Americansspending more on cars and housing helped the economy maintain a“modest to moderate” pace of expansion from early July through lateAugust, even as borrowing costs increased.

Bloomberg News

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.