The Federal Reserve’s latest beige book, which takes a region-by-region pulse of economic activity in the United States, is a depressing read. “Consumer spending slowed further since the last report,” it begins, and then it gets worse. Energy and food prices rising, the job market sagging, inventory levels climbing through June 2. “Residential real estate markets were generally weak across most of the nation,” according to the beige pages.

Most analysts seized on the report’s discussion of inflationary pressures as another sign that the Fed will move rates higher later this year. But the language seemed calm and balanced. Sure, the Fed’s business sources “in most districts” reported higher prices, especially “for energy, petroleum derivatives, metals, plastics, chemicals, and food.” There has been some success in passing those along in manufacturer price hikes in some districts. On the other hand, prices related to construction were stable or lower in the Cleveland, Atlanta, and Chicago districts. Retail prices were mixed.

More important, “business contracts most districts reported moderate or limited wage growth.” The inflationary commentary hardly seems to be a harbinger of higher Fed rates.

Meanwhile, European Central Bank officials seemed to be backpedaling from earlier suggestions that sustained rate increases were in store in a showdown with inflation. Maybe, one ECB officer suggested at the end of a speech last week, there will only be one rate hike.

Oil and grain prices continued to respond to conditions in their respective markets, a tendency likely to continue with or without central bank intervention. The world’s citizens are eating more and driving more. The floods in the U.S. wheat and corn belts threaten the harvests. World oil consumption may not be rising as much as expected, but it’s still outstripping supply.

Financial market liquidity remains tentative. There are rumblings that the loss bond insurers Ambac and MBIA’s triple A ratings could result in writedowns of $10 billion for Citigroup, Merrill Lynch, and UBS. And there are warning signs in the leveraged buy-out market. In a report looking at 209 LBOs and around $300-billion of related loans form issuance to the end of May 2008, Fitch Ratings found that credit rating cuts out-numbered increases by a three-to-one margin. No wonder Merrill Lynch chairman John Thain wants the Fed to keep a window open for investment banks.

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