US economic activity declines as tariffs pressure prices, Fed says

U.S. economic activity has declined and higher tariff rates have put upward pressure on costs and prices in the weeks since Federal Reserve policymakers last met to set interest rates, the U.S. central bank said on Wednesday in its latest snapshot of the nation's economy.

"On balance, the outlook remains slightly pessimistic and uncertain, unchanged relative to the previous report," according to the document, known as the "Beige Book" and which is based on surveys, interviews and observations collected from the commercial and community contacts of each of the Fed's 12 regional banks through May 23. "There were widespread reports of contacts expecting costs and prices to rise at a faster rate going forward." The Fed has kept its policy rate in the current 4.25%-4.50% range since December and is widely expected to leave it there for another few months while its policymakers gauge the impact of U.S. President Donald Trump's trade and other policies on inflation and the labor market. With the impact so far not obvious in the government's regular monthly reports, Fed officials say they are putting a premium on more timely data, including the day-to-day experiences of businesses and households like those captured in the Beige Book and which suggest widespread, if uneven, impact from Trump's tariffs.

In January, all 12 Fed districts reported economic growth; the latest report showed just three did, while half reported economic declines. Meanwhile most districts reported employment as "flat."

The Personal Consumption Expenditures Price Index rose just 2.1% in April from a year earlier, the lowest reading in four years and just a hair above the Fed's 2% inflation target.

Economists expect data due on Friday to show U.S. employers added 130,000 jobs last month, down from 177,000 in April but still above the 100,000 or so thought to be adequate for a healthy labor market. Analysts say they anticipate both the inflation and the labor market data to deteriorate, and the Beige Book suggests it is happening to some degree.

Other survey-based data show that deterioration as well, including an Institute for Supply Management report earlier on Wednesday that showed the service sector contracted in May for the first time in a year, and businesses paid more for inputs.