Jan 14 (Reuters) - Economic activity increased in most parts of the U.S. and employment was mostly unchanged in recent weeks, the Federal Reserve said on Wednesday in a report that may do little to sway policymakers' interest rate views ahead of the central bank's meeting in two weeks.
"Outlooks for future activity were mildly optimistic with most expecting slight to modest growth in coming months," the Fed said in its latest "Beige Book" report, a compendium of survey results, interviews, and other qualitative data from its 12 regional banks that is meant to help central bankers assess the economy's health in the run-up to each of the eight yearly rate-setting meetings.
Eight of the 12 Fed banks reported increased economic activity, and eight reported mostly no change in hiring, the report said. Prices grew at a "moderate rate" across all but two districts, which reported just "slight" price growth.
The report overall appeared to be a modest upgrade compared with the last one.
Fed policymakers cut rates by three quarters of a percentage point last year in a bid to keep the labor market from deteriorating further, but in December signaled they are inclined to leave the policy rate in its current 3.50%-3.75% range for a bit while they wait for improvement on inflation.
Financial markets expect the central bank to leave rates unchanged at its January 27-28 meeting.
Since the rate cut last month, the U.S. unemployment rate has ticked down, to 4.4% in the latest reading, while a government report earlier this week showed consumer prices rose 2.7% in December from the year-earlier period.
The Fed targets 2% inflation.
Interest rate futures markets reflect expectations policymakers will wait until June - after Fed Chair Jerome Powell's term as head of the central bank ends - to cut rates. President Donald Trump has vowed to install a Fed chief who aligns with his own view that short-term borrowing costs should be sharply lower.
Fed policymakers themselves have been sharply divided. Their decision in December to cut rates passed by a 9-3 vote, with the majority feeling that the weakening labor market needed support from lower rates.
Several of the seven non-voting Fed bank presidents have since indicated they sided with the "no" voters in seeing inflation as the bigger risk and supported holding the policy rate steady.
PRICE SENSITIVITY AND JOB OPTIMISM
The Minneapolis Fed offered fresh evidence of a bifurcated economy, with a Montana restaurant owner noting that wealthier customers “seem to still be spending and eating out frequently,” while lower-income consumers “definitely seem to be pulling back, eating out less, or are more price sensitive.”
In the Cleveland Fed district, the strains were also evident, with 70% of low-income workers in a survey reporting higher expenses and half stating their income did not cover their costs.
But they expressed optimism about the job market: 45% said they planned to look for a job in the coming months, "and nearly all were confident that they would find a new or better position."
The report was shot through with hints of how Trump administration policies are impacting the economy in ways both micro and macro.
'Tariffs' got 50 mentions, more than in the November report. Most focused on the impact of continued upward price pressures, with business contacts in many districts beginning to pass on higher prices to customers even as those in the retail and restaurant industries were reluctant to do so for fear of hurting demand.
Two districts mentioned the drag from the end of affordable healthcare subsidies, a political fight which triggered the record-long government shutdown last year.
The Richmond and Cleveland Fed districts noted higher prices in the freight business after the Trump administration's regulatory restrictions on non-citizen drivers of commercial trucks.
In the Minneapolis Fed district, where a U.S. agent taking part in a Trump administration immigration crackdown shot a woman dead last week, "immigrant-owned businesses, especially those in food service, were experiencing considerably lower sales as foot traffic declined for fear of immigration enforcement. Nearly one in five contacts reported lower head counts. A manufacturer said some employees quit after a co-worker was deported."
ARTIFICIAL INTELLIGENCE
Contacts across several districts said artificial intelligence was having either a limited impact on hiring or that they expected it to begin doing so in the years ahead.
"The demand for marketing professionals has also waned, partly due to increased efficiencies brought about by AI," the New York Fed said.
In Boston, meanwhile, a staffing services industry contact said "some larger companies had made selective layoffs to reduce costs but said that AI was not a factor behind these decisions. Nonetheless, one IT services firm paused hiring plans as it considered using AI instead." The Dallas Fed in a survey asked firms how AI was affecting their hiring plans. "Most companies using AI said it hasn't had an impact, though a quarter expect it to decrease their need for workers over the next few years," it reported.