"Overall economic activity increased slightly since late May," the U.S. central bank said in its latest "Beige Book" compendium of surveys and interviews conducted across its 12 districts through June 30. Five districts reported some growth, five reported no change and two showed modest declines.

"Overall economic expectations for the coming months generally continued to call for slow growth," the Fed said.

Meanwhile, the report largely dovetailed with other recent data suggesting upward pressure on prices was softening.

"Prices increased at a modest pace overall, and several Districts noted some slowing in the pace of increase," the report said, taking note of the differing extent to which businesses were able to pass their input cost increases to consumers.

Looking ahead, "Price expectations were generally stable or lower over the next several months."

Employment was also reported to have continued increasing "modestly," and contracts in a number of districts said wage increases, which have remained higher than Fed officials believe are consistent with low inflation, were returning toward pre-pandemic levels.

MIXED PICTURE

The report was emblematic of an economy that is adjusting to the stiff interest rate increases the Fed has delivered, with impacts varying across regions and economic sectors.

The Richmond Fed said manufacturers in its district cited rising interest rates' impact on activity and a pullback in consumer spending as leading to drops in new orders and, in some cases, rising inventory levels.

In upstate New York, meanwhile, auto dealers said new car sales have been strong as pent-up demand has been satisfied by ongoing improvements in inventory, although used car sales remained subdued.

The report also flagged the ongoing challenges faced by the commercial real estate sector in the wake of the coronavirus pandemic. The switch to work-from-home arrangements for many office workers has upended the office space part of the real estate world, which could bring challenges for financial markets over time.

The New York Fed noted, "commercial real estate markets remained mostly unchanged, with persistently high office vacancies," and said, "conditions in the broad finance sector continued to deteriorate, though at a more subdued pace than in recent months."

The San Francisco Fed, which was at the epicenter of bank troubles this spring, noted in the report relative calm for the financial sector in its district.

By contrast, conditions for small and mid-sized regional banks in the New York district declined, citing "lower loan demand across all loan segments, including refinancing. Credit standards tightened for all loan types, and loan spreads continued to narrow."

JULY MEETING AHEAD

The report was released two weeks before the central bank is due to make its next interest rate decision, with financial markets widely expecting it to raise rates by a quarter of a percentage point after having opted against a hike last month.

Policymakers said then that the hiatus - after raising rates at 10 straight meetings since March 2022 - would allow them more time to assess how the economy was evolving in the face of the aggressive measures they have taken so far to rein in inflation.

Data since the June 13-14 meeting have shown an economy still growing despite expectations that the 5 percentage points of Fed rate increases over the last year or so would tip it into recession. Employers have continued to add more than 200,000 jobs a month, and while consumer outlays for goods have weakened, households continue to spend briskly on services.

That said, the Beige Book roundup was published just hours after the latest reading on consumer prices presented the most benign view of inflation in more than two years. The Labor Department's consumer price index rose 3% in June from a year earlier, slightly below economists' forecasts and down by a full percentage point from the month before. It also marked the smallest annual increase since March 2021.

That raised optimism that the Fed's preferred measure of inflation - the personal consumption expenditures price index - would notch a comparable decline when it is reported at the end of July and bring it closer to the central bank's 2% target. That figure, last reported at 3.8% for May, will not be published until after the Fed's July 25-26 meeting.

Projections submitted by policymakers last month signaled that their policy rate may rise by perhaps another half of a percentage point from the current 5.00%-5.25% range by the end of this year. The latest CPI data did little to dissuade financial markets from betting on a rate hike later this month, but it did support investors' current base case that the Fed will stand pat after that point.