The Fed: Fed’s Beige Book still can’t find inflation threat despite labor bottlenecks so severe they’re shackling U.S. economy

The Federal Reserve can’t find a whole lot of inflation, but that won’t stop the central bank from raising U.S. interest rates one more time in 2017.

The Fed’s verdict: The Federal Reserve said the pace of growth in the U.S. was “split between modest and moderate” in its latest snapshot of the economy known as the Beige Book. The report covers Aug. 29 to Oct. 6.

A stable economy and the tightest labor market in years, however, did little to move the need on inflation. The Fed characterized the increase in wages and the cost of materials as “modest.”

What happened: A trio of hurricanes, Harvey, Irma and Maria, were a bit of a damper on the U.S. growth in September. Yet the economy appears to have weathered the storms better than expected. While some regions in the South experienced major disruptions, most of the country barely felt a ripple.

A bigger problem is an ultra-tight labor market. All 12 Fed regional banks said companies “were having difficulty finding qualified workers.”

The shortage of talent has moved some businesses to boost wages, but for the most part worker pay still isn’t growing very rapidly. In some cases firms have resorted to unorthodox methods to attract employees that do not involved extravagant pay hikes.

Big picture: The Fed is still on track to raise interest rates by December. The recent hurricanes were just a pothole for an economy now in its ninth year of growth, making it one of the longest expansions ever.

The strong growth has soaked up almost all of the nation’s available pool of skilled employees, especially in industries such as construction, manufacturing, trucking and health care.

Senior Fed officials still expect labor and material bottlenecks to spur inflation higher, but the Beige Book doesn’t find much evidence.

Nonetheless, the central bank is prepared to raise interest rates again in December as part of a strategy to head off an unwanted spike in inflation. The October Beige Book does nothing to change that.

What they are saying?: “I have no issue getting clients. If I had 100 people, I could put them all to work,”an executive in Minnesota told the Fed.

Market reaction: The Dow Jones Industrial Average

DJIA, +0.70%

 held onto sizable gains after the Beige Book report. The S&P 500

SPX, +0.17%

 was also higher. Treasury yields

TMUBMUSD10Y, +1.67%

 were little changed.