Fed report says economy solid, notes disruption from immigration crackdown in Minnesota

* Fed survey provides granular looks at economic activity, prices, employment trends

* US central bank expected to hold rates steady in March

* Traders anticipate no Fed rate cut until July

* Beige Book shows effects of immigration crackdown, tariffs

By Ann Saphir and Howard Schneider

March 4 (Reuters) - U.S. economic activity rose a bit, prices continued to increase and employment levels were stable in recent weeks, the Federal Reserve said on Wednesday in a report that also captured the upheaval to businesses and workers in Minnesota from the Trump administration's immigration crackdown.

"Overall, economic expectations were optimistic, with most (Fed) districts expecting slight to moderate growth in the coming months," the U.S. central bank said in its latest "Beige Book" report, a roundup of qualitative economic data from across the country including surveys of and interviews with business leaders and community organizations. "On balance, firms expected prices to rise at a somewhat slower pace in the near term," according to the report, which is designed to give Fed officials a granular look at the economy's health in the run-up to their eight yearly rate-setting meetings. The information in the latest report was gathered on or before February 23, just after the Supreme Court's invalidation of many of President Donald Trump's global tariffs and prior to the start of the U.S.-Israeli war with Iran. It paints a picture of an economy that has been more resilient than expected in the face of the constraints of policies rolled out by the Trump administration, including import levies that continue to push up prices and an immigration crackdown that's hurting labor supply and, in some places like Minneapolis, consumer demand.

Seven of the Fed's 12 districts reported an expanding economy while five reported flat or declining activity, a slight downgrade from the report in January. The Fed held its benchmark overnight interest rate steady in the 3.50%-3.75% range at its January 27-28 meeting, citing a stabilizing labor market and continued elevated inflation as reasons to pause a string of interest rate cuts in the last three meetings of 2025. With data since then showing steady growth in the manufacturing sector, a surge in wholesale prices in January, and no obvious labor market deterioration, the central bank was widely expected to leave rates on hold again at its March 17-18 meeting even before the Iran conflict sent oil prices higher. That development could leave the central bank on hold for longer due to inflation concerns. Traders currently don't expect the Fed to deliver another rate cut until its July 28-29 meeting, when former Fed Governor Kevin Warsh is expected to already be installed as the central bank's new chief. Trump submitted his nomination of Warsh to replace Fed Chair Jerome Powell to the U.S. Senate on Wednesday. Powell's term as Fed chief ends in mid-May, and Warsh is expected to support the rate cuts that Trump wants.

IMPACT OF IMMIGRATION CRACKDOWN The anecdotes in the latest Beige Book appear to bolster what's been a growing sense among Fed policymakers that the job market is stabilizing and inflation, though expected to ease later in the year as the effect of tariffs recedes, remains a problem. Firms and households from across the Fed's 12 regions continue to grapple with higher prices resulting from the Trump administration's tariffs. A flower importer in the Boston Fed district, for instance, reported raising prices for the third time in 12 months, and one contact told the Dallas Fed that input prices were increasing without notice, sometimes doubling.

But "most districts received reports of some firms holding selling prices stable despite higher costs because their customers were increasingly price-sensitive," the Beige Book said, an observation that may bolster the arguments of some Fed policymakers that tariff-driven consumer inflation is mostly in the rear-view mirror. The report suggested labor supply continues to outpace demand - a financial services firm told the San Francisco Fed it had "recently hired a candidate with decades of experience for an entry-level role" - but there is limited evidence of layoffs outside of the technology sector. And despite widespread angst over the potential for artificial intelligence to replace workers altogether, there was little evidence of it in the latest Beige Book.

"Despite weak hiring overall, contacts at larger firms with more stable operations continued to hire recent college graduates at steady levels, citing long-term employment needs and the belief that AI will increase productivity and business activity," the New York Fed said. The Beige Book was filled with anecdotes showing the impact of the Trump administration's crackdown on unauthorized migrants, as firms sought to find other sources of labor and dealt with what appeared to be a related drop in demand for some services. The picture from the Minneapolis Fed district, where immigration officers killed two U.S. citizens and enforcement has met strong opposition and caused widespread disruption, looked particularly dark. A Minnesota landscape firm said federal immigration enforcement "was having a significant effect on our staff" and reported being unable to find replacements. Employees, vendors, and customers were described as "afraid to travel," the value of non-residential building permits in the city dropped to a decade low, and a survey revealed a sharp decline in foot traffic in the Minneapolis-St. Paul area, particularly among retail and food services businesses. (Reporting by Ann Saphir; Additional reporting by Howard Schneider; Editing by Paul Simao)