The Federal Reserve sounded a note of caution on the U.S. economy, which expanded "modestly" through early October with slowing activity raising recession concerns amid some indications of easing inflationary pressure.

"Outlooks grew more pessimistic amidst growing concerns about weakening demand," the Fed said Wednesday in its Beige Book report, published two weeks before each meeting of the policy-setting Federal Open Market Committee. "Several Districts reported a cooling in labor demand, with some noting that businesses were hesitant to add to payrolls amid increased concerns of an economic downturn."

The report was based on anecdotal information collected by the Fed's 12 regional banks through Oct. 7 and compiled by the Dallas Fed. It mentioned the word "recession" 13 times compared with 10 times in September's Beige Book.

"National economic activity expanded modestly on net since the previous report; however, conditions varied across industries and Districts," the Fed said. "Four Districts noted flat activity and two cited declines, with slowing or weak demand attributed to higher interest rates, inflation, and supply disruptions."

The Fed has been raising interest rates aggressively to try and cool demand to bring down consumer inflation that has remained above 8% for seven straight months.

The central bank is on track for a fourth consecutive 75 basis-point interest-rate hike in early November as policymakers battle the hottest inflation in four decades. Investors are betting another increase of that size is likely in December, with markets seeing rates approaching 5% next year, after disappointing inflation news.

"Some contacts noted solid pricing power over the past six weeks, while others said cost passthrough was becoming more difficult as customers push back," the report found. "Looking ahead, expectations were for price increases to generally moderate."

Recession concerns surfaced in several parts of the country. In the Boston Fed district, for example, "the outlook turned more pessimistic as recession fears spread." One manufacturer instituted a hiring freeze amid the concern. And in the Philadelphia region, "talk of a recession rose."

U.S. core consumer prices, which strip out food and energy, rose 6.6% in September from a year ago, the highest level since 1982, according to a Labor Department report published Oct. 13. That continues a worrying pattern for policymakers after the gauge accelerated in August as well.

Overall, the labor market was described as tight, though several districts reported an easing in wage pressures.

"Contacts expect wage growth to continue as higher pay remains essential for retaining talent in the current environment," the report found. In New York, "wage growth has shown signs of slowing" amid slower hiring and "scattered reports of layoffs."

Chair Jerome Powell and his colleagues have warned that defeating inflation will probably cause some pain, including a higher rate of unemployment. Officials have described the labor market as tight to an unhealthy degree, though job growth has moderated recently. Nonfarm payrolls increased 263,000 in September and the unemployment rate dropped to 3.5%, matching a five-decade low.

Contrary to the tone of the report, economic growth may have picked up in the third quarter, with the Atlanta Fed's tracker of gross domestic product pointing to expansion of close to 3% in the quarter.

Steve Matthews reports for Bloomberg News.

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