Home Fed minutes signal inflation and asset valuation concerns

Fed minutes signal inflation and asset valuation concerns

The FOMC meeting minutes released last week showed no major deviations from the main themes. The central bank indicated that it is preparing to hike interest rates in December. Citing broadly upbeat growth and the tightening labor market including consumer spending, the central bank officials are all set to hike interest rates at the next FOMC meeting in December.

The central bank’s minutes showed that since the information received since the September FOMC meeting, economic data indicated continued strengthening and that the economy is rising at a solid pace, despite the disruptions from the hurricanes in September.

September’s weather patterns saw a brief disruption to the jobs and the inflation data, however, data thereafter showed quick moderation. This suggests that the impact of the hurricanes to the data was minimal.

The U.S. dollar fell sharply following the Fed’s release of the meeting minutes. Here’s a quick recap of the main points of interest from last Wednesday’s FOMC meeting minutes.

Officials concerned about weaker inflation growth

Consumer prices in the U.S. touched 2.0% on an annual basis as of October. While the Fed’s preferred gauge of inflation is the core PCE data which will be released later this week, the overall inflation metrics show that consumer prices were rising at a slower pace.

Earlier this year, inflation briefly rose above 2.2% before falling back below the Fed’s 2.0% inflation target rate. According to the FOMC minutes, members also discussed changing the central bank’s approach to targeting price stability. This was seen as a major point for the markets. However, no significant developments were made on this point.

Despite the concerns about inflation, other members of the Fed noted that waiting for inflation to reach the inflation target could also be worrying. The divided opinions on inflation have remained a major underlying factor with the Fed for the most part or this year.

The Fed on asset valuations

The meeting minutes also showed that members of the FOMC were concerned about the rising valuations in the financial markets. The minutes were more cautious on valuations.

The U.S. stock market has continued to maintain its secular bull rally through most of this year, setting new record highs. Valuations have increased in the trillions on the back of stronger corporate earnings. The partly optimistic view also came from the proposed tax reform plans.

Although no major inroads were made on this, it was only until a few weeks back that the U.S. Congress began to make preparations. The final bill is expected to be implemented in the coming weeks. Corporate tax is expected to be slashed from the current 35% to 20%.

FOMC members were concerned that a sudden drop in the markets could be troublesome. “In light of elevated asset valuations and low financial market volatility, several participants expressed concerns about a potential buildup of financial imbalances,” the minutes showed.

Despite the concerns, officials at the FOMC have consistently downplayed the idea that the markets were in a bubble. Industry analysts are also mixed with some expecting a major top forming in 2018, while others expect the year ahead to see further record highs being set.

Looking ahead, the economic data from the U.S. this week will feature the second revised GDP estimates for the third quarter. The data is expected to show a slightly higher GDP growth rate of 3.2%, putting it on par with the expansion rate during the second quarter.

On Friday, the ISM manufacturing report will be released. The manufacturing activity, as measured by ISM is expected to show a modest decline to 58.4 in November. This follows October’s print of 58.7.

With the next FOMC meeting fast coming up, the markets are reluctantly inclined to price in the 25-basis points rate hike coming up next month, despite the ongoing concerns on inflation.

John Benjamin

John Benjamin

John is a market analyst for Orbex Ltd. and is a forex and equities trader having been involved in trading since late 2009. John makes use of a mix of technical and fundamental analysis and inter-market relationships. The analysis present here is a mix of intra-day analysis while considering the long term outlook of the markets as well. For any comments or questions, John can be reached at [email protected]