Fed Sees Assets Prices As Elevated, Expects To Raise Rates Further

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Minutes of the Federal Reserve’s May meeting highlight major concerns about US inflation and a strong commitment to controlling it. Minutes reflect decisions taken earlier in May, with minutes issued 3 weeks after the meeting. Although the stock market has sold more since the minute release with the S&P 500 entering a bear market, the Fed showed little concern for the decline in asset prices, noting that the valuation of many assets ” advanced”.

inflation risk

The Fed is concerned about inflation. Of course, given that inflation is well above the Fed’s target of 2% today, this should come as a surprise. However, the Fed discussed the risks that Chinese lockdowns and the war in Ukraine could push inflation even higher than current levels. The notes also noted that price pressures were “expanding” to core goods and services, when compared to a more concentrated spike in commodity prices that last year. He also noted that potentially “it is too early to believe that inflation is peaking.”

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The Fed’s concern was clear during the minutes that current inflation was not under control.

financial markets

In contrast, the Fed showed little concern for financial markets. Valuations of many properties remain high, he said. That possibility includes the stock market where the S&P 500 trades at a relatively higher valuation than in history even after its downtrend. The Fed was less concerned about home prices, even though they rose sharply because underwriting standards for mortgages appear much stronger than in 2008 in the Fed’s view.

strong employment situation

Although perhaps less concerned about financial markets, the Fed is monitoring unemployment closely, and takes comfort that a currently strong job market gives the Fed the ability to raise rates aggressively.

The Fed also discussed the negative economic growth that the US saw in the first quarter of 2022, but largely believes it was due to one-sided factors, such as trade volatility, and the US’s growth in the second quarter. Growth is expected to return. ,

commuting and hiking

Minutes confirm the notion that the Fed will continue to aggressively raise rates until inflation subsides. In fact, the Fed appears to be inclined to act even more aggressively if inflation rises further. A collapse in financial markets is unlikely to change the Fed’s course, but a major slump in the job market could lead to a rethink on the Fed. While markets may show some concern about the prospect of a recession, as of three weeks ago, Fed minutes suggest they view inflation as a more pressing concern.

Credit: www.forbes.com /

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