There were two explicit warnings about stock market valuations in the latest Fed Minutes: first, the Fed warned that “vulnerabilities associated with asset valuation pressures had edged up from notable to elevated, as asset prices remained high or climbed further, risk spreads narrowed, and expected and actual volatility remained muted in a range of financial markets.” Then, in an odd admission, the Fed said that “recent rises in equity prices might be part of a broad-based adjustment of asset prices to changes in longer-term financial conditions, importantly including a lower neutral real interest rate, and, therefore, the recent equity price increases might not provide much additional impetus to aggregate spending on goods and services.” In other words, the entire premise behind the “wealth effect” – the assumption that high stock prices will lead to a boost in spending – may have been, oops, wrong.
One day later, Dallas Fed president Robert Kaplan picked up where the minutes left off with a discussion of market valuations, and said that while risks associated with high stock valuations may be “elevated” he is not worried; what he is worried about ‘is a correction accompanied with leverage.’
This post was published at Zero Hedge on Aug 17, 2017.
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