Fed Warns "Equity Prices Are High", Sees Low Volatility As A "Risk To Financial Stability"

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by Tyler Durden
Wednesday, Jul 05, 2017 - 14:20

While the core focus in the June FOMC minutes was on whether and when the Fed would hike next, and/or begin its balance sheet unwind (indicentally, Fed Funds futures now shows odds of another rate hike in 2017 at about 60%), what was perhaps most notable in today's Minutes was the Fed's repeat warning about asset prices - something it has cautioned on previously - and the introduction of a warning on low volatility, which the FOMC said could pose "risks to financial stability." Finally, the Minutes highlighted the biggest paradox facing the Federal Reserve namely the continued easing in financial conditions despite the Fed's 2 rate hikes so far in 2017.

The sections in question, first on high equity prices:

"in the assessment of a few participants, equity prices were high when judged against standard valuation measures."

On low volatility as a catalyst to higher financial instability in the future:

"Some participants suggested that increased risk tolerance among investors might be contributing to elevated asset prices more broadly; a few participants expressed concern that subdued market volatility, coupled with a low equity premium, could lead to a buildup of risks to financial stability."

Finally, on continued easy financial conditions:

"according to some measures, financial conditions had eased even as the Committee reduced policy accommodation and market participants continued to expect further steps to tighten monetary policy."   

We expect stocks to rise despite these warnings in yet another confirmation that the Fed - at least through its jawboning - has lost control of the market, forcing it to act instead.