Stocks, Dollar & Yields Sink After Fed Warns Of "Elevated Vulnerabilities" From High Asset Prices

The initial reactions wre modest but directionally 'correct' given the dovish bias to the Fed Minutes - stocks are up, bonds are up (lower in yield), and the dollar is down. But then traders read the warnings that due to excessively easy financial conditions, "a tighter monetary policy than otherwise was warranted", something Goldman has been warning about for months, and stocks sank.

To be sure, there were 3 very dovish quotes:

1. "Many participants, however, saw some likelihood that inflation might remain below 2 percent for longer than they currently expected, and several indicated that the risks to the inflation outlook could be tilted to the downside."


2. "Participants agreed that a fall in longer-term inflation expectations would be undesirable, but they differed in their assessments of whether inflation expectations were well anchored."


3. "Most Fed officials saw wage-price framework still valid"

Bonds and the dollar were following that bias...

But stock reversed their initial gains...

As many missed the following comment on why The Fed is tightening...

According to another view, 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.


According to one view, the easing of financial conditions meant that the economic effects of the Committee's actions in gradually removing policy accommodation had been largely offset by other factors influencing financial markets, and that a tighter monetary policy than otherwise was warranted.

Translated: they are tightening because financial conditions are too easy and in an effort to push markets lower... which they're not worried about as the wealth effect has gone.

Certainly, the 'tightening' is not working:

Finally, and most ominously for bulls, there was the  very explicit warning that an asset bubble is getting bigger:

The staff provided its latest report on potential risks to financial stability, indicating that it continued to judge the vulnerabilities of the U.S financial system as moderate on balance. This overall assessment incorporated the staff's judgment that, since the April assessment, 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.