The Fed sees asset prices as high and expects to raise rates further

The minutes of the Federal Reserve’s May meeting highlight major concerns about US inflation and a strong commitment to containing it. The minutes reflect decisions made earlier in May and the minutes were posted 3 weeks after the meeting. Although the stock market has sold off further since the minutes were released with the S&P 500 entering a bear market, the Fed showed little concern about falling asset prices, citing that the valuation of many assets is down. “high”.

Inflation risks

The Fed is worried about inflation. Of course, given that inflation is well above the Fed’s 2% target today, this should come as a surprise. However, the Fed discussed the risks that the Chinese shutdowns and the war in Ukraine could push inflation even higher from current levels. The notes also mentioned that price pressures were “widening” into basic goods and services, compared to the more targeted surge in commodity prices that initially pushed prices higher last year. They also mentioned that it is potentially “too early to be sure that inflation has peaked”.

Throughout the minutes, the Fed’s concern was clear that current inflation was not under control.

Financial markets

On the other hand, the Fed showed little concern for the financial markets. They noted that the valuation of many assets remained elevated. This likely includes the stock market where the S&P 500, even after its decline, is still trading at relatively high valuations relative to history. The Fed was less concerned about house prices even though they had risen sharply, as mortgage underwriting standards look much more robust than in 2008 according to the Fed.

Strong employment situation

While perhaps less concerned about financial markets, the Fed is watching unemployment closely and welcomes the currently strong job market giving it some ability to raise rates aggressively.

The Fed also discussed the negative economic growth the United States experienced in the first quarter of 2022, but largely believes this was due to one-time factors, such as fluctuations in trade, and expects to see the United States return to growth in the second quarter. .

More hikes to come

The minutes confirm the impression that the Fed will continue to raise rates aggressively until inflation subsides. In fact, if inflation were to rise further, the Fed seems inclined to act even more aggressively. Financial market declines are unlikely to change the Fed’s course, but a major slippage in the labor market could cause the Fed to reconsider its stance. Although markets may be showing some concern about the possibility of a recession, three weeks ago the Fed’s minutes suggest they see inflation as a much more pressing concern.