Fed Minutes: Some FOMC Members Worried About Rising Financial Markets

James Hyerczyk
U.S. Federal Reserve
U.S. Federal Reserve

The minutes of the U.S. Federal Reserve meeting in November released at 1900 GMT Wednesday revealed that central bank officials were largely optimistic about the economy but also worried that financial market prices are out of balance and posing a threat to the economy.

According to the minutes, nearly all Federal Open Market Committee members expressed positive views on growth – specifically the labor market, consumer spending and manufacturing.

They did have some disagreements on the pace of inflation, and even talked about changing the Fed’s approach to price stability, the sentiment otherwise was largely positive.

The FOMC also noted the economic picture could improve even more if Congress lowers corporate taxes as part of the reform plan making its way through the Senate.

The minutes stated, “In their discussion of the economic situation and the outlook, meeting participants agreed that information received since the FOMC met in September indicated that the labor market had continued to strengthen and that economic activity had been rising at a solid rate despite hurricane-related disruptions.”

While the comments about the state of the economy were upbeat, the central bank remarks about market conditions took on a more caution tone. Some members even feared what would happen if the market suddenly took a hit.

“In light of elevated asset valuations and low financial market volatility, several participants expressed concerns about a potential buildup of financial imbalances,” the minutes said. “They worried that a sharp reversal in asset prices could have damaging effects on the economy.”

FOMC members also noted the labor market is “operating at or above full employment,” GDP is likely to “grow at a pace exceeding that of potential output,” and even inflation has been slowed only by “temporary or idiosyncratic factors.”

Some members disagreed with the idea that all the softness was due to issues that would pass. Other members, though, thought the Fed could be in danger of waiting too long for inflation to rise and could risk further instability in the financial markets.

Several FOMC members said the upcoming data would be critical in determining whether they felt the Fed was close to meeting its 2 percent inflation goal.

A “couple” members even suggested the Fed tweak its approach to inflation, moving away from the 2 percent goal and toward a more nebulous “gradually rising path” in prices instead.

Finally, also at the meeting, members discussed the well-publicized reduction of the Fed’s $4.5 trillion balance sheet.

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