Federal Reserve Says Stocks Driven by Fundamentals, Not Speculation

The newly-released Federal Reserve meeting minutes from its July meeting kept investors guessing about when to expect the next interest rate hike and when the Fed will begin to unwind its bloated balance sheet. For now, the best news for investors may be that Fed members see no obvious cause for concern about the record-high U.S. stock market.

The U.S. jobs report from July indicated that unemployment has dipped to its lowest level in 16 years. However, Fed members remain concerned about slow wage growth and slipping inflation levels. The core personal consumption expenditures index, a popular measure of inflation, dipped from 1.8 percent in February to 1.5 percent in June, still well short of the Federal Reserve’s 2 percent target.

Some Fed members argued that further interest rate hikes should be delayed “in light of their concern about the recent slowing.”

The Federal Reserve is still forecasting another interest rate hike before the end of the year, but investors aren’t so certain. Bond traders are currently pricing in only a 42 percent chance of a rate hike by the December Fed meeting, according to CME Group’s FedWatch tool. Bond investors were pricing in a 48.3 percent chance of a December hike just one month ago.

The Fed also failed to shed much light on its plan to start reducing the massive bond portfolio it accumulated as part of the economic stimulus efforts following the last recession. Earlier this week, New York Fed President William Dudley said he didn’t think market participants “are unreasonable” in expecting a definitive decision on balance sheet measures at the next Fed meeting in September.

While investors were likely disappointed by the lack of clarity the Fed provided on interest rates and balance sheet initiatives, they did get a major vote of confidence regarding what some see as an overheated U.S. stock market.

The Fed discussed…

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