Understanding FOMC’s View of Equity Markets

FOMC members on equity markets

The FOMC (Federal Open Market Committee) September meeting minutes show some mention of equity markets (SPY). Financial markets information is presented in the staff review section. According to the minutes, FOMC members see financial market conditions remaining accommodative and noted the muted reaction of markets amid geopolitical tensions.

The September meeting held very little discussion of the higher valuations in equity markets (QQQ). The valuations of many companies are high, but there doesn’t look to be any end to the stock rally—at least for the time being.

Understanding FOMC’s View of Equity Markets

FOMC members see no major risks to financial stability

Financial stability, however, is correlated with the banking (XLF) system, which seems to be in control now. FOMC members said that the banking system is adequately capitalized and has enough liquidity, which reduces the risk of financial stability.

Some members, however, have mentioned that if the ultra-loose monetary policy is not tightened, it could lead to asset bubbles and pose a risk to financial stability.

Equity market reaction to the US Fed

Equity markets (DOD) in the US remained unaffected by the monetary policy decision of the US Fed. There have been two rate hikes this year, and markets are now faced with another potential rate hike in December.

Equity markets consider rate hikes to be negative on stocks, but that doesn’t seem to be the case now, likely because the rate is only now being “normalized.” Investors have accepted that the Fed needs to raise the rate to the 2.5–3.0% range to bring the economy back to normalcy, and so the focus is on earnings rather on than worrying about rate hikes.

This isn’t the case, however, with bond market (AGG) investors. We’ll discuss this further in the next and final part of this series.