Fed Warns “Valuation Pressures Have Increased Further” In Latest Monetary Policy Report

The Fed released its July Monetary Policy Report which forms the basis of Janet Yellen’s testimony to Congress next week, and while it does not traditionally discuss monetary policy, it does provide a snapshot of the Fed’s take of the economy and capital markets at any given moment. Here are some of the highlights courtesy of BBG:

Federal Reserve says bond liquidity ample despite lower market-maker inventory, in monetary policy report in Washington.

Fed sees little evidence of liquidity impairment in corp bonds

Fed says financial markets recently performed well under stress

Fed says financial system vulnerabilities stayed modest

Fed notes liquidity mismatch at FHLBs as funding-strain risk

Fed warns that valuation pressures are up in bonds, equities, com real estate

Fed says term-premium rise poses downside risk to long bond prices

Fed sees signs of tightening credit in commercial real estate

Fed defends its opposition to rules-based monetary policy

And some further details, first on the the global productivity slowdown.

“Over the past decade, labor productivity growth both in the United States and in other advanced economies has slowed markedly. This slowdown may reflect a waning of the effects from advances in information technology in the 1990s and early 2000s. Productivity growth may also be low because of the severity of the Global Financial Crisis, in part because spending for research and development was muted. Some of the factors restraining productivity growth may eventually fade, but it is difficult to ascertain whether the recent subdued performance of productivity represents a new normal”

On labor markets and wage growth:

“The labor market has strengthened further so far this year. Over the first five months of 2017, payroll employment increased 162,000 per month, on average, somewhat slower than the average monthly increase for 2016 but still more than enough to absorb new entrants into the labor force. The unemployment rate fell from 4.7 percent in December to 4.3 percent in May—modestly below the median of FOMC participants’ estimates of its longer-run normal level. Other measures of labor utilization are also consistent with a relatively tight labor market. However, despite the broad-based strength in measures of employment, wage growth has been only modest, possibly held down by the weak pace of productivity growth in recent years.”