FOMC minutes show Yellen is no longer convinced that low inflation is transitory. Other members mention bubble concerns.

Minutes of the FOMC Oct. 31-Nov. 1 meeting reflect concern inflation could stay below target longer than expected. The minutes also show a concern over bubbles.

Inflation or not, the Wall Street Journal reports Fed on Track for December Rate Rise, but Inflation Worries Persist.

Federal Reserve officials said at their latest meeting they likely would raise short-term interest rates “in the near term” because of a strengthening economy, although several said their support for the move would hinge on whether they see inflation picking up.

With three weeks to go until the Fed’s final scheduled gathering of 2017, the minutes of the Fed’s last meeting reinforced market expectations that a quarter-percentage-point rate increase is imminent. The market for federal-funds futures contracts, where traders bet on the path of interest rates, suggested a 100% probability of a rate increase at the Dec. 12-13 meeting, according to CME Group.

Yet minutes of the Oct. 31-Nov. 1 meeting, released Wednesday with the usual three-week lag, indicated that officials thought persistently weak inflation could stay below their 2% annual target for longer than many expected, raising questions about the pace of rate increases next year.

FOMC Minutes

Let’s dive straight into the FOMC Minutes for more details (Emphasis mine).

Asset Valuation Discussion

The staff continued to judge that the overall vulnerabilities were moderate: Asset valuation pressures across markets were judged to have increased slightly, on balance, since the previous assessment in July and to have remained elevated; leverage in the nonfinancial sector stayed moderate; and, in the financial sector, leverage and vulnerabilities from maturity and liquidity transformation continued to be low.

In their comments regarding financial markets, participants generally judged that financial conditions remained accommodative despite the recent increases in the exchange value of the dollar and Treasury yields. In light of elevated asset valuations and low financial market volatility, several participants expressed concerns about a potential buildup of financial imbalances. They worried that a sharp reversal in asset prices could have damaging effects on the economy. It was noted, however, that elevated asset prices could be partly explained by a low neutral rate of interest. It was also observed that regulatory changes had contributed to an appreciable strengthening of capital and liquidity positions in the financial sector over recent years, increasing the resilience of the financial system to potential reversals in valuations.

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