U.S. equity "melt-up" puts Fed in an awkward position:
U.S. equity "melt-up" puts Fed in an awkward position: while the Fed doesn't target asset bubbles (wink), it has had a hand in inflating them in the past. This has spawned some questions about a "surprise inter-meeting hike" from the Fed or a 50 bp move, just to provide a reality check for investors, despite the Fed all but guaranteeing a "gradual pace." Former Fed Governor Krozner was asked about that on CNBC and a BofA research report says it's a hot topic as well. Dallas Fed's Kaplan argued for 3-hikes earlier and NY's Dudley overnight said the tax cuts risk an unsustainable fiscal path and economic overheating, posing challenges for the Fed. The S&P 500 hasn't looked back since the last hike mid-December and is fast approaching 2.8k from 2.66k at the time for a 22.6% gain over the past year. Both the Dow and NASDAQ are approaching 30% windfalls on a 1-year basis. Having just cleared the 25k psych target, the Dow is already a day or two away from 26k at this torrid pace. Between the wealth effects and increased growth, the tax cuts could well push GDP growth north of a 3.0% average for the next two years. At the very least, the Powell Fed will be very sensitive to any changes in wage growth and inflation, should they prove faster than anticipated.