Fed members say they are not worried about stock market surge

The stock market’s seemingly unstoppable rally is drawing notice from Federal Reserve officials.

At their meeting in July, central bank officials discussed whether the rise in equity prices was posing broader financial dangers – and whether the Fed’s accommodative policies were adding to the risk-taking environment.

However, they ultimately concluded that the market rise was based not on speculation but on fundamentals.

“A couple of participants noted that favorable macroeconomic factors provided backing for current equity valuations,” minutes from the meeting stated. “In addition, as recent equity price increases did not seem to stem importantly from greater use of leverage by investors, these increases might not pose appreciable risks to financial stability.”

The assessment is at odds with warnings from some high-profile market veterans.

Hedge fund manager Ray Dalio, bond guru Jeffrey Gundlach and investing legend Howard Marks each have issued cautionary statements about the path of market prices. However, another hedge fund king, David Tepper, also this week said the market was not overvalued.

The S&P 500 has risen nearly 11 percent this year, largely on the back of sentiment for a more business-friendly climate in Washington and consecutive quarters of strong earnings reports. The index is up about 270 percent from its March 2009 lows.

Fed officials added during their July discussion that financial conditions appear stable, with aggressive regulations keeping the banking system sound.

Some members did express concern over commercial real estate lending by smaller banks, and said that “the pace of increase in real estate prices in the multifamily segment and the pattern of the lending and borrowing activities of certain government-sponsored enterprises” could pose stability risks.

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