The appointment of the next chair of the US Federal Reserve is imminent, with the Wall Street Journal suggesting Federal Reserve governor Jerome Powell as President Trump's nomination as he continues to remove all Obama appointees.

Powell's dovish bias makes him a "market friendly" selection, given his likely path of slow interest rate normalisation. Under Powell's watch, we expect the Fed to continue to slowly shrink its balance sheet and increase interest rates, but tied closely to the rate of improvement in general economic conditions.

While President Trump revels in the next Fed Chair guessing game, US equity markets continue to hit new highs almost daily, seemingly driven by the combination of strong earnings results from tech giants, tax policy discussion and speculation about an incoming dovish Fed chair.

With Alan Greenspan's classic phrase of "irrational exuberance" still fresh in our minds, correction risks continue to intensify.

Strong top-line revenue growth continues to feature for the big US tech stocks, in stark comparison to the generally tepid revenue growth reported by the big non-resource stocks in Australia. The relative underperformance of the Australian equity market continues to disappoint, despite some recent strength.

International investors are in no hurry to pour money into the Australian market as domestic earnings growth prospects are uninspiring, the Australian dollar appears overvalued and better investment opportunities lay elsewhere.

As Peter Warnes noted in his Overview of 19 September 2017, the "steady as she goes" approach to interest rates could force the Fed to play catch up in the future, eventually applying tougher and less palatable monetary policy tightening.

The most favoured approach of kicking the can down the road continues, but uncertainty surrounding US corporate tax rate cuts could derail market confidence as talk now moves to staggered reductions. Then again, these markets don't seem to want to price risk anymore.

The Federal Open Markets Committee (FOMC) concluded its two-day monetary policy meeting on Wednesday, and as expected, no change was made to the US federal funds target rate of 1.0 per cent to 1.25 per cent.

Futures data from the CME Group indicates a likely 0.25 per cent funds rate increase when the FOMC next meets in December, with up to two interest rate increases likely during 2018 as the US economy continues to strengthen.

A broad strengthening of key economic activity supports the long and arduous quantitative easing, or QE, unwind process recently started by the Fed.

Improving GDP growth, low unemployment, a modest pick-up in inflation and healthy corporate profit growth are encouraging signs.

Inflation long remained stubbornly below the Federal Reserve's 2 per cent target--a "mystery" that both potential nominee Powell and current chair Yellen have acknowledged--but has recently inched back towards normal levels.

Consumer sentiment in October hit a 13-year high and US long-term interest rates are starting to increase, with the key 10-year bond rate up to 2.37 per cent, providing a signal that US interest rates are on the way up.

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David Ellis is Morningstar's head of Australian banking research, Australia and New Zealand. Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

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