US Federal Reserve Chair Janet Yellen on Wednesday described stock market valuations as high and said the central bank was carefully monitoring their impact on financial stability.
“I would highlight that equity market valuations at this point generally are quite high,” Yellen said in conversation with IMF managing director Christine Lagarde at an economics conference.
Coupled with weak economic reports in the morning, her remarks drove stocks broadly lower in Wednesday trading in New York. The Dow Jones Industrial Average dropped by 0.5 percent, the Standard & Poor’s 500 index fell by 0.5 percent and the NASDAQ composite declined by 0.4 percent.
Photo: Bloomberg
In Asia trading yesterday, Tokyo stocks fell by 1.23 percent, Sydney fell by 0.81 percent, Seoul lost 0.65 percent and Hong Kong slipped by 1.3 percent. Shanghai fell by 2.77 percent.
However, Yellen said that the overall risks to financial stability are “moderated, not elevated,” and that she does not see the hallmarks of any bubbles.
Meager returns on safer investments such as bonds, because of low interest rates, are one reason for high stock prices, she said.
However, “there are potential dangers there,” Yellen said.
The very low level for short-term and long-term interest rates represented a risk because rates can move rapidly, she added.
“We saw this in the case of the taper tantrum in 2013, where there was a very sharp upward movement in rates,” Yellen said.
The “taper tantrum” occurred when global financial markets were rocked by comments then-Fed chairman Ben Bernanke made in June 2013.
He discussed the possibility that later in the year, the Fed would begin to trim the purchases it was making of long-term bonds, a program designed to keep interest rates low to spur growth.
The Fed is mindful of the impacts of its decisions, Yellen said.
Investors are intently watching the Fed for signals of when it would start raising a key interest rate that it has kept at a record low, near zero, since December 2008.
In her most extensive comments on financial stability, Yellen also discussed the potential stability risks facing banks, insurance companies and pension funds amid low interest rates.
She described the risk as “moderated,” because the Fed is not seeing a broad rise in corporate or household debt, or any rapid jump in debt levels.
“I would call those things kind of the hallmark of a financial bubble or the precursors of a financial crisis, but these are things we are of course focusing on very carefully,” Yellen said.
At the conference hosted by the Institute for New Economic Thinking, Yellen and Lagarde posed questions to each other following their prepared remarks.
Yellen told Lagarde that she the financial system was now better equipped to guard against a repeat of the 2008 financial crisis.
“I think there was a great deal we missed before [the 2008] crisis,” Yellen said. “I think we are better-positioned now and have better tools.”
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