National Post (National Edition)
'QUITE HIGH'
Yellen warning on stocks drives prices lower.
WASHINGTON • Federal Reserve chairwoman 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 Christine Lagarde, managing director of the International Monetary Fund, at an economics conference.
Coupled with weak economic reports in the morning, her remarks drove stocks broadly lower in Wednesday trading.
Yellen added, however, that the overall risks to financial stability are “moderated, not elevated” and she does not see the hallmarks of any bubbles.
She cited one reason stock prices were high: the meagre returns on safer investments such as bonds because of low interest rates.
“But there are potential dangers there,” Yellen said.
The very low level for shortterm and long-term interest rates represented a risk because rates can move rapidly, she explained.
“We saw this in the case of the taper tantrum in 2013 where there was a very sharp upward movement in rates,” Yellen said.
Yellen said the Fed was mindful of the impacts of its decisions. At the moment, investors are intently watching the Fed for signals of when it will start to raise a key interest rate, which 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 at a time of very 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,” Yellen said.
“But these are things we are of course focusing on very carefully.”