Janet Yellen says equity valuations high, warns of 'potential dangers'
On Wednesday, Federal Reserve Chair Janet Yellen said that high equity valuations could pose potential dangers but that stability risks across the US financial system is in check.
Yellen said that she would highlight that generally the equity market valuations at this point are quite high. She said that there are potential dangers there.
While sharing her view on the run-up in stocks, Yellen's opinion was an answer to questions from International Monetary Fund Managing Director Christine Lagarde. Lagarde joined the Fed chief for the opening session of the ‘Finance and Society’ conference there.
Yellen said that they have also seen the compression of spreads on high-yield debt that definitely looks like a reach for yield type of behavior.
While pointing out another potential trouble spot, Yellen mentioned the low long-term interest rates, which could spike as the Fed normalizes its policy, and will cause disruption across the financial system.
She said, “When the Fed decides it's time to begin raising rates, these term premiums could move up and we could see a sharp jump in long-term rates. So we're trying to ... communicate as clearly about our monetary policy so we don't take markets by surprise”.
Yellen expressed her anger at these remarks by saying that she did not see any bubble formation at the moment. She described the risks to financial stability as ‘moderated, not elevated’.
The question and answer session with Lagarde started after the two delivered similar speeches that highlighted the need to continue reining in risk across the banking sector.
While giving remarks, Yellen outlined the contributions of the banking system to society and the economy.
But she didn’t took much time in turning her speech to the distorted system of incentives and weak controls throughout the financial industry that set the stage for the 2008 financial crisis.
Furthermore Lagarde threw a critical eye on the behavior of bankers and the need for change.
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