Federal Reserve Chair Janet Yellen on Wednesday finally conceded what many analysts have been saying for years – the U.S. stock market may be running a little too hot for its own good.
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“I would highlight that equity market valuations at this point generally are quite high,” Yellen said at a conference in Washington, D.C.
But there are caveats, according to Yellen.
“Now they’re not so high when you compare the returns on equities to the returns on safe assets like bonds which are also very low, but there are potential dangers there,” she said.
U.S. stock indexes – the Dow Jones Industrial average, the S&P 500 and the Nasdaq stock market – are all at or near all-time highs, reaching those peaks less than a decade after plummeting during the 2008 financial crisis.
Many economists have suggested stocks have soared as a result of Fed policies that have pumped trillions of dollars of cash into U.S. financial markets in an effort to stave off further damage from the financial crisis.
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So-called easy money policies, including the Fed’s bond buying programs and years of near-zero interest rates, have generated lots of cash and provided an incentive for investors to pour money into stock markets, according to that school of thought.
Yellen has long argued that stocks are not approaching bubble territory, and she maintained that position on Wednesday.
The Fed chief, answering questions from International Monetary Fund Managing Director Christine Lagarde, also addressed the Fed’s ongoing efforts to prepare markets for an interest rate hike.
Yellen said the impact on the global economy from a rate hike could be significant, making all forms of borrowing more expensive.
“We need to be attentive to the possibility that 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 as I’ve repeatedly said, communicate as clearly about our monetary policy so we don’t take markets by surprise,” she said.
In an earlier speech, Yellen outlined the Fed’s ongoing efforts to rein in risk in financial markets, especially in the banking sector, in an effort to prevent another financial crisis.
"A combination of responses to distorted incentives by players throughout the financial system created an environment conducive to a crisis," Yellen said.