Fed Chair Janet Yellen said current high stock market valuations do not mean the market is overvalued or that a sell-off would pose much risk to the economy or financial system.
During her final press briefing on Wednesday, Yellen said when the Fed warns that asset levels are elevated, it means metrics, such as the price-to-earnings ratio for stocks, are on the high end of historical ranges.
“But economists are not great knowing what appropriate valuations are,” she said. “We don’t have a terrific record. And the fact that those valuations are high doesn’t mean that they are necessarily overvalued.”
Yellen said the low-rate environment is supportive of higher valuations. “We are enjoying solid economic growth with low inflation. And the risks to the global economy look more balanced than they have in many years,” she said.
The Fed assesses whether there would be an economic impact or financial stability concerns if the stock market were to sell off. “I think when we look at other indicators of financial stability risks, there is nothing flashing red there or possibly even orange,” she said.
She said the banking system is more resilient than in the past, and there is not a “worrisome buildup in leverage or credit growth at excessive levels.”
“This is something that the FOMC pays attention to,” she said, referring to the Federal Open Market Committee. “But if you ask me: ‘Is this a significant factor shaping monetary policy now?’ Well, it’s on the list of risks. It’s not a major factor.”