US Federal Reserve chief Janet Yellen warned Wednesday of potential dangers from high equity valuations but said that risks to financial stability remained generally in check.
“I would highlight that equity market valuations at this point generally are quite high,” Yellen said at a forum in Washington. “There are potential dangers there.”
Another potential trouble spot is low long-term interest rates, which could spike as the Fed normalizes its policy, causing disruption across the financial system, Reuters cited the Fed chief as saying.
“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 said.
Yellen tempered her remarks by saying that she did not see any bubbles forming at the moment, and described risks to financial stability as “moderated, not elevated.”
In other comments, the Fed chief pointed to a distorted system of incentives and weak controls throughout the financial industry that set the stage for the 2008 financial crisis.
Policy makers must “remain watchful for areas in need of further action or in which the steps taken to date need to be adjusted,” Yellen said.
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