Noting that she is "looking very closely at inflation," The Fed's Lael Brainard continued the recent trend of warnings from Fed speakers by noting "asset valuations do look a bit stretched," which seemed to take some of the exuberance out of stocks...
Asset valuations historically aren't "way out of line, but elevated I would say, relative to historical averages," Federal Reserve Governor Lael Brainard says in response to audience question at event in Cambridge, Massachusetts.
“Normally, stretched asset valuations in themselves are something that you would monitor,” she says
“Volatility has been exceptionally low -- both realized and implied -- and that’s something that also I’ve been sort of looking at and I think trying to better understand what the underlying dynamics are there”
“When you see financial imbalances turning into something more systemic, you usually have them coupled with growing maturity mismatches or building leverage. And that connection is something that I’m intensely focused on, and I think we have good analysis on that. That’s an area that just hasn’t really been flashing yellow, for the most part.”
And stocks briefly reacted...
Brainard adds to the list of Fed worriers, as we detailed previously...
If there was any confusion why the Fed intends to keep hiking rates, even in the face of negative economic data and disappearing inflation, it was put to rest over the past 2 days when not one, not two , not three, but four Fed speakers, including the three most important ones, made it clear that the Fed's only intention at this point is to burst the asset bubble.
First there was SF Fed president John Williams who said that "there seems to be a priced-to-perfection attitude out there” and that the stock market rally "still seems to be running very much on fumes." Speaking to Australian TV, Williams added that "we are seeing some reach for yield, and some, maybe, excess risk-taking in the financial system with very low rates. As we move interest rates back to more-normal, I think that that will, people will pull back on that,
Then it was Fed vice chairman Stan Fischer's turn, who while somewhat more diplomatic, delivered the same message:
"the increase in prices of risky assets in most asset markets over the past six months points to a notable uptick in risk appetites.... Measures of earnings strength, such as the return on assets, continue to approach pre-crisis levels at most banks, although with interest rates being so low, the return on assets might be expected to have declined relative to their pre-crisis levels--and that fact is also a cause for concern."
Fischer then also said that the corporate sector is "notably leveraged", that it would be foolish to think that all risks have been eliminated, and called for "close monitoring" of rising risk appetites.
All this followed the statement by Bill Dudley, who many perceive as the Fed's shadow chairman, who yesterday warned that rates will keep rising as long as financial conditions remain loose:
"when financial conditions tighten sharply, this may mean that monetary policy may need to be tightened by less or even loosened. On the other hand, when financial conditions ease—as has been the case recently—this can provide additional impetus for the decision to continue to remove monetary policy accommodation."
And finally, it was Yellen herself, who speaking in London acknowledged that some asset prices had become “somewhat rich" although like Fischer, she hedged that prices are fine... if only assumes record low rates in perpetuity:
“Asset valuations are somewhat rich if you use some traditional metrics like price earnings ratios, but I wouldn’t try to comment on appropriate valuations, and those ratios ought to depend on long-term interest rates,” she said.