Trio of Fed Speakers Warn on Valuations With Eyes on Tightening
(Bloomberg) -- When a trio of Federal Reserve officials delivered remarks on Tuesday, the state of U.S. financial markets came in for a little bit of criticism.
When all was said and done, U.S. equities sank the most in six weeks, yields on 10-year Treasuries rose and the dollar weakened to the lowest level versus the euro in 10 months.
Fed Chair Janet Yellen said that asset valuations, by some measures “look high, but there’s no certainty about that.” Earlier, San Francisco Fed President John Williams said the stock market "seems to be running very much on fumes" and that he was "somewhat concerned about the complacency in the market." Fed Vice-Chair Stanley Fischer suggested that there had been a "notable uptick" in risk appetite that propelled valuation ratios to very elevated levels.
The Fed officials’ comments came amid a torrent of events that buffeted financial markets Tuesday, from an IMF cut to its U.S. growth forecast, Google suffering the biggest ever EU antitrust fine, a fresh blow to the Republican agenda in Washington and a global cyberattack. Still, selling in U.S shares accelerated around 1:30 p.m. as Yellen delivered her assessment of the market since the central bank raised interest rates June 14.
“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,” Yellen said during a speech in London.
Investors are on guard for signs of a change in its economic outlook that could delay rate increases or when it will begin shrinking its $4.5 trillion balance sheet. Yellen said the Fed’s plans for the balance sheet were “well understood” by financial markets. Officials have said they intend to begin allowing the portfolio to roll off this year.
In the end, Yellen made it pretty apparent that that her plans for continued monetary policy tightening haven’t shifted.
“We’ve made very clear that we think it will be appropriate to the attainment of our goals to raise interest rates very gradually,” Yellen said.