“So let me start, Steve [Leisman, CNBC] with the stock market generally. Of course the stock market has gone up a great deal this year and we have in recent months characterized the general level of asset valuations as elevated. What that reflects is simply the assessment that looking at price-earnings ratios and comparable metrics for other assets other than equities we see ratios that are in the high end of historical ranges. And so that’s worth pointing out.
But economists are not great at knowing what appropriate valuations are. We don’t have a terrific record. And the fact that those valuations are high doesn’t mean that they’re necessarily overvalued.
We are in a – I’ve mentioned this in my opening statement and we’ve talked about this repeatedly – likely a low interest rate environment, lower than we’ve had in past decades. If that turns out to be the case, that’s a factor that supports higher valuations.
We’re enjoying solid economic growth with low inflation and the risks in the global economy look more balanced than they have in many years.
So I think what we need to, and are trying to think through, is if there were an adjustment in asset valuations in the stock market, what impact would that have on the economy and would it provoke financial stability concerns.
And, I think when we look at other indicators of financial stability risks, there’s nothing flashing red there or possibly even orange.
We have a much more resilient, stronger banking system and we’re not seeing worrisome buildup in leverage or credit growth at excessive levels. So, this is something that the FOMC [Federal Open Market Committee] pays attention to, but if you ask me is this a significant factor shaping monetary policy now, while it’s on the list of risks it’s not a major factor.”
MK note: Apparently, she disagrees with other members of the FOMC who recently declared their concerns about overvaluation of stocks as revealed in minutes released at the end of November. All of which reminds me of a Stein cartoon drawn specially for USAGOLD just after the 2007-2008 Wall Street implosion.