On Tuesday, Janet Yellen seemed to come out with an unusually specific warning about overstretched valuations in social media, biotech and other high-flying stocks.
The remarks came in Yellen’s semi-annual monetary policy report to Congress.
However the concerns weren’t mentioned in her prepared Senate remarks. Nor were they explicitly addressed in her Q&As with the Senate and the House.
On its face one would not hesitate to conflate Yellen’s opinion with the Fed.
But Cornerstone Macro’s Roberto Perli argues the absence of discussion about those sectors by Yellen directly is a sign this issue is not on her radar. While she ostensibly signs off on the report, it’s written by her staff, with very little input from her or the Board. In a note released yesterday he writes:
I find it significant that both in her written testimony and in the Q&A Yellen did not refer to equity valuations as a source of concern. She limited herself to saying that valuations appear stretched “in some sectors, such as lower-rated corporate debt.” That’s a much milder statement, which has been made before by people inside and outside the Fed.
Moreover, in the past, as well as again today, Yellen made it very clear that the Fed is very unlikely to raise rates to address what it sees as financial imbalances. The Fed prefers to use so-called macroprudential tools for that purpose. It is unclear what macroprudential tools Yellen might have to bring down the valuation of some specific equity subsectors. So, even if it were her firm opinion (and again, I don’t think it is) that some equity sectors are overvalued, there isn’t much that she could do to change that as long as she is not willing to raise interest rates to achieve the purpose.
As a result, Perli says, he does believe the Fed will react at all to market valuations of any kind, much less ones in specific sectors. “I would be inclined to treat the controversial sentence more as a rhetorical sidenote than a firm policy position, let alone one that the Fed has the power or willingness to enforce,” he writes.