Federal Reserve Chair Janet Yellen gave no indication her plans for continued monetary policy tightening had shifted while acknowledging that some asset prices had become “somewhat rich.”
“We’ve made very clear that we think it will be appropriate to the attainment of our goals to raise interest rates very gradually,” she said Tuesday in London.
In her first public remarks since the U.S. central bank hiked rates on June 14, Yellen said that asset valuations, by some measures “look high, but there’s no certainty about that.”
“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.
Yellen’s comment on asset prices follows remarks earlier on Tuesday by Fed Vice Chairman Stanley Fischer, who said increased valuations could only partly be explained by an improving economic outlook.
Investors are listening to the Fed 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.
Fed officials have been wrestling over how the central bank should react to seemingly conflicting signals about the U.S. economy from unemployment and inflation. Joblessness dropped to 4.3 percent in May, a 16-year low. Yellen and some of her colleagues have called for continued, if slow, tightening because they expect labor market gains will eventually trigger higher wages and overall prices.
On Tuesday, Yellen nodded to concerns among some economists that inflation expectations might be declining.
“What we would worry about is if it looked like inflation expectations were slipping because that could make low inflation become endemic and ingrained. So we certainly want to avoid that,” she said.
She added, however, that different gauges of inflation expectations were providing conflicting signals. “We don’t get a consistent story,” she said.
Actual inflation has not been responding as expected to the long-term decline in unemployment, and the riddle has become more pronounced in recent weeks. A widely tracked year-on-year measure of the underlying inflation trend that excludes food and energy prices slowed to 1.7 percent last month, marking the fourth straight month of declines, according to data released by the U.S. Labor Department.
Responding to a question on financial system stability, Yellen said post-crisis regulatory efforts had made financial institutions much “safer and sounder.”
“Would I say there will never, ever be another financial crisis? Probably, that would be going to far,” she said. “But I do think we’re much safer, and I hope that it will not be in our lifetimes, and I don’t believe it will be.”