Dudley, William

MCKEE: Over the next five years, two of your researchers recently published a paper suggesting investors can expect abnormally high excess returns on the S&P. Do you agree with their conclusion?

DUDLEY: I learned not to follow forecasts of the stock market.

MCKEE: They base that on the current equity risk premium, which was 5.4 percent as of December, a record high. Does that concern you?

DUDLEY: Well, the equity risk premium is as high as it is because, one, PE ratios aren't that high. So if we take the price-earnings ratio of the stock market, it's around 16, 17. So you flip that to get the E-to-P ratio. It's around 6 percent. And you compared that to real interest rates. TIPS yields are negative. So that equity risk premium, that difference between the two is very, very wide. So that would argue that the stock market isn't grossly overvalued, but there are other ways of looking at it.

If you talk to Bob Shiller, who's a very respected academic who's looked at the stock market, you look at the stock market relative to the trailing 10-year earnings, the stock market actually looks quite expensive. So it really depends on what framework you use to evaluate the stock market.