Yellen, Janet

In addition to our monetary policy responsibilities, the Federal Reserve works to promote financial stability, focusing on identifying and monitoring vulnerabilities in the financial system and taking actions to reduce them. In this regard, the committee recognizes that an extended period of low interest rates has the potential induce investors to reach for yield by taking on increased leverage, duration risk, or credit risk. Some reach for yield behavior may be evident, for example, in the lower-rated corporate debt markets where issuance of syndicated leverage loans and high-yield bonds has continued to expand briskly, spreads have continued to narrow, and underwriting standards have loosened further. While some financial intermediaries have increased their exposure to duration and credit risk recently, these increases appear modest to date, particularly at the largest banks and life insurers. More generally, valuations for the equity market as a whole and other broad categories of assets, such as residential real estate, remain within historical norms. In addition, bank holding companies have improved their liquidity positions and raised capital ratios to levels significantly higher than prior to the financial crisis. For the financial sector more broadly, leverage remains subdued and measures of short-term funding continue to be far below levels seen before the financial crisis. ... So, we can't detect within any certainty whether or not there's an asset bubble. But we can look at a variety of different valuation metrics akin to price-earnings ratios and the stock market; a variety of ways of measuring those. And we can look to see how valuations in that sense moved out of historically normal ranges. And I would say for the equity market as a whole, the answer is that valuations are in historically normal ranges. Now, interest rates, long-term interest rates are low and that is one of the factors that feeds into equity market valuations. So, there is that linkage. So, there are pockets where we could potentially see misvaluations in smaller-cap stocks, but overall those broad metrics don't suggest that we are in obviously bubble territory. But, you know, we don't have targets for equity prices and can't -- can't detect if we're in a bubble with -- with certainty.