FILE - In this July 2, 2014, file photo, Federal Reserve Chair Janet Yellen speaks at the International Monetary Fund in Washington. Yellen testifies to a Senate committee to deliver the Fed's twice-a-year report to Congress on interest-rate policy and the economy on Tuesday, July 15, 2014. (AP Photo/Susan Walsh, File)The Associated Press
After Federal Reserve chair Janet Yellen warned in Congressional testimony on Tuesday that some stock valuations were "stretched", observers were left pondering when a Fed chief had singled out an asset class before. After all, the Fed's mandate is restricted to employment and inflation, not the stock market, making comments on equities rare indeed.
David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates, noted on Wednesday that the last time the Fed made mention of a frothy environment was back in 1997. The target of then-chair Alan Greenspan: The high-yield bond market, and the narrow yield spread over higher quality bonds that suggested a perception of "unrealistically low risk."
As Mr. Rosenberg pointed out, Mr. Greenspan was a little early in his warning, but prescient given what happened in the following year. This makes you wonder if Ms. Yellen is onto something in her warnings on some frothy areas of the market. Investors certainly took note, at least initially, driving down the Russell 2000 index, Nasdaq-listed biotech stocks and various social media stocks.
She also had good things to say about the U.S. banking system and the state of capital spending, which investors took to heart. As Mr. Rosenberg noted, financials rallied 0.7 per cent and industrials also rose.
David Berman