Share prices 'quite high', says Yellen

Federal Reserve chairwoman Janet Yellen said valuations in the stock market were "quite high" - even if overall risks to financial stability remain contained.

Speaking at question-and-answer session in Washington, Ms Yellen also said there was a risk of a "sharp jump" in longer-term bond yields when the Federal Reserve raises short-term rates, which was why the central bank is going out of the way to communicate clearly to markets.

The Fed chairwoman struck a sanguine note about overall risks in the financial sector, saying these were "not elevated at this point". In particular, there was no sign of a broad-based pickup in indebtedness, credit growth or maturity transformation, which could serve as hallmarks of potential bubbles.

However Ms Yellen said she would "highlight that equity-market valuations at this point generally are quite high," when asked about possible risks. "They are not so high when you compare the returns on equities to the returns on safe assets like bonds, which are also very low. But there are potential dangers there."

Ms Yellen also pointed to very low long-term interest rates and the risk that depressed term premiums could suddenly shoot up - something that was seen in the so-called taper tantrum of 2013.

"We need to be attentive - and are - to the possibility that when the Fed decides it is time to begin raising rates these term premiums could move up, and we could see a sharp jump in long-term rates."

The Fed was as a result trying to communicate clearly to ensure it did not take markets by surprise, she said.

Ms Yellen acknowledged the need to be watchful for risks to stability during long periods of low interest rates, such as the one seen in major economies including the US in recent years.

However she said the Fed's near-zero short-term rates had had a favourable effect by supporting job creation and economic growth and helping households pay down debt. "We are in a much sounder position," she said.

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