"I would highlight that equity market valuations at this point
generally are quite high," Yellen said. "There are potential dangers
there."
Yellen's view on the run-up in stocks was an answer to questions
from International Monetary Fund Managing Director Christine Lagarde,
who joined the Fed chief for the opening session of the "Finance and
Society" conference here.
"We’ve also seen the compression of spreads on high-yield debt,
which certainly looks like a reach for yield type of behavior,"
Yellen said.
U.S. stocks were trading lower following the comments, building on
earlier declines triggered by weak private job data.
Another potential trouble spot that Yellen pointed out was low
long-term interest rates, which could spike as the Fed normalizes
its policy, causing disruption across the financial system.
“When the Fed decides it’s time to begin raising rates, these term
premiums could move up and we could see a sharp jump in long-term
rates. So we’re trying to ... communicate as clearly about our
monetary policy so we don’t take markets by surprise,” she said.
U.S. Treasuries continued to slide for a ninth straight day on
Wednesday amid a global bond sell-off, with longer-maturity
Treasuries declining the most.
Yellen tempered these remarks by saying that she did not see any
bubbles forming at the moment, and she described risks to financial
stability as "moderated, not elevated."
The question and answer session with Lagarde occurred after the two
delivered similar speeches highlighting the need to continue reining
in risk across the banking sector.
Yellen also noted concerns about potential liquidity problems facing
certain asset-managers should they face a wave of redemptions.
BANKER BEHAVIOR
In her remarks, Yellen outlined the contributions of the banking
system to society and the economy.
But she quickly turned her speech to the distorted system of
incentives and weak controls throughout the financial industry that
set the stage for the 2008 financial crisis.
"A combination of responses to distorted incentives by players
throughout the financial system created an environment conducive to
a crisis," Yellen said.
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Lagarde also cast a critical eye on the behavior of bankers and the
need for change.
“What is needed is a culture that induces bankers to do the right
thing even if nobody is watching,” Lagarde said in her prepared
remarks.
Lagarde noted that more women leaders would help improve governance
in the financial system, a comment that resonated in the event's
crowd and waiting speakers, which featured some of the world's most
powerful women in finance.
Lagarde also said bank compensation incentives need to change so as
to not reward excessive risk-taking.
Yellen said that regulators were too focused on individual firms
before the crisis, and not focused enough on the safety of the
entire financial system.
Policy makers, including the Fed, "remain watchful for areas in need
of further action or in which the steps taken to date need to be
adjusted," she said.
When Lagarde asked Yellen about shadow banking, the Fed chief said
it was an area the Fed was closely watching and one that needed
"appropriate regulation."
Yellen did not comment on monetary policy in her remarks.
(Editing by Meredith Mazzilli)
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