Central Banks

Wednesday, January 29, 2020 - 15:20

MNI TRANSCRIPT: Powell on Financial Stability Vulnerability


WASHINGTON (MNI) - The following is the portion of a transcript from Federal Reserve Chairman Jerome Powell's press conference after the FOMC meeting Wednesday:

Q: I wanted to ask you about the stock market by historical comparisons as you note valuations are considerably high and I just wonder how much discussion and concern you and your colleagues have done that and what risks do you see for the economy?

A: So we look at a very broad range of financial conditions. There isn't any one financial condition that we look at, and when we look at financial conditions, what matters for the real economy is substantial changes in or material changes in financial conditions that are sustained over a period of time. If I can -- maybe I'll answer that in the context of our overall financial stability framework, that's one way to look at it. So when we look at financial stability, we look at really four pillars to that. The first of which is leverage in the financial system and that is at a comfortable level, our particular large banks have high levels of capital. The second is financial sector divided to households and businesses. Household debt to GDP is coming down since the financial crisis, it's not moving up, it's at low levels compared to what it was before the crisis, so not every household in the aggregate household debt is in a good place, a very good place. Business debt is moving up. We've been calling that out for more than a year, substantially more than a year, and it's something that we're focused on and taken appropriate measures and are monitoring carefully, but we think it's not something that will threaten financial stability but be more an amplifier. The other is asset prices, getting to your question. We do see asset valuations as being somewhat elevated. I do see it somewhat elevated. If you look at risk spreads they're narrow and PEs are high. The way I think about -- a good way or one way to think about equity prices though is what's the premium you're getting paid to own equities rather than risk-free debt? And that's also at fairly low level, but not extremely low level, so valuations are high but not at extremes. The final factor is funding risk or big financial institutions and other players in the financial system funded with stable funding or is there a lot of run risk? And the answer is very stable funding for the most part. So if you look at overall what you see, in my view, is vulnerabilities to the financial -- to financial stability are moderate overall.

--MNI Washington Bureau; +86 (10) 8532-5998; email: ryan.hauser@marketnews.com

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