Stocks with record highs and bond yields not far from their all-time lows tell two different stories, but Federal Reserve Chairman Jerome Powell said he wasn’t worried about inequality.
In fact, the central bank chief said during a press conference Wednesday that the low interest rates are helping to justify a rise in stocks that has remained largely unabated since the pandemic lows in March.
“I’d say the broad picture of financial stability is mixed,” Powell responded to a CNBC question on post-meeting media questions and answers. “Asset prices are a bit high on that metric, I think, but overall the picture is mixed. You don’t have many red flags.”
The S&P 500 is up 65% from its March 23 low. The index trades at 22 times future earnings, well above its 10-year average of 15.6.
At the same time, the 10-year Treasury bill, which serves as a benchmark for consumer lending rates as well as the expected level of economic growth, remains unchanged with a yield of 0.92%. That is well above the March low, but also well below what the market saw before the pandemic.
Such a dichotomy could indicate increased asset prices, but Powell said there is more to the picture.
“Admittedly (value for money) are high,” he said. “But that may not be as relevant in a world where we believe the 10-year treasury will be lower than it was in the past.”
Low interest rates have helped keep borrowing costs cheap for businesses, which could otherwise have gotten into trouble as economic activity has slowed so much due to the spread of the coronavirus.
Powell noted that corporate leverage is high but “your interest payments are low. Defaults and downgrades have decreased since the beginning of the year.”
He said the Fed is continuously monitoring asset price levels but sees no threat yet.
“We are being held accountable for what we have seen and missed, so we are working very hard on it,” he said.
The Fed kept its key interest rate close to zero after the meeting. In addition, the company pledged to continue buying bonds worth at least $ 120 billion a month until both goals of full employment and sustained inflation of 2% are met.
