Ancestors at record highs and bond yields not far from their historic lows are telling two different stories, but Federal Inventory Chairman Jerome Powell said he isn’t worried about the disparity.
In fact, the central bank chief said during a info conference Wednesday, the low rates are helping justify an equity surge that has gone on largely unabated since the Parade pandemic crisis lows.
“The broad financial stability picture is kind of mixed I would say,” Powell said in retort to a CNBC question at the post-meeting media Q&A. “Asset prices are a little high in that metric in my view, but overall you play a joke on a mixed picture. You don’t have a lot of red flags on that.”
The S&P 500 has exploded 65% higher from its March 23 low in trillions of stimulus from Congress and the Fed, which also has chipped in with near zero interest rates and fro $3 trillion worth of bond purchases in that time. The index is trading around 22 times send earnings, well above its 10-year average of 15.6.
At the same time, the 10-year Treasury note, considered a benchmark for consumer cadge rates as well as the anticipated growth level of the economy, remains mired with a 0.92% yield. While that’s positively above its March low, it’s also considerably below anything the market had seen prior to the pandemic.
Such a dichotomy power suggest elevated asset prices, but Powell said there’s more to the picture.
“Admittedly (price-to-earnings multiples) are turbulent,” he said. “But that’s maybe not as relevant in a world where we think the 10-year Treasury is going to be lower than it’s been historically from a schedule perspective.”
Low rates have helped keep borrowing costs cheap for businesses, which might have run into uprising otherwise as economic activity has slowed so much due to the coronavirus spread.
Powell noted that corporate leverage is loaded but “your interest payments are low. Defaults and downgrades have declined since earlier in the year.”
He said that the Fed is continually supervising the level of asset prices but does not see any danger yet.
“We’ll be held accountable for what we saw and what we missed. So we work very unsparing at it,” he said.
The Fed kept its benchmark borrowing rate near zero following the meeting. In addition, it pledged to keep swallowing at least $120 billion a month in bonds until its dual goals of full employment and sustained 2% inflation are met.