July 16 (Reuters) – Markets aren’t afraid of Janet Yellen,
but you might want to be.
Yellen and her colleagues at the Federal Reserve Board took
unusually frank aim at frothy valuations in social media and
biotech shares, as well as at parts of the debt markets, in
testimony before Congress this week. The market reaction
amounted to a politely stifled yawn.
This is both telling, and worrying.
That’s because Yellen herself is putting great stress on
macroprudential policies as a primary means of defense against
bubbles. Well, jawboning the market is an important part of
macroprudential policy and we can already see that is not
That’s bullish news for risk assets in the short term.
Markets are not wrong to have rallied over the last two days.
Longer term the risks are skewed a bit more than previously
toward the ugly end of the probability tail.
Yellen’s critique, perhaps the most remarkable by a Fed
chair since Alan Greenspan’s “irrational exuberance” speech in
1996, came in two parts.