Powell's Irrational Exuberance Moment

During a speech in Providence, Rhode Island today, Fed Chair Jerome Powell was asked whether he and his colleagues give any weight to the impact of their monetary policies on financial markets. He responded: "We do look at overall financial conditions, and we ask ourselves whether our policies are affecting financial conditions in a way that is what we're trying to achieve.” Then he opined that "by many measures, for example, equity prices are fairly highly valued." However, he then added that this is "not a time of elevated financial stability risks."

We are inclined to agree with the Fed chair, although he triggered our contrary instincts with that last statement. Financial crises tend to be Black Swans, i.e., events that occur unexpectedly, especially when irrational exuberance is widespread and intensifying. In a December 5, 1996 speech, former Fed Chair Alan Greenspan famously asked, "But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions ...?"