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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