July 30 (Bloomberg) — Former Federal Reserve Chairman Alan Greenspan said equity markets will see a decline at some point after surging for the past several years.
"The stock market has recovered so sharply for so long, you have to assume somewhere along the line we will get a significant correction," Greenspan, 88, said today in an interview on Bloomberg Television's "In the Loop" with Betty Liu. "Where that is, I do not know."
While Greenspan said he didn't think equities were "grossly overpriced," his comments come amid growing concern that interest rates near record lows are creating asset-price bubbles. Fed Chair Janet Yellen said in July 16 congressional testimony that while she saw signs of high valuations in some markets, prices overall — including for U.S. stocks — weren't out of line with historical norms.
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The Standard & Poor's 500 Index has gained 17 percent in the past year and almost tripled since March 9, 2009, its low point during the financial crisis. The benchmark index was little changed at 1,970.77 in New York at 10:05 a.m.
Forty-seven percent of financial professionals said the equity market is close to unsustainable levels while 14 percent already saw an asset-price bubble, according to the quarterly Bloomberg Global Poll conducted July 15-16.
Greenspan said he measures stock valuations by looking at their rate of return over sovereign debt yields.
'Exceptionally High'
"I would say that's closer to normal after being exceptionally high, and that means we are not yet in a stressful position," Greenspan said. He served as chairman of the Fed for more than 18 years, stepping down in 2006.
Yellen said in semi-annual testimony that the Fed must press on with monetary stimulus as "significant slack" remains in labor markets and inflation is still below the Fed's goal. The Federal Open Market Committee is scheduled to release a policy statement at 2 p.m. today in Washington.
Even if Yellen agreed that bubbles were emerging, she's expressed doubt monetary policy can do much to stop them.
"Monetary policy faces significant limitations as a tool to promote financial stability," Yellen said July 2 at the International Monetary Fund in Washington. "A macroprudential approach to supervision and regulation needs to play the primary role."
In testimony before the House Financial Services Committee, Yellen said valuations "appeared stretched" in some sectors. She identified lower-rated corporate debt as an area the Fed is closely monitoring.
"The committee recognizes that low interest rates may provide incentives for some investors to reach for yield," she said. "My general assessment at this point is that threats to financial stability are at a moderate level and not a very high level."
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