Fed's Cook issues rare warning on asset prices
2min read Federal Reserve Governor Lisa Cook delivered a speech on Monday with a striking focus on asset class valuations, offering an unusually blunt assessment that has drawn comparisons to Alan Greenspan's famous "irrational exuberance" remarks in 1996. Cook warned that valuations in equity and corporate debt markets are elevated, with risk premia near historical lows. This combination, she noted, suggests that markets are “priced to perfection” and vulnerable to significant declines triggered by economic shocks or shifts in investor sentiment. While her remarks have not yet rattled the market—contrasting with Greenspan's immediate impact—they add a layer of caution to a rally that has pushed major indices to lofty levels.
Cook’s comments are particularly notable because Fed officials typically avoid direct commentary on market valuations, focusing instead on broader economic indicators. Her remarks underscore concerns about the sustainability of current market levels, with metrics such as Robert Shiller’s cyclically adjusted price-to-earnings (CAPE) ratio hovering near levels last seen during the dot-com bubble. Despite these warnings, the S&P 500 has continued its ascent, reflecting investor optimism about technological advancements, particularly in artificial intelligence, and potential deregulation under the incoming Trump administration.
On monetary policy, Cook struck a cautious tone, advocating for a gradual approach to rate cuts. She noted that recent rate reductions—amounting to a full percentage point since September—have significantly reduced the restrictiveness of monetary policy. While inflation has moderated, with core PCE falling to 2.8% in November, Cook emphasized that the path back to the Fed's 2% target could still be uneven. This perspective aligns with the Fed’s strategy to balance inflation control with maintaining a resilient labor market.
Cook’s observations on the labor market were measured. She highlighted improvements in labor market balance, with signs of cooling yet persistent strength. November’s unemployment rate stood at 4.2%, and December’s jobs report is expected to show further moderation in hiring. Cook’s remarks suggest confidence in the Fed’s ability to navigate a “bumpy” disinflation process without derailing employment gains, which remains a central pillar of its dual mandate.
Market reactions to Cook’s speech were subdued, with the S&P 500 reclaiming the 6,000 level and continuing its upward momentum. This muted response suggests that investors may be discounting the immediacy of Cook’s warnings on valuations. However, her commentary on financial stability risks, including those posed by private credit and AI-driven speculative trends, provides a critical lens for assessing potential vulnerabilities in the current rally.
Cook also addressed the broader economic context, acknowledging risks tied to policy uncertainty as the Trump administration prepares to take office. Expectations of tariffs and tax cuts could introduce new variables into the Fed’s decision-making process, complicating its efforts to stabilize inflation and employment. Cook’s cautious approach to monetary policy suggests that the Fed aims to remain flexible in navigating these uncertainties while staying committed to its long-term objectives.
In conclusion, Cook’s rare and direct critique of asset valuations adds a noteworthy dimension to the discourse on market sustainability. While her remarks did not immediately impact markets, they underscore potential vulnerabilities in a landscape characterized by elevated valuations and optimism about technological and policy developments. Coupled with her measured stance on monetary policy, Cook’s speech serves as a reminder of the delicate balancing act facing the Fed as it navigates the evolving economic and financial environment. Investors should remain vigilant, as any deterioration in fundamentals could amplify the risks Cook has highlighted.