How to Read Market Reactions to the Janet Yellen Effect

Yesterday, stock and bond markets dipped on the news that Federal Reserve Chair Janet Yellen said that “equity market valuations at this point generally are quite high.” She further noted, “There are potential dangers there.”

She did not go so far as to say that she saw any market bubble. That would be akin to admitting that something drastic – and well, more immediate – would be required to address said bubble. Instead, she said, “The risks to financial stability are moderate, not elevated at this time.“

Yellen has parlayed this theme several times before, with slightly different wording. After each utterance, the markets have reacted mostly the same way – dropping initially, before rebounding quickly to slightly lower levels than before their decline.