Yellen should stop warning of bubbles and normalize policy says Paulsen

Janet Yellen took to Capitol Hill again this week to tell Congress what the Federal Reserve is up to. Yahoo Finance asked Wells Capital Management’s Jim Paulsen what, if anything we may have learned from Yellen’s time there.

“You get a sense that the Federal Reserve as a whole entity is moving a little closer every day to getting more and more hawkish,” he notes.

But it was Yellen weighing in on the stock market that Paulsen found most interesting. “Equity valuations of smaller firms as well as social media and biotechnology firms appear to be stretched,” Yellen told the Senate Banking Committee Tuesday.

Her comments reminded Paulsen of similar testimony given by former Fed Chair Alan Greenspan. “The last time we got the irrational exuberance call from a Fed Chairman,” Paulsen said, “I think was in December of 1996 and the market was probably around 700 on the S&P 500 (^GSPC) and it doubled over the next four years.”

Whether or not the market doubles by July of 2018 remains to be seen of course but at least in the short term Paulsen really doesn’t think Yellen’s comments will do much for the market “beyond the headline trader volatility that’s created by Fed comments. I still think Wall Street’s gonna be more dictated, just like the Fed at the end of the day, by what happens on Main Street.”

Still, Yellen’s comments about social media and biotech, essentially suggesting a sort of bubble in those industries, managed to ruffle Paulsen’s feathers a bit.

“If there is a bubble generated you’d have to say the Federal Reserve with their massive zero interest rate, $3.5 trillion excess reserve policy is part and parcel the foundation for any bubble creation...rather than warning us they should normalize policy."

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