Are equities overvalued, so that the economy is threatened with an asset market bubble? This is perhaps the most-asked question I get, so I thought I would preempt you and answer this one directly – though you may decide that I chose to entertain this question! Equity prices have increased enormously over the past four years, to levels that challenge previous valuation standards.
Let me make clear at the outset that I honestly do not know whether or not equities are fairly valued or overvalued. I have nothing to share with you about this question. What I do want to share with you is how the equity market fits into my thinking about monetary policy.