Fed Watch: Powell Sounds Alarm on "Excessive" Valuations

Federal Reserve Chair Jerome Powell has issued a rare and direct warning regarding financial stability, stating that equity prices appear “fairly highly valued.” This comment, delivered ahead of the market close for 2025, has introduced a note of caution into risk sentiment for the new year.

The Valuation Warning

Powells remarks align with the Shiller P/E Ratio (CAPE), which has surged to 40.74—a level historically associated with market bubbles, surpassing 1929 levels and approaching the 2000 Dot-Com peak.

While the Feds dual mandate focuses on inflation and employment, explicit comments on asset prices usually signal a desire to tighten financial conditions without necessarily raising rates.

Impact on FX and Equities

• Risk Appetite: Powell's rhetoric serves as a headwind for high-beta currencies (AUD, NZD) and equity indices.
• FOMC Minutes: Investors will scour the upcoming minutes for consensus on whether “financial exuberance” will delay rate cuts in 2026. If the committee shares Powell's concern, the USD could catch a bid on hawkish repricing.