This feels like a much better proxy for overall American mood than the nominal indices.

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The Fed has the authority to require banks to add to their capital temporarily if it sees a risk that excess credit growth threatens financial stability. This Countercyclical Capital Buffer (CCyB) is now zero. Do you think it should be raised?

Yellen: I would urge the Federal Reserve Board to carefully consider raising the CCyB at this time.  Some key financial indicators, such as the ratio of credit to GDP, do not currently signal growing financial stability risk; and the Board’s recent Financial Stability Report assessed vulnerabilities overall as moderate.  But I am concerned that asset valuations, including in sectors such as commercial real estate, are elevated and I see dangers relating to the large volume leveraged lending where there’s been a significant weakening of underwriting standards.  The high debt burdens of riskier nonfinancial corporations could deepen the next downturn and impose losses on the banking system that would intensify a downturn by restricting the supply of credit.   Raising the countercyclical capital buffer now would improve the resilience of the banking system, enabling it to better weather a future downturn.  Extra capital can be released when stresses in the economy and the banking system emerge.

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