6 Words From Now-Former Fed Chair Jerome Powell That Will Echo Through Wall Street for Years to Come

You might not realize it, but you've just borne witness to history. Yesterday, May 15, marked the final day of Jerome Powell's two-term tenure as Fed chair and the beginning of Kevin Warsh's first term as the head of the Federal Reserve. In over 110 years, there have been only 17 Fed chairs, including Warsh.

But just because Powell's time as Fed chair is up (he's chosen to remain on the Board of Governors to fulfill the remainder of his 14-year term), it doesn't mean his actions and opinions won't continue to echo on Wall Street and potentially impact the Dow Jones Industrial Average (DJINDICES: ^DJI), S&P 500 (SNPINDEX: ^GSPC), and Nasdaq Composite (NASDAQINDEX: ^IXIC) for years to come.

Jerome Powell participating in a discussion. Image source: Official Federal Reserve Photo.

Powell's six-word warning to Wall Street shouldn't be ignored

Most investors are likely to remember former Fed Chair Powell's contentious final year, given the public feud between him and President Donald Trump concerning interest rates.

Trump vocally criticized Powell and other members of the Federal Open Market Committee (FOMC) for not aggressively cutting interest rates to 1% or lower. The FOMC is the 12-person body, including the Fed chair, responsible for setting the nation's monetary policy.

Meanwhile, Powell often pointed to elevated inflation caused by President Trump's tariffs and/or the Iran war as reasons why the FOMC wasn't in a position to cut rates further. Trump and Powell throwing each other under the bus became commonplace.

But it's not Jerome Powell's public spat with Trump that will be remembered long after his now-ended term as head of the Federal Reserve. It'll be the ultra-rare commentary he offered in September on equity valuations.

Typically, sitting Fed chairs don't discuss the stock market or valuations. The job of the FOMC is to uphold the dual mandate (price stability and maximum employment) and allow active market participants to determine the other variables. However, rare instances where a Fed chair has interjected their opinion on equity valuations shouldn't be ignored.

In December 1996, Fed Chair Alan Greenspan delivered his now-famous "irrational exuberance" speech at the American Enterprise Institute. He outlined the mechanics behind a rapid rise in stock valuations following the advent and proliferation of the internet. A little over three years later, the dot-com bubble burst.

In September 2025, while giving a speech in Rhode Island, Powell was questioned about how the FOMC accounts for equity valuations when setting and adjusting monetary policy. Here's how the now-former Fed chair responded:

We do look at overall financial conditions, and we ask ourselves whether our policies are affecting financial conditions in a way that is what we're trying to achieve. But you're right, by many measures, for example, equity prices are fairly highly valued.

For possibly the first time in nearly 30 years, a sitting Fed chair squarely put the spotlight on meteoric stock valuations by plainly stating, "equity prices are fairly highly valued."

It's these six words that can echo through Wall Street for years to come.

Image source: Getty Images.

Short-term history is not on the Dow's, S&P 500's, or Nasdaq Composite's side

Over the last century, there's no question that stocks have been a winning investment. Despite the ups and downs that come with investing in equities, we've watched the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite repeatedly climb to record highs over long periods.

But history is most definitely not on the Dow's, S&P 500's, or Nasdaq Composite's side over the short term.

Although "value" is subjective, one time-tested valuation tool has demonstrated the ability to cut through this subjectivity and investors' emotions to offer true apples-to-apples valuation comparisons: the Shiller Price-to-Earnings (P/E) Ratio, also known as the Cyclically Adjusted P/E Ratio (CAPE Ratio).

Whereas the traditional P/E ratio accounts for trailing 12-month earnings, the S&P 500's Shiller P/E is based on average inflation-adjusted earnings from the trailing 10 years. Relying on a decade of earnings history ensures that recessions can't meaningfully skew readings.

Shiller PE Ratio has the Dot Com Bubble all-time high in its sight 🚨🤯👀 pic.twitter.com/XDfXBeDyxL

-- Barchart (@Barchart) May 8, 2026

When back-tested to January 1871, the CAPE Ratio has averaged 17.36. As of the closing bell on May 13, the day Kevin Warsh was confirmed to succeed Powell as Fed chair, the CAPE Ratio reached 42.32. This marks its highest reading during the current bull market and its second-priciest valuation in history, trailing only the dot-com bubble that peaked at 44.19 in December 1999.

History has not been kind to expensive stock markets. Though the Shiller P/E offers no assistance to investors in spotting when the music will stop, there's been a clear negative correlation between S&P 500 Shiller P/Es above 30 and significant declines in the Dow Jones Industrial Average, S&P 500, and/or Nasdaq Composite.

Over the last 155 years, there have been six instances in which the CAPE Ratio exceeded 30, including the present. The previous five were eventually followed by declines of 20% to 89% in one or more of the major stock indexes. In other words, the S&P 500's Shiller P/E has an immaculate track record of foreshadowing steep stock market drops.

While Jerome Powell was discussing stock valuations purely in the context of setting FOMC monetary policy, his six words on equity valuations will likely echo through Wall Street for years... or until history repeats itself, yet again.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.