"It's part of their job to disturb the tranquility and I praise Janet Yellen for doing that," he said in an interview with CNBC's "Squawk on the Street."
"On the other hand, she was also right not to be alarmist about it."
On Wednesday Yellen spooked markets when she warned that equity market valuations were "quite high," though she added the Fed was not seeing the hallmarks of a bubble.
Yellen also noted that the Fed was watching the issue closely. Stocks were already moving lower on the day but they took a dip down on her comments before regaining some ground. The Dow was off triple digits mid-afternoon Wednesday.
The Fed chair made it clear that while she does not see a bubble in financial markets, bond yields were down due to low premiums. But bond yields can move rapidly and she noted that was the case in the "taper tantrum" of 2013.
"We need to be attentive and are to the possibility that when the Fed decides it is time to begin raising rates, these term premiums could move up and we could see a sharp jump in long-term rates," she said.
This was not the first comment by a Fed chair that stock prices are too lofty. Former Fed Chairman Alan Greenspan used the phrase "irrational exuberance" to describe the stock market in 1996.
Shiller, who is a 2013 Nobel laureate, said that the Fed was right to go ahead with quantitative easing when it did.
"Nobody knows for sure because it's a new experiment, and yes the boom in the housing market and the stock market are partly the Fed's doing. But on the other hand, we were close to a depression and they had to do something."