Fed's Yellen Says Low Rates May Prompt Risk-Taking
Federal Reserve Vice Chairman Janet Yellen
Andrew Harrer/Bloomberg
Federal Reserve Vice Chairman Janet Yellen.
Federal Reserve Vice Chairman Janet Yellen. Photographer: Andrew Harrer/Bloomberg
Janet Yellen, in her first public remarks as the Federal Reserve’s vice chairman, said low interest rates may give firms the incentive to engage in excessive risk-taking.
“It is conceivable that accommodative monetary policy could provide tinder for a buildup of leverage and excessive risk-taking in the financial system,” the 64-year-old central banker said in a speech today in Denver.
Yellen warned that Fed policies may in some cases be encouraging firms to “reach for yield” and could present officials “with difficult tradeoffs” if “emerging threats to financial stability become evident.”
The Fed vice chairman spoke while central bank officials debate whether to take further action to stimulate the economy, and as the Fed board in Washington gears up to implement directives under the Dodd-Frank law that overhauls U.S. financial regulation. Her comments weren’t specifically focused on the Fed’s current monetary policy.
“Our goal should be to deploy an enhanced arsenal of regulatory tools to address systemic risk,” Yellen, the former president of the San Francisco Fed, said in a luncheon address to the National Association for Business Economics. “We need macroprudential policy makers ready to take away the punch bowl when the party is getting out of hand.”
‘Risk-Taking Behavior’
“Monetary policy cannot be a primary instrument for systemic risk management,” Yellen said in the text of her speech. Still, “I cannot unequivocally rule out the possibility that situations could emerge in which monetary policy should play some role in reining in risk-taking behavior,” she said.
The Dodd-Frank legislation was enacted in July after a bubble in U.S. housing prices burst, resulting in more than $1.8 trillion of global losses and writedowns and spurring Fed-backed rescues of Bear Stearns Cos. and American International Group Inc.
Under the new law, the Fed will supervise all large, systemically important financial institutions and work with other regulators on a Financial Stability Oversight Council to identify emerging risks.
Referring to the power of regulators to wind down failing institutions, she said in response to an audience question, “it will be complex to design a resolution regime, especially for the largest and globally most complex institutions.”
“I’m very hopeful that a resolution regime is workable,” she said.
Stocks erased earlier gains, with the Standard & Poor’s 500 Index declining less than 0.1 percent to 1,165.05 at 4:01 p.m. in New York.
‘Top Priority’
Yellen said “a top priority” of regulators assigned to monitor systemic risks should be determining whether asset prices are signaling the emergence of a bubble. She added that surveillance of emerging risks is likely to focus in part on the accumulation of credit and funding risk inside systemically important firms, and counterparty risks.
“A first-order priority must be to engineer a stronger, more robust system of financial regulation and supervision, one capable of identifying and managing excesses before they lead to crises,” Yellen said.
“We know that market participants won’t take kindly when limits are set precisely in those markets that are most exuberant, the ones in which they are making big money,” she said. Even so, “discretionary interventions will inevitably play a part in macropruential supervision.”
“We must find the right balance between overly strict supervision and laissez faire,” she said.
Yellen won the support of the U.S. Senate Banking Committee in July to become the Fed’s vice chairman. She was confirmed by the Senate in September and sworn in on Oct. 4.
To contact the reporter on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net
To contact the editor responsible for this story: Christopher Wellisz in Washington at cwellisz@bloomberg.net
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