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Yellen Says Low Volatility a Worry If It Induces Risky Behavior

Federal Reserve Chair Janet Yellen said low volatility in financial markets may be worrisome if it encourages excessive risk-taking.

“Volatility both actual and expected in markets is at low levels,” Yellen said today at a press conference in Washington following the central bank’s policy meeting.

Policy makers have no target for an appropriate level of volatility, she said. “But to the extent that low levels of volatility may induce risk-taking behavior that for example entails excessive buildup in leverage or maturity extension, things that can pose risks to financial stability later on, that is a concern to me and to the committee,” Yellen said.

Advances in asset prices and economic data have helped suppress volatility, pushing the Chicago Board Options Exchange Volatility Index, a gauge of Standard & Poor’s 500 Index swings, to a seven-year low this month. Foreign-exchange volatility and swings in government bonds also have decreased.

Price Swings

The Bank of America Merrill Lynch MOVE Index, which measures Treasury price swings based on options, is near its 11-month low of 54.72 on April 9. The gauge has averaged about 60.2 this year, below the 91.1 average since December 2008.

The CBOE index, known as the VIX, has been pushed lower by narrower swings in U.S. stocks as well as shares rising to a record. The S&P 500 failed to post a gain or loss exceeding 1 percent for at least 40 days through Monday, the longest stretch of calm since 1995, data compiled by Bloomberg show. The index remains near last week’s record close at 1,951.27.

Dudley's Concern

Federal Reserve Bank of New York President William Dudley said last month he’s concerned about “unusually low” volatility in financial markets. “It’s not just fixed income, it’s fixed income, foreign exchange, and equities,” he said in response to an audience question from an economist organization after a speech in New York. “That makes me a little nervous.”

Boston Fed President Eric Rosengren said in a speech last week that the calm in markets “may be challenged in the future” as the Fed reduces accommodation. The sharp rise in bond yields last year is a reminder that “uncertainty or misunderstanding about the contours of our exit has the potential to be problematic,” he said in Guatemala City.

St. Louis Fed President James Bullard said last week the Fed will need to “carefully” reduce its balance sheet over time to avoid stirring up volatility in markets.

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