Dudley Says Financial Stability Definitely on Fed’s Radar

The Federal Reserve is on the lookout for signs of asset-price bubbles, and financial stability is a necessary condition for effective monetary policy, said William C. Dudley, president of the Federal Reserve Bank of New York.

“I think we do need to try to identify asset bubbles in real time,” Dudley said today at the Bloomberg Markets Most Influential Summit in New York. “You can’t have an effective monetary policy if you have financial instability.”

Vice Chairman Stanley Fischer has been appointed to lead a new panel on financial stability, as measures of volatility in stocks, bonds and currencies declined to record or multi-year lows in a possible sign of investor complacency.

Chair Janet Yellen acknowledged the risk in July, telling Congress that financial-market valuations appeared stretched in some sectors, including lower-rate corporate debt, and that policy makers were monitoring developments closely.

The Fed’s semi-annual Monetary Policy Report to Congress also discussed “substantially stretched” valuations for smaller firms in the social media and biotechnology industries.

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