Janet Yellen, chairwoman of the US Federal Reserve, has warned she doesn’t currently see a need for changes in monetary policy, such as interest rate rises, to tackle financial stability.
In a speech yesterday, Ms Yellen instead stated: “It should be clear that I think efforts to build resilience in the financial system are critical to minimising the chance of financial instability and the potential damage from it. This focus on resilience differs from much of the public discussion, which often concerns whether some particular asset class is experiencing a “bubble” and whether policymakers should attempt to pop the bubble.
“Because a resilient financial system can withstand unexpected developments, identification of bubbles is less critical.”
Speaking at the International Monetary Fund, the chairwoman added she does not presently see a need for “monetary policy to deviate from a primary focus on attaining price stability and maximum employment, in order to address financial stability concerns”.
She admitted, however, that there is evidence of “pockets of increased risk-taking across the financial system”, highlighting low levels of corporate bond spreads, which suggest “some investors may underappreciate the potential for losses and volatility going forward”.
Ms Yellen added: “We are mindful of the possibility that credit provision could accelerate, borrower losses could rise unexpectedly sharply, and that leverage and liquidity in the financial system could deteriorate. It is therefore important that we monitor the degree to which the macroprudential steps we have taken have built sufficient resilience, and that we consider the deployment of other tools, including adjustments to the stance of monetary policy, as conditions change in potentially unexpected ways.”
