Yellen Says Financial Instability Shouldn’t Prompt Rate Change
By Craig Torres and Jeff Kearns
Federal Reserve Chair Janet Yellen said concerns about financial stability shouldn’t prompt a change in current monetary policy while flagging “pockets of increased risk-taking” in the financial system. Yellen delivered a comprehensive salvo in the global debate among central bankers over whether interest rates should be a first-order tool to curb financial excess, saying supervision should be “the main line of defense” against turmoil. “Monetary policy faces significant limitations as a tool to promote financial stability,” Yellen said yesterday at the International Monetary Fund in Washington. “Its effects on financial vulnerabilities, such as excessive leverage and maturity transformation, are not well understood and are less direct than a regulatory or supervisory approach.” Yellen said the “primary role” should fall to a macroprudential approach, a combination of multiagency oversight, attention to bank capital and liquidity, and regulatory pressure to create buffers against failure. Bank regulators overlooked the risk of securitization prior to the previous crisis. One feature of the current leveraged-loan boom is that high-risk loans are bundled into structured financial instruments and distributed around the world. “What is the contagion risk, and how do banks spread it is a critical question,” said Karen Shaw Petrou, managing partner at Federal Financial Analytics in Washington.