By Dow Jones Business News,
July 02, 2014, 05:50:00 PM EDT
By Pedro Nicolaci da Costa and Ben Leubsdorf
Federal Reserve Chairwoman Janet Yellen pushed back against critics who say the central bank should consider
raising interest rates to avoid fueling future financial crises.
Ms. Yellen, speaking Wednesday to an audience at the International Monetary Fund, said she favors relying first on
regulation and supervision to make the financial system more resilient to occasional bouts of turbulence, though she
wouldn't rule out applying the monetary brakes if those tools fail.
"I do 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," Ms. Yellen said.
The comments come amid a debate among global central bankers about whether very low interest rates, adopted in many
advanced economies since the 2008 financial crisis to spur stronger recoveries, are feeding market bubbles that could
burst and cause new financial turmoil. The Fed has held short-term rates near zero since late 2008 and is winding down a
bond-buying program aimed at lowering long-term rates.
Ms. Yellen's stance contrasts sharply with that of the Bank for International Settlements, a central bankers' forum
based in Switzerland, which urged central banks in a report Sunday to consider raising rates to reduce risks of
financial instability. The BIS said low rates may be lulling global investors into a false sense of security, citing
historic lows in market volatility and record highs in stock prices.
She also differs with former Fed governor Jeremy Stein and other current Fed officials who argue the Fed should
consider raising interest rates to curtail the possible buildup of asset bubbles or other dangerous types of risk
Ms. Yellen said some pockets of finance, such as leveraged-loan and short-term funding markets, bear close
regulatory scrutiny. But she said she favored promoting financial stability through so-called macroprudential tools,
such as regulatory limits on leverage and short-term funding and stronger loan underwriting standards.
She also said raising rates would hurt the economy, noting that "efforts to promote financial stability through
adjustments in interest rates would increase the volatility of inflation and employment."
Her perspective is the dominant one among top Fed officials, J.P. Morgan Chase economist Michael Feroli wrote in a
research note Wednesday. But it isn't a unanimous view, he added, and could remain a topic of disagreement.
Most Fed officials have indicated they expect to start raising rates next year, but the decision will depend on
whether the economy continues to strengthen as they forecast. They also have said when they do lift borrowing costs,
they will do so gradually and their benchmark short-term rate is unlikely to rise as high as it has in previous, more
Ms. Yellen's comments echoed those of Bank of England Chief Economist Andrew Haldane, who told a conference in
London on Wednesday that macroprudential tools--such as curbs on mortgage lending or higher bank capital requirements--
should help shield the economy from financial-sector excesses. Like Ms. Yellen, he said central banks must be prepared
to use higher interest rates as part of their defenses if needed. "Monetary policy can on occasions have a role to play
in ensuring against these financial stability risks," he said.
Mr. Haldane also noted that reviving investors' appetite for risk was one of the goals of crisis-fighting measures
such as cutting interest rates to near zero and buying safe assets such as government bonds, a policy known as
quantitative easing, or QE.
"That's why we did it. Lower rates and QE were an exercise in, among other things, trying to stimulate risk
taking," Mr. Haldane said at the Camp Alphaville conference in London.
Michael S. Derby contributed to this article.
Write to Pedro Nicolaci da Costa at firstname.lastname@example.org and Ben Leubsdorf at email@example.com
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