Yellen Leery of Using Rates to Address Risk -- Update

By Dow Jones Business News, 
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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 taking.

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 robust recoveries.

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 pedro.dacosta@wsj.com and Ben Leubsdorf at ben.leubsdorf@wsj.com


  (END) Dow Jones Newswires
  07-02-141750ET
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This article appears in: US Markets , Economy


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