Wednesday, July 2, 2014 8:45 pm
In a speech on how central banks should deal with excessively risky behavior in an economy, especially one underpinned as now by very low interest rates, Yellen said the United States is in much better shape in the wake of the 2008 crisis.
But with interest rates still next to zero five years after the recession ended, and markets soaring, Yellen acknowledged that “I do see pockets of increased risk taking across the financial system.”
Yet given the overall picture of the economy — moderate growth, slow growth in lending and “much-reduced” leveraging — Yellen said there was no need to raise interest rates or otherwise shift policy.
“Taking all of these factors into consideration, 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.”
Yellen argued that, for a central bank facing rising risks in a financial system, tight monetary policy is at best a “very blunt tool” to get things under control, and would not alone have stemmed the 2008 financial crisis.
“Monetary policy faces significant limitations as a tool to promote financial stability,” she said.
Instead, regulators need to take a robust “macroprudential” approach — requiring financial institutions to strengthen capital foundations, strengthen funding and reduce risky activities to ensure the broader financial system remains on a firm base.
Tougher rules on banks and non-bank financial institutions laid down in the wake of the crisis have gone a long way toward achieving that goal, she said.