Yellen sees little threat to financial stability

Federal Reserve Chair Janet Yellen speaks at the International Monetary Fund. Yellen said she doesn't see a need for the Fed to start raising interest rates. Photo / AP
Federal Reserve Chair Janet Yellen speaks at the International Monetary Fund. Yellen said she doesn't see a need for the Fed to start raising interest rates. Photo / AP

Federal Reserve Chair Janet Yellen said overnight that she doesn't see a need for the Fed to start raising interest rates to defuse the risk that extremely low rates could destabilise the financial system.

Yellen said she does see "pockets" of increased risk-taking. But she said those threats could be addressed through greater use of regulatory tools. Many of those tools, such as higher capital standards for banks, were put in place after the 2008 financial crisis, which triggered the Great Recession.

In her remarks at a conference sponsored by the International Monetary Fund, Yellen disputed criticism that the Fed had contributed to the 2008 crisis by keeping rates too low earlier in the decade.

Yellen acknowledged that financial stability risks "escalated to a dangerous level in the mid-2000s" and that policy-makers overlooked the vulnerabilities in the financial system that would make the subsequent decline in home prices so destabilising.

She included herself in this group of policymakers.

"Policymakers failed to anticipate that the reversal of the house price bubble would trigger the most significant financial crisis in the United States since the Great Depression," Yellen said.

She said the government has made progress since then in closing the regulatory gaps that allowed the financial crisis to erupt.

Yellen spoke one day after the Dow Jones industrial average set a record for the stock market. Some critics of Fed policies have warned that the central bank could be setting the stage for another dangerous bubble by keeping rates so low for so long.

But in her speech, Yellen said she didn't see dangerous excesses in the financial system. She said that there were isolated areas of increased risk taking but that those could be dealt with through regulatory changes rather than by raising rates.

She specifically mentioned that demand for corporate bonds, commonly called junk bonds, is rising. This suggests that investors are buying those bonds in a "reach for yield" without properly assessing the risks of a possible default on some of these bonds. But Yellen said regulators had the tools to address rising risks in specific areas.

Yellen's comments were in line with remarks she made at a news conference after the Fed's June 17-18 meeting. She made clear then that the US economy still needs help from the Fed's low rates and that she saw no need to start boosting them now. Most analysts think the Fed won't start raising its benchmark short-term rate before mid-2015.

-AP

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