No need to change current monetary policy - Yellen

Despite “pockets of increased risk-taking” Federal Reserve Chair Janet Yellen argues that monetary policy faces “significant limitations”

US Federal Reserve Chair Janet Yellen (l), International Monetary Fund (IMF) Managing Director Christine Lagarde, and former IMF Director Michel Camdessus walk onstage before their remarks at the inaugural Michel Camdessus Central Banking lecture in Washington today. Photograph: Gary Cameron/Reuters

US Federal Reserve Chair Janet Yellen (l), International Monetary Fund (IMF) Managing Director Christine Lagarde, and former IMF Director Michel Camdessus walk onstage before their remarks at the inaugural Michel Camdessus Central Banking lecture in Washington today. Photograph: Gary Cameron/Reuters

Wed, Jul 2, 2014, 17:01

Federal Reserve Chair Janet Yellen said there is no need to change current monetary policy to address financial stability concerns although she sees “pockets of increased risk-taking” in the financial system. In a comprehensive salvo into the worldwide debate among central bankers over whether interest rates are a first-order tool to rein in financial excess, Yellen came down against that idea and in favor of regulatory tools.

“Monetary policy faces significant limitations as a tool to promote financial stability,” Yellen said today 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.” She said the macroprudential approach, a term that describes a combination of multiagency oversight, attention to bank capital and liquidity, and regulatory pressure to create buffers against failure, “needs to play the primary role.”

US stocks rose to an intraday record, with the Standard and Poor’s 500 Index increasing 0.1 per cent to 1,974.40 as of 11:10 a.m. in New York. The yield on the benchmark 10-year Treasury note rose 0.04 percentage point to 2.61 per cent.

Yellen’s comments are significant because economists worry that central banks may now be causing a worldwide reach for yield as interest rates are suppressed by monetary policy.

Bloomberg