Home / News / World /  Yellen says rate policy shouldn’t change over stability concerns

Washington: 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 on Wednesday in prepared remarks at the International Monetary Fund (IMF) 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 multi-agency oversight, attention to bank capital and liquidity, and regulatory pressure to create buffers against failure, needs to play the primary role.

The 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.

A powerful and pervasive search for yield has gathered pace, the Basel, Switzerland-based Bank for International Settlements said in its annual report dated 29 June.

The Fed itself has kept the benchmark lending rate near zero since December 2008 and is buying longer-term Treasury debt and mortgage-backed securities, holding down yields on the safest debt.

Risky loans

Bank regulators have tried to limit risk, issuing guidance on high-yield, high-risk leveraged loans in March 2013.

The directive, which is less stringent than a rule, was unusually prescriptive, saying that debt levels exceeding six times a measure of earnings raises concerns for most industries.

Still, US leveraged loans sold to institutional investors have topped $329 billion so far this year, the third biggest first-half on record, following last year’s record $414 billion in the first six months.

About half were covenant-light, meaning they lack standard protections for lenders such as limits on debt relative to earnings, Bloomberg data show.

Yellen said so far the Fed doesn’t see a systemic threat from the high-yield loan market since broad measures of credit growth don’t suggest excessive debt and improved capital and liquidity positions at banks should ensure resilience against losses. BLOOMBERG

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