Yellen Sees Little Threat to Financial Stability

Yellen
Susan Walsh/APFederal Reserve Chair Janet Yellen speaks Wednesday at the IMF in Washington.
By MARTIN CRUTSINGER

WASHINGTON -- Federal Reserve Chair Janet Yellen said Wednesday that she doesn't see a need for the Fed to start raising interest rates to defuse the risk that extremely low rates could destabilize 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 destabilizing. 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 (^DJI) 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 Wednesday 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 U.S. 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.


Increase your money and finance knowledge from home

What Is Your Risk Tolerance?

Answer the question "What type of investor am I?".

View Course »

Introduction to Retirement Funds

Target date funds help you maintain a long term portfolio.

View Course »

Add a Comment

*0 / 3000 Character Maximum

5 Comments

Filter by:
syhersch

Considering that our stock markets are at all time highs for no good economic reason OTHER than the low interest rates provided by the Fed, I would think that Mrs. Yellen would be seeing a very serious threat to the financial markets given that the interest rates MUST return, at some point in time , to average historic levels. Just exactly how long does she believe our debt at any cost is of no consequence.

July 03 2014 at 12:50 PM Report abuse rate up rate down Reply
Valerie

Greenspan couldn't see it. Bernanke couldn't see it. Now, Yellen can't see it, either.

All anyone has to do is look around their own hometown to see how bad things are. Boarded-up vacant storefronts, beggars and homeless people everywhere, millions getting laid off from their jobs, people living in tent cities, desperate people causing robbery and other crimes to explode.

But these overpaid "government financial experts" can't see past the tinted windows on their chauffer-driven limosines. And they continue giving speeches on how much the economy is "improving".

July 02 2014 at 4:47 PM Report abuse +2 rate up rate down Reply
jdykbpl45

Yellen sees little. This says it all.

July 02 2014 at 4:13 PM Report abuse +1 rate up rate down Reply
rrob.smythe

The bubble is forming all over again. You can only prop up the market for so long. look for a repeat of 2008.

July 02 2014 at 3:35 PM Report abuse +1 rate up rate down Reply
nsoccio

What a joke she is, Bernake was bad I think she's worse.. Inflation is running wild & they lie & sayy it's in check. Start looking around & tell me what hasn't risen 2-3 times in the last 6 yrs..

July 02 2014 at 2:56 PM Report abuse +2 rate up rate down Reply