There are significant limitations in using interest rates as a tool to combat financial stability risks, US Federal Reserve chief Janet Yellen said on Wednesday, mounting a strong defense of the central bank’s decision to keep monetary policy loose in the face of soaring asset prices.
A macroprudential approach would involve using non-monetary policy tools designed to manage the safety of the financial system as a whole, she said.
“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 said, according to the Financial Times.
“That said, I do see pockets of increased risk-taking across the financial system, and an acceleration or broadening of these concerns could necessitate a more robust macroprudential approach.”
The comments suggest that there is little chance of an increase in interest rates to head off exuberant stock or bond markets, and that investors will be allowed to inflate and collapse asset classes as long as the underlying financial system is strong enough to withstand any shocks, FT said.
Yellen’s remarks run counter to a recent warning from the Bank for International Settlements, which said that rates should rise now in order to control financial speculation, the report noted.
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