Fed’s Yellen Urges Regulation and Not Rate Policy To Lead Recovery

Monetary policy faces “significant limitations” as a tool to counter financial stability risks, Federal Reserve Chair Janet Yellen said on Wednesday, adding that heading off the U.S. housing bubble with higher interest rates would have caused major economic damage.

Weighing in on a global debate, Yellen reiterated her view that regulation – not rate policy – needs to play the lead role in combating excessive financial risk-taking.

“The potential cost … is likely to be too great to give financial stability risks a central role in monetary policy discussions,” Yellen said at an event sponsored by the International Monetary Fund.

She didn’t close the door entirely, however, and she cited some areas that bore monitoring with an eye toward a possible tightening of regulation.

Analysts said Yellen was pushing back against some Fed officials who believe financial stability should be given a more prominent place in formulating monetary policy.

Jeremy Stein, who stepped down as a Fed governor in May, had sparked the debate by arguing higher rates should at least be considered to help stamp out possible asset bubbles, and a number of regional Fed bank presidents have warned of the dangers of keeping rates near zero for too long.

But Yellen made clear she did not see a need for the U.S. central bank to alter its current course. “I do not presently see a need for monetary policy to deviate from a primary focus on attaining price stability and maximum employment,” she said.

via The Globe and Mail

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