ST. LOUIS — Federal Reserve Gov. Jeremy Stein denied Thursday that the low interest rates which the Fed set early in the last decade helped cause the financial crisis.

Stein said interest rate spreads — not the record low, absolute levels of rates - are the most important thing to watch now in trying to assess whether there is excessive risk-taking in credit markets that the Fed needs to address.

The policymaking Federal Open Market Committee held the funds rate at a then historically low 1% through much of 2003-2004, then increased it very gradually.

Fed critics such as Stanford University economist John Taylor have said the low funds rate, which was reflected in mortgage and other market rates, contributed greatly to the housing market "bubble" which deflated rapidly in 2007-2008, generating a cascading financial crisis.

Fed Chair Ben Bernanke has maintained that easy monetary policy was, at most, a marginal factor in the housing boom-bust, and Stein backed him up in response to questions at a St. Louis Fed conference.

Saying he has done a lot of research on the causes of the crisis, Stein said "it's hard to make the case" that the FOMC's low rate settings led to the mortgage crisis.

"It's hard to find the smoking gun," he said.

On the other hand, "there's clearly a lot of blame to be allocated to some combination of market participants and supervision," he said.

In earlier prepared remarks, Stein referred to "very robust" junk bond issuance but called yield spreads in that market "moderate by historical standards." He noted that the spread on nonfinancial junk bonds of about 400 basis points is "just above the median of the pre-financial-crisis distribution, which would seem to imply that pricing is not particularly aggressive."

However, Stein was challenged by an audience member who suggested the long period of near zero short-term rates makes the 400 basis point spread less relevant and inclines market participants to greater risk-taking than if rates were higher.

Stein said credit spreads are "the first thing to look at," regardless of the level of short-term rates because they are a measure of compensation for default risk.

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