"Significant limitations" exist that prevent monetary policy from being the right tool to promote financial stability, Federal Reserve Board Chair Janet Yellen said Wednesday.
"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; in addition, efforts to promote financial stability through adjustments in interest rates would increase the volatility of inflation and employment," she said in a lecture before the International Monetary Fund, according to prepared text released by the Fed. "As a result, I believe a macroprudential approach to supervision and regulation needs to play the primary role."
With nonfinancial credit growing moderately, leverage greatly lower than it's been, and reliance on short-term wholesale funding down "significantly" from pre-crisis levels, "important structural vulnerabilities remain in short-term funding markets."
Yellen said, "Taking all of these factors into consideration, 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."
But, she noted "pockets of increased risk-taking across the financial system," which if accelerated or broadened "could necessitate a more robust macroprudential approach."
