Federal Reserve Chair Janet Yellen, speaking July 2 to the International Monetary Fund in Washington, said she thinks that stronger regulation is necessary to preserve financial stability, and that raising interest rates would be a second line of defense and unnecessary at this time, The New York Times reported.
“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, the Times reported.
Critics of the Fed have warned that the agency’s policies encourage too much risk-taking. The Bank for International Settlements, for example, published a report June 29 warning that low interest rates were leading to concerning increases in global asset prices.
Yellen and her colleagues have acknowledged there are some signs of undue speculation, but they said it isn’t occurring to such a degree as to threaten the economy.
Yellen said her biggest concern is strengthening regulation, and she is particularly concerned about “shadow” banks — financial firms such as hedge funds that are not subject to the same level of regulation as banks.
According to the Times, Yellen noted that regulation has its limits, and that some items, such as speculation in the commercial real estate market, could instead be addressed by tightening underwriting standards. The Fed is considering creating rules that would constrain lending in times of strong growth and then loosen it when the economy needed a pick up.
Yellen said she is open to the idea of raising interest rates to pop bubbles but said that raising rates ultimately slows growth, which is not something the economy needs right now, the Times reported.