Federal Reserve Chair Janet Yellen says she doesn’t see a need for the Fed to start raising interest rates to defuse the risk that extremely low rates could destabilise the financial system.
Yellen said she does see “pockets” of increased risk-taking, but argued those threats could be addressed through greater use of regulatory tools.
Many of those tools, such as higher capital standards for banks, were put in place after the 2008 financial crisis, which triggered the Great Recession.
In her remarks on Wednesday at a conference sponsored by the International Monetary Fund, Yellen disputed criticism that the Fed had contributed to the 2008 crisis by keeping rates too low earlier in the decade.
She acknowledged that financial stability risks “escalated to a dangerous level in the mid-2000s” and that policy-makers, including herself, overlooked the vulnerabilities in the financial system that would make the subsequent decline in home prices so destabilising.
“Policy-makers failed to anticipate that the reversal of the house price bubble would trigger the most significant financial crisis in the United States since the Great Depression,” Yellen said.
She said the government has made progress since then in closing the regulatory gaps that allowed the financial crisis to erupt.
Yellen spoke one day after the Dow Jones industrial average set a record for the stock market.
Some critics of Fed policies have warned that the central bank could be setting the stage for another dangerous bubble by keeping rates so low for so long.
But in her speech, Yellen said she didn’t see dangerous excesses in the financial system.
She said that there were isolated areas of increased risk taking but that those could be dealt with through regulatory changes rather than by raising rates.