Today at the IMF, Janet Yellen gave a speech on financial stability. More specifically, she talked about monetary policy’s shortcomings as a tool for financial stability. Neil Irwin calls it “the most significant speech yet in her still-young Federal Reserve chairmanship.”
Monetary policy’s “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,” she said. She clarified that she’s not against raising interest rates to stem financial bubbles, but, she said, oversight and regulation should play the primary role (things like the Fed’s stress tests). Tighter monetary policy, she said, would not have been sufficient to stop the 2008 crisis.
In a post-speech Q&A, IMF director Christine Lagarde asked Yellen about risks from the shadow banking sector, to which Yellen responded, “that is a huge challenge to which I don’t have a great answer.” Regulators have to accept that as they put up regulatory walls, certain activities will deliberately move outside of them, she said. Yellen and Lagarde also spoke briefly about the spillover effects that the Fed’s policies have on emerging markets. “Ms. Yellen acknowledged the Fed’s role in that turmoil… but she also blamed investors, saying traders had built up positions that were based on unrealistic expectations about interest rate paths,” writes Ian Talley. However, to some extent, spillovers can’t be avoided given the size of the U.S. economy, Yellen said.
Yellen’s speech came just following — and seemed to be a response to — the release of the annual report from the Bank of International Settlements. In addition to critiquing the the moves of global central banks, BIS called for more austerity and higher interest rates from governments. “It is essential to move away from debt as the main engine of growth,” concludes the report. Ryan Avent, however, calls BIS a stopped clock: “Though the BIS’s diagnoses of the global economy’s ills have evolved over time its policy recommendations have not.” Martin Wolf says the BIS report gives mostly bad advice, even as it correctly diagnoses a problem. “The BIS is entitled to warn. Central banks should listen to it politely. But they must reject important parts of what it advises,” he says.
During the IMF event today, Binyamin Appelbaum tweeted, “Yellen to BIS: Calm down.” — Shane Ferro
On to today’s links:
Stuff We’re Not Linking To
Ben Stein writes about his crushes