Tags: Lagarde | Yellen | policy | Fed

Fed Chair Yellen Speaks at IMF — Part III

By    |   Thursday, 10 Jul 2014 07:48 AM

In the final portion of the program in which Federal Reserve Chair Janet Yellen gave the inaugural Michel Camdessus Lecture on Monetary Policy at the International Monetary Fund (IMF) on July 2, Yellen sat for an interview with her host, IMF Managing Director Christine Lagarde.

For the first question, Lagarde asked whether "macroprudential" tools would play "second fiddle" to monetary policy or perhaps assume primary status as a first line of defense. Yellen responded explicitly that the theme of her speech was that macroprudential policy should play the primary role and be coordinated with agencies like the Basel Committee and the Financial Stability Board (FSB) and should strengthen the global financial system through more capital, higher quality capital, higher liquidity buffers, central clearing of derivatives to reduce interconnectedness among systemically significant financial institutions (SIFIs), strengthening the payments and clearing systems to deal with risks like tri-party repurchase agreements and imposing on the SIFIs a surcharge for the higher risk they pose as well as high leverage ratios to augment the capital requirements.

She spoke of all of these steps, as well as reducing the reliance of the largest banks on wholesale funding and plans for the resolution of failed SIFIs, as necessary to make the global financial system safer and more resilient. Moreover, additional steps could be taken, as emerging economies have done, to address problems that develop in specific sectors such as housing.

Yellen repeated from her speech that "We don't yet understand how these will work," and she suggested that the Fed and IMF engage in active research in order to deploy the tools better.

Camdessus recalled in his remarks being told by British Prime Minister Margaret Thatcher not to lecture bankers. Yellen allowed that monetary policy would still be "actively in the mix" for use when circumstances require it.

Somewhat ironically, Lagarde asked whether the use of macroprudential tools in "calmer" times might help to move the countries now "stuck" at the lower bound of interest rates, with the European Central Bank exploring the adoption of negative interest rates.

Yellen mused that seeing so many countries affected by the lower bound of interest rates would long have seemed "unimaginable" to her. She observed that if shocks continue or recur, the world economy "could continue to be hit by the zero lower bound," due to what some have called "secular stagnation," so that the equilibrium of interest rates could settle at a lower rate than has historically been the case, so that "we may have to worry about these episodes more often."

Lagarde then raised a favorite issue of the banking industry, which is what to do about so-called "shadow banks," without recognizing that banks are often connected with the shadow system and that banks themselves have been weakly regulated by captive agencies staffed by lawyers who are friendly to the industry they often worked for before they joined the agencies and plan to pass again through the notorious "revolving door."

Yellen called this issue "an enormous challenge . . . to which I don't have a great answer." She cited margin requirements as a tool the Fed could use to control risk more both within and beyond the banking system. She lauded the "very active monitoring tools" the authorities have developed in order to look out for the next crisis.

As the final question, Lagarde asked Yellen whether the Fed is independent, paraphrasing a standard set by Napoleon and quoted by Camdessus that "the central bank should be independent, but not too much."

Yellen qualified her answer so much that scholars should take note. Yellen contended that the Fed is independent as to monetary policy, but that when it ventures into areas that border on fiscal policy, the lines become blurred and the Fed's actions can be controversial.

(Archived video can be found here.)

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Robert-Feinberg
In the final portion of the program in which Federal Reserve Chair Janet Yellen gave the inaugural Michel Camdessus Lecture on Monetary Policy at the International Monetary Fund (IMF) on July 2, Yellen sat for an interview with her host, IMF Managing Director Christine Lagarde.
Lagarde, Yellen, policy, Fed
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2014-48-10
Thursday, 10 Jul 2014 07:48 AM
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