Tags: federal reserve | tarullo | rates | bubbles

Fed's Tarullo: Tighter Fiscal Policy Can't Be 'Taken off the Table'

Tuesday, 25 February 2014 11:01 AM

The Federal Reserve's top regulator waded into the debate over whether monetary policy should be tightened in the face of financial stability risks, saying on Tuesday that such a move cannot be "taken off the table."

Fed Governor Daniel Tarullo, the U.S. central bank's point person on financial supervision, said that while investors are taking on more risks in high-yield corporate bonds and leveraged loans, for example, overall there is not a need to change policy at the moment.

More than five years of near-zero Fed interest rates and trillions of dollars in stimulative asset purchases have raised concerns that policymakers may need to tighten policies quicker than planned to head off risk-taking in financial markets.

Editor's Note: Secret Wall Street Calendar Uses Strange ‘Crash Alert System,’ Gets 18.79% Annual Returns

"In reviewing the relationship between financial stability considerations and monetary policy, ...monetary policy action cannot be taken off the table as a response to the build-up of broad and sustained systemic risk," Tarullo, who has a permanent vote on policy but rarely talks publicly about it, told the National Association for Business Economics.

He added that further developments in supervisory tools and measures that can affect certain forms of funding can help to "reduce the number of occasions on which a difficult tradeoff between financial stability considerations and near-term growth or price stability aims will need to be made."

The 2007-2009 financial crisis and recession were caused in large part by an unsustainable build-up on Wall Street of leverage in mortgage assets, and by lax regulation. A flurry of subsequent rule-making is meant to reinforce the financial system, but the Fed's unprecedented easy-money policies are again prompting investors to take risks to turn profits.

"While ad hoc supervisory action aimed at specific lending or risks is surely a useful tool, it has its limitations," Tarullo said, citing the "strong inflows" in the corporate bonds and leveraged loans that raise "the possibility of large losses going forward."

He said it has, to date, "seemed appropriate to rely on supervisory responses."

But the Fed is closely watching these so-called macroprudential risks posed by persistently low rates, Tarullo added, "particularly given the possibility that interest rates may remain historically low for some time even after" policymakers begin to raise them.

"Our monitoring does find some evidence of increased duration and credit risk, but the increases appear relatively moderate to date - particularly at the largest banks and life insurers," he said.

Based on published forecasts, the central bank plans to halt its bond-buying program later this year and start to raise rates some time in 2015, as long as the economy continues to expand and unemployment continues to drift lower.

The potential problem, as Tarullo reinforced in his speech, is that if the Fed continues to stimulate the economy it could sow the seeds of renewed financial instability, but the "removal of accommodation could choke off the recovery just as it seems poised to gain at least a bit more momentum."

Fellow Fed Governor Jeremy Stein effectively sparked the debate a year ago when he said monetary policy "gets in all of the cracks" that financial regulations might not.

Editor's Note: Secret Wall Street Calendar Uses Strange ‘Crash Alert System,’ Gets 18.79% Annual Returns

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The Federal Reserve's top regulator waded into the debate over whether monetary policy should be tightened in the face of financial stability risks, saying on Tuesday that such a move cannot be taken off the table.
federal reserve,tarullo,rates,bubbles
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2014-01-25
Tuesday, 25 February 2014 11:01 AM
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