In a speech at the
"Monetary policy faces significant limitations as a tool to promote financial stability," Yellen said. "Its effects on financial vulnerabilities ... are less direct than a regulatory or supervisory approach."
The Fed has kept its benchmark interest rate at an unprecedented near-zero since
"Such risk-taking can go too far, thereby contributing to the fragility in the financial system," she said.
Yellen conceded that experience with supervisory and regulatory tools such as countercyclical policy - known in central banking as macroprudential policy - is "limited, and we have much to learn" to use those tools effectively.
She noted that
After the US and global financial crisis of 2008-2009, spawned by US banks dabbling in a class of high-risk mortgage bonds, the
The law requires banks and other financial organizations to hold larger capital buffers and undergo periodic stress tests. Applicants for new mortgages, for example, undergo more stringent review than before the crisis.
While US interest rate policy will continue to be tailed to balancing price stability and full employment, Yellen said, she noted "pockets of increased risk-taking across the financial system" that could require a "more robust macroprudential approach."
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