Record-low interest rates may give companies an incentive to take excessive risks that could be bad for the economy, the Federal Reserve’s new vice chairwoman said on Monday.
Janet Yellen has supported the Fed’s policy of ultra-low interest rates to bolster the economy and to help drive down unemployment.
Her remarks, which don’t change that stance, may be aimed at tempering critics. They worry she’ll want to hold rates at record low levels for too long, which could inflate new bubbles in the prices of commodities, bonds or other assets.
PHOTO: BLOOMBERG
Yellen, who was sworn in as the Fed’s second-highest official last week, made clear she is aware of the risks.
“It is conceivable that accomodative monetary policy could provide tinder for a buildup of leverage and excessive risk-taking,” Yellen said in remarks to economists meeting in Denver.
It was her first speech since becoming vice chairwoman.
The Fed at its meeting next month is expected to take new steps to energize the economy. It’s likely to announce a new program to buy government bonds. Doing so would lower rates on mortgages, corporate loans and other debt. The Fed hopes that would get people and companies to buy more, which would strengthen the economy.
The new effort is expected to be smaller than the US$1.7 trillion launched during the recession. Under that program, the Fed bought mostly mortgage securities and debt, although it did buy some government bonds, too.
The Fed has held its key interest rate at a record low near zero since December 2008. Because it can’t lower that rate any more, it has turned to other unconventional ways to pump up the economy.
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