Speaking at the International Monetary Fund yesterday, Yellen dropped a strong hint that rate rises may be some way off in the US, stating there are better ways to control any financial excess seen in markets.
According to Bloomberg, Yellen said supervision should be “the main line of defense” against turmoil.
“Monetary policy faces significant limitations as a tool to promote financial stability,” she said.
“Its 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.”
Yellen and her Fed colleagues are debating when to raise the benchmark lending rate in a move which would be the first policy tightening since 2006.
However, with inflation low, the real challenge is to maintain a grip on financial markets where ultra loose policy has allowed many to take significant risks once again.
But the impact of higher rates on such practices is limited. Yellen said the financial crisis would not have been averted or mitigated by “substantially tighter monetary policy” in the mid-2000s.
She added higher interest rates would have increased unemployment but failed to close regulatory gaps that allowed large banks to “escape comprehensive supervision.”