Federal Reserve press conference, 2018-09-26 — Chair Jerome Powell

Question (Sam Fleming, Financial Times): Thanks very much. Sam Fleming from the Financial Times. The Fed has recently been saying that financial stability risks are moderate. What kind of developments could prompt a change in that assessment to elevated risks? And is there an argument for moving the countercyclical capital buffer, even when risks are moderate, rather than waiting until the risks are seen as elevated, which, arguably, could be too late? Thanks.
Answer: So I think one of the most important lessons from the financial crisis is really the importance of the stability of the financial system. And so we—since the financial crisis, as you’re aware, we’ve had a major focus on building up our monitoring of financial conditions and financial stability issues. We’ve also put in place many, many initiatives to strengthen the financial system through higher capital and better regulation, more transparency, central clearing, margins on uncleared derivatives, all kinds of things like that, which are meant to strengthen the financial system. We’ve done many of those things, and we feel that the financial system is in a much better place. As we look at—as we look at conditions most recently—and this was at our last meeting, and it was in our minutes for the last meeting—quarterly, we have a briefing at the FOMC, and also at the Board, of the staffs’ views on financial stability, and the staff judged the overall vulnerabilities to be moderate. If you dig into the different aspects of that question, households or balance sheets are in good shape. You know, employment is high, wages are rising, that sort of thing. The banking system, as I mentioned, is—you know, much higher capital, much higher liquidity—is much stronger. If you look at asset prices, it is true that some asset prices are in the upper range of their historical—upper reach of their historical ranges. And then if you look at nonfinancial corporates, you get—there is the story of leverage there. So it’s not that there aren’t any vulnerabilities, but we see them as moderate. Now, you ask about the countercyclical capital buffer. The countercyclical capital buffer is a tool that we added to our toolkit, I think, finally, back in 2016. We said that we would deploy it when vulnerabilities were meaningfully above normal. We revisit that on a regular schedule, and the last time we revisited it was, I think, last year—sometime last year—and concluded that the test was not met. As I mentioned at the last briefing, the—you know, the assessment was that vulnerabilities were moderate, but it remains a kit—a tool for our toolkit that we can deploy, you know, when and as we feel appropriate.