Federal Reserve press conference, 2014-06-18 — Chair Janet Yellen

Question (Pedro Da Costa, Dow Jones Newswires): Hi, I’m Pedro da Costa from Dow Jones Newswires. Thank you very much. Since we are currently having a World Cup, I thought it would be valid to ask a question about the world. And I’m surprised—a little surprised at the optimism of your forecast given some, you know, the darkening outlook overseas. You’ve got conflict in the Ukraine, escalation of war in Iraq with implications for oil prices that potentially have global economic impact. You have—excuse me—a European recovery that’s still fairly weak, and emerging markets that are slowing down sharply. Do you think the U.S. can be a lone engine of economic recovery globally? And if I could just follow up very quickly on Greg’s question, because you talked about the two sides of the mandate, but you didn’t quite answer the financial stability part. Do you think—is financial stability currently preventing the Fed from being more accommodative than it would like? And if not, when do you expect that to happen, if at all? Thank you.
Answer: So, let me—I’m sorry I didn’t answer the last part of Greg’s question and the last part of yours. Let me start there. With respect to financial stability, we monitor potential threats to financial stability very, very carefully, and we have spoken about some—I’ve spoken in recent congressional testimonies and speeches about some threats to financial stability that are on our radar screen, that we are monitoring. Trends in leveraged lending and the underwriting standards there, diminished risk spreads in lower-grade corporate bonds—high- yield bonds—have certainly caught our attention. There is some evidence of reach-for-yield behavior. That’s one of the reasons I mentioned that this environment of low volatility is very much on my radar screen and would be a concern to me if it prompted an increase in leverage or other kinds of risk-taking behavior that could unwind in a sharp way and provoke a sharp, for example, jump in interest rates. And we’ve seen what effect that can have on the global economy, and I think it’s something that it’s important to avoid. But broadly speaking, if the question is, to what extent is monetary policy, at this time, being driven by financial stability concerns, I would say that—well, I would never take off the table that monetary policy should—could, in some circumstances, respond. I don’t see them shaping monetary policy in an important way right now. I don’t see a broad-based increase in leverage, rapid increase in credit growth or maturity transformation, the kinds of broad trends that would suggest to me that the level of financial stability risks has risen above a moderate level. And we are using supervisory tools and regulations both to make the financial system more robust and to pay particular attention to areas where we’ve spotted concerns, like leveraged lending, which is very much a focus of our supervision. Now, let’s see. There was a first part to your question, and the first part was about global risks, and we always pay attention to global risks and the likely evolution of the global economy. You expressed a lot of pessimism about emerging markets, and I see it more likely that we’ll see moderate growth and a pickup there. Of course, there are geopolitical risks—the Middle East, developments in Iraq, of course. They’re not only a humanitarian concern; they are a concern with respect, potentially, to energy supplies and prices, and so I would certainly list that as something in the category of risks to the outlook.