By Pedro Nicolaci da Costa
WASHINGTON Feb 7 An extended period of low
interest rates could create risks to financial stability, and
policymakers should keep an eye on junk bond and leveraged loan
markets for signs of excess risk-taking, a top Federal Reserve
official said on Thursday.
Jeremy Stein, a member of the U.S. central bank's powerful
board of governors, said the current evidence is inconclusive.
"In terms of the variables that could be informative about
the extent of market overheating, the picture is mixed," Stein
said in prepared remarks at a conference sponsored by the St.
Louis Federal Reserve Bank.
Stein's remarks come at a time when some analysts, including
top Fed officials, have raised concerns about the potentially
destabilizing effects of the central bank's unconventional
monetary policies, in particular its asset purchase program.
In December the Fed reinforced its third round of
quantitative easing, replacing a more modest earlier program
that did not add to its balance sheet with a more aggressive
buying of Treasuries, maintaining a pace of $85 billion in
purchases first established in September.
With U.S. stocks rallying sharply in January and corporate
bond issuance breaking records, some worry the Fed's low rates
policy might encourage investors to take on excess risk. Stein
argued policymakers should remain attuned to these risks, and
not shy away from using monetary policy to mitigate them - a
break with past convention, which has tended to favor regulatory
tools to deal with asset price inflation.
"If the underlying economic environment creates a strong
incentive for financial institutions to, say, take on more
credit risk in a reach for yield, it is unlikely that regulatory
tools can completely contain this behavior," Stein said.
"Waiting for decisive proof of market overheating may amount
to an implicit policy of inaction on this dimension."