February 28, 2014 / 3:15 PM / 6 years ago

Fed's Stein: big bond funds bear watching for stability risk

WASHINGTON - The behavior of asset managers such as big bond funds could pose financial stability risks and the rise of these funds needs careful watching, a top Federal Reserve official said on Friday.

Federal Reserve Governor Jeremy Stein said a paper presented to the University of Chicago Booth School of Business Monetary Policy Forum in New York was right to note that policymakers should not only focus on measures of leverage by banks and shadow banks when assessing risks to financial stability.

“The rapid growth of fixed-income funds — as well as other, similar vehicles — bears careful watching. As they point out, it would be a mistake to be complacent about this phenomenon simply because such funds are unlevered,” Stein said.

The paper warned that more policy stimulus today can spark bigger disruptions in the future, underlining concerns that regulatory tools may not be enough to stamp out financial market risks.

Stein said deciding whether to tackle risks in financial markets with regulation or through monetary policy had to be decided case-by-case, based on detailed analysis of the market upset in question.

“While I think it is important to remain heterodox and to be open to taking either approach, I would not want to rule out the possibility that some of the risks identified by the authors could be mitigated, at least in part, via a regulatory approach,” he said in prepared remarks.

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