WASHINGTON – Federal Reserve Chair Janet Yellen said Wednesday that she doesn’t see a need for the Fed to start raising interest rates to defuse the risk that extremely low rates could destabilize the financial system.
Yellen said she does see pockets of increased risk-taking. But she said those threats could be addressed through greater use of regulatory tools. Many of those tools, such as higher capital standards for banks, were put in place after the 2008 financial crisis, which triggered the recession.
In her remarks at a conference sponsored by the International Monetary Fund, Yellen disputed criticism that the Fed had contributed to the 2008 crisis by keeping rates too low earlier in the decade.
Yellen acknowledged that financial stability risks escalated to a dangerous level in the mid- 2000s and that policymakers overlooked the vulnerabilities that would make the subsequent decline in home prices so destabilizing.
Policymakers failed to anticipate that the reversal of the house price bubble would trigger the most significant financial crisis in the United States since the Great Depression, Yellen said.
She said the government has made progress in closing the regulatory gaps that allowed the financial crisis to erupt.