Fed's Dudley: U.S. 'A Long Way' From Having Bubble Fighting Tool Kit
October 03 2015 - 12:31PM
Dow Jones News
By Michael S. Derby
BOSTON--Federal Reserve Bank of New York President William
Dudley said Saturday the U.S. tool kit to deal with financial
imbalances remains some distance from where it needs to be.
"My own view is that while the use of macroprudential tools
holds promise, we are a long way from being able to successfully
use such tools in the United States," Mr. Dudley said in the text
of remarks to be delivered at a conference held by the Boston
Fed.
Mr. Dudley was addressing the stable of tools authorities have,
or aspire to posses, to smooth over financial imbalances that
emerge in the economy. Fed officials and many others would rather
use these set of facilities to quell brewing bubbles rather than to
use the blunt tool of raising interest rates, which comes with a
cost to the broader economy in terms of weaker employment levels
and slower growth. Given the genesis of the Great Recession,
authorities around the world have a great interest in knowing how
to stop bubbles from rising to levels that would threaten the
performance of the economy as a whole.
Mr. Dudley, a close ally of Fed Chairwoman Janet Yellen, didn't
address the monetary policy outlook in his remarks. At the same
time, he said he doesn't see any imminent threat when it comes to
bubbles in the financial sector.
"While we work to sort all this out, we should take considerable
solace from the fact that we have made the financial system more
resilient to shocks," Mr. Dudley said. While it may be hard to spot
the next round of imbalances, "with higher capital and liquidity
requirements and the use of stress tests to assess emerging
vulnerabilities, I think we are much better placed than we have
been in the past," he said.
Mr. Dudley allowed that the very process of trying to spot a
brewing bubble is unsettled. Also, unlike with interest rate policy
choices and some forms of regulation, "there is not a well-defined
framework for identifying emerging imbalances and applying
macroprudential tools in response," he said.
What's more, getting the hodgepodge of U.S. regulatory
authorities to recognize the problem and come up with an effective
response can be difficult. "Timely implementation" is likely to be
a problem because "the U.S. regulatory structure is fragmented, so
that in most cases, no single regulator is able to implement
macroprudential tools in a comprehensive manner."
Mr. Dudley said he sees some value in creating "hard-wired"
rules in policies that would address brewing imbalances. But he
also warned "my concern is that we could over-engineer the
financial system, building in complexity in response to potential
risks that might, or might not, manifest themselves in the
future."
Write to Michael S. Derby at michael.derby@wsj.com
(END) Dow Jones Newswires
October 03, 2015 12:16 ET (16:16 GMT)
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