Risks to financial stability not elevated at this point, Fed's Yellen

Risks to financial stability are moderated and not elevated at this point although the equity market valuations appeared "quite high" and some investors may be taking risks in pursuing high yields, Federal Reserve chair Janet Yellen said on Wednesday.

Yellen was answering questions on the potential risks from the Fed's long-standing policy for near zero interest rates, asked by International Monetary Fund Managing Director Christine Lagarde who joined Yellen at the "Finance and Society" conference.

"My assessment at this point would be that risks to financial stability are moderated, not elevated at this point," said Yellen.

But the Fed chair stressed low interest rates can certainly create risks for financial stability, saying there are potential dangers, such as high equity market valuations, compressed spreads on high-yield debt, and deterioration in underwriting standards for leveraged loans.

Another potential risk that Yellen pointed out was low long- term interest rates, which could move up rapidly after the Fed raised interest rates. She cited the taper tantrum in 2013 as an example for such risk. In the summer of 2013, then Fed chair Bernanke suggested that the Fed could start reducing its bond purchases in the later of that year, which triggered sharp upward movement in rates and caused disruption across the financial system.

"When the Fed decides it's time to begin raising rates, these term premiums could move up and we could see a sharp jump in long- term rates. So we're trying to ...communicate as clearly about our monetary policy so we don't take markets by surprise," Yellen said.

In their separate speeches during the conference, both Yellen and Lagarde stressed the need to have appropriate and better regulation and supervision over both the bank and nonbank financial sectors. Endite