Fed Vice Chair Yellen on 'Prudent Risk-Taking'

Here is how Fed Vice Chair Janet Yellen described the Fed’s game plan in a panel discussion at a conference hosted by the IMF on April 16:

By lowering private-sector expectations of the future path of short-term rates, this guidance can reduce longer-term interest rates and also raise asset prices, in turn, stimulating aggregate demand. Absent such forward guidance, the public might expect the federal funds rate to follow a path suggested by past FOMC behavior in ‘normal times’--for example, the behavior captured by John Taylor's famous Taylor rule. I am persuaded, however, by the arguments laid out by our panelist Michael Woodford and others suggesting that the policy rate should, under present conditions, be held ‘lower for longer’ than conventional policy rules imply.

She concluded her short remarks by stating that the Fed’s goal is “to promote a return to prudent risk-taking.” She admits that risk-taking can be taken too far, but reassuringly said she isn’t worried: “I don't see pervasive evidence of rapid credit growth, a marked buildup in leverage, or significant asset bubbles that would threaten financial stability.” Ms. Yellen’s only concern so far seems to be that fixed-income investors are “reaching for yield.” Gee, I wonder why they might be doing so? She didn’t mention that margin debt recently rose back to its previous record high. Here it all that she did say:

To put it in context, let's remember that the Federal Reserve's policies are intended to promote a return to prudent risk-taking, reflecting a normalization of credit markets that is essential to a healthy economy. Obviously, risk-taking can go too far. Low interest rates may induce investors to take on too much leverage and reach too aggressively for yield. I don't see pervasive evidence of rapid credit growth, a marked buildup in leverage, or significant asset bubbles that would threaten financial stability. But there are signs that some parties are reaching for yield, and the Federal Reserve continues to carefully monitor this situation.