The Federal Reserve's top regulator waded into the debate over whether monetary policy should be tightened in the face of financial stability risks, saying on Tuesday that such a move cannot be "taken off the table."
Fed Governor Daniel Tarullo, the U.S. central bank's point person on financial supervision, said that while investors are taking on more risks in high-yield corporate bonds and leveraged loans, for example, overall there is not now a need to change policy.
But "in reviewing the relationship between financial stability considerations and monetary policy, ...monetary policy action cannot be taken off the table as a response to the build-up of broad and sustained systemic risk," Tarullo, who has a permanent vote on policy but rarely talks publicly about it, told the National Association for Business Economics.
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He added that further developments in supervisory tools and measures that can affect certain forms of funding can help to "reduce the number of occasions on which a difficult tradeoff between financial stability considerations and near-term growth or price stability aims will need to be made."
More than five years of near-zero Fed interest rates and trillions of dollars in stimulative asset purchases have raised concerns that policymakers may need to tighten policies quicker than planned to head off risk-taking in financial markets.