Falling corporate bond spreads and volatility indicators are signs that investors may not fully appreciate the risk of future losses, Fed Chair Janet Yellen warned on Wednesday.
Taking a variety of factors into consideration, "I do not presently see a need for monetary policy to deviate from a primary focus on attaining price stability and maximum employment, in order to address financial stability concerns," she said.
"That said, I do see pockets of increased risk-taking across the financial system, and an acceleration or broadening of these concerns could necessitate a more robust macroprudential approach," Yellen said in prepared remarks for a speech at the International Monetary Fund.
Yellen noted that monetary policy was limited in its ability to promote financial stability, and that low rates can raise incentives to take on risk.
She also cautioned about easier terms in the leveraged loan market as investors chase higher yields.
"To date, we do not see a systemic threat from leveraged lending," Yellen said, adding that borrowers do not appear to be taking on excess debt and that lenders appear resilient to potential losses.
But she said it was important to monitor the steps already taken to build resilience, to ensure they are still working, and to be flexible about using monetary policy if conditions change.
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