May 30, 2019
(Reuters) – Federal Reserve Vice Chair of Supervision Randal Quarles reiterated on Thursday the U.S. central bank’s longstanding view that macroprudential policies, not interest rates, are the central banking tool best suited to addressing risks to financial stability.
But at the same time he left open the possibility that raising rates to battle asset bubbles could be appropriate, warning that leaving monetary policy too easy for too long can create financial vulnerabilities.
While overall financial stability risks are currently not elevated, higher-than-usual business debt built up during the current near-record economic expansion could set the stage for worse outcomes in a future downturn, he said in remarks prepared for delivery to a New York Fed conference.
Even if the risk of financial system disruption does not seem high, Quarles said, “if the economy weakens, some businesses may default on this debt, potentially leading to a contraction in investment, a slowdown in hiring, and possibly to an unusual tightening in financial conditions.”
Still, he said, “while there is evidence that financial vulnerabilities have the potential to translate into macroeconomic risks, a general consensus has emerged that monetary policy should be guided primarily by the outlook for unemployment and inflation and not by the state of financial vulnerabilities.”
Quarles did not speak to his current outlook for the economy or interest rate policy in his prepared remarks, though their thrust suggested he is not a supporter of the rate cut in coming months that traders of short-term interest rate futures are currently betting on.
(Reporting by Ann Saphir; Editing by Paul Simao)