Riskier trading practices are on the rise though the country''s top economist sees no need to immediately alter today''s accommodative U.S. monetary policy.
Corporate bond spreads have been falling as have volatility indicators such as the Volatility S&P 500, which may indicate investors are taking on risks despite the possibility of facing losses for which they might not be fully prepared, Federal Reserve Chair Janet Yellen said on Wednesday.
"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. 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," said Yellen in prepared remarks of a speech she delivered at the International Monetary Fund earlier.
"For example, corporate bond spreads, as well as indicators of expected volatility in some asset markets, have fallen to low levels, suggesting that some investors may underappreciate the potential for losses and volatility going forward"
Yellen added monetary policy has its limits when dealing with instability in financial markets.
"Monetary policy faces significant limitations as a tool to promote financial stability: Its effects on financial vulnerabilities, such as excessive leverage and maturity transformation, are not well understood and are less direct than a regulatory or supervisory approach; in addition, efforts to promote financial stability through adjustments in interest rates would increase the volatility of inflation and employment," Yellen said.
"As a result, I believe a macroprudential approach to supervision and regulation needs to play the primary role."
U.S. stocks were up, with theDow 30 up 0.07%, the S&P 500 index up 0.04%, while the NASDAQ Composite index up 0.11%.