WASHINGTON Federal Reserve Board Chairman Ben Bernanke on Wednesday told lawmakers his concerns about the financial stability risks from historically low interest rates have “increased a bit” and the central bank continues to factor such concerns into policy decisions.
The Fed has tried to maintain a delicate balance of keeping rates low for an extended period to help improve economic growth and employment trends while monitoring the implications of its monetary policy action for the health of the financial system. The low rates have allowed banks to access large amounts of cheap funding, but institutions could see their costs multiply suddenly when rates begin to rise to historical norms.
“It is a very difficult tradeoff because, as I mentioned, a weak economy means low interest rates, which creates some of the same problems, and moreover, a weak economy means worsening credit quality, for example, and that too has financial stability implications,” said Bernanke. “There are tradeoffs and difficult judgments to make.”
Bernanke also distanced himself from recent proposals to break up the largest banks, saying already-enacted policies such as the Dodd-Frank Act should be implemented as intended to try and deal with systemic concerns. He did not endorse recent ideas, for example, to move the regulatory framework closer to that which existed under the Depression-era law known as Glass-Steagall. That law, which was repealed in 1999, created firewalls between commercial and investment banking.
“Glass-Steagall is not the solution because as we saw in the crisis, investment banks [and] commercial banks, separately, got into serious trouble,” he said.
Yet the hearing focused primarily on the pace of the economic recovery and Fed monetary policy decisions.
Bernanke assured lawmakers that the Fed, as it foresees eventually letting rates rise again, has greatly increased its monitoring and attention to interest rate risk while also coordinating with other regulatory agencies to be prepared for such risks.
“We are quite aware of this issue and watching it very carefully and it does factor into our thinking about the appropriate amount of accommodation and the appropriate exit strategy,” he said.
