Volatility Will Not Shape Fed's Monetary Policy, Top Official Says

WASHINGTON — Federal Reserve Board Gov. Jerome Powell said Friday that he does not anticipate the central bank's interest rate policy changing because of real or perceived volatility in the market.

Since then Fed Chairman Ben Bernanke announced last year that the central bank was winding down its purchase of mortgage-backed securities, dubbed "quantitative easing," the market reaction has been relatively smooth, Powell said. He noted that the central bank will look more to indicators about inflation and employment when and if it decides to raise interest rates from the near-zero level sometime next year.

"In my view, while market volatility will continue to ebb and flow, these fluctuations are not likely to have important implications for policy," Powell said. "The path of policy will depend on the progress of the economy toward fulfillment of the dual mandate."

Powell, who sits on the Fed's Open Market Committee and was confirmed to a full term on the Fed Board earlier this year, said that while the Fed's ultra-low interest rates that have been in place since the 2008 financial crisis are intended to spur lending and therefore the assumption of risk, banks have actually taken up a smaller share of the riskiest loans over that period.

Instead, research shows that a greater share of high-risk loans has been taken by U.S.-based investment funds, mutual funds and pension funds. Greater risk is also taken by international lenders when U.S. interest rates are so low, Powell said.

"These data suggest that a tougher regulatory environment may have made U.S.-based bank originators unable or unwilling to hold risky loans on their balance sheets," Powell said. "Related work … shows a similar pattern of increased risky loan underwriting by international lenders. Together, these results suggest a potential spillover from accommodative U.S. monetary policy through increased risk-taking in syndicated loans globally."