The financial crisis has demonstrated the need for a strong relationship between monetary policy and bank regulation, a top Federal Reserve official said Tuesday.

"In the past, monetary and regulatory policies have generally been viewed as separate domains with distinct objectives," Janet Yellen, the president of the Federal Reserve Bank of San Francisco, said in a speech to the Institute of Regulation and Risk in Hong Kong.

"It is no longer obvious that setting policies to stabilize the economy on the one hand and to safeguard the financial system on the other can be cleanly separated — either in conception or implementation."

Yellen's comments come as the Senate Banking Committee will begin consideration of legislation authored by Chairman Chris Dodd that would strip supervision powers from the Fed and other banking agencies.

"It's clear that the effectiveness of monetary policy and the performance of the macroeconomy depend greatly on maintaining a stable and healthy financial system," Yellen said.

"And a sound economy makes the work of regulators much easier, because economic downturns put considerable stress on the financial system," she said. "In addition, the insights we derive from our supervision of banking organizations are helpful in formulating monetary policy."

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