WASHINGTON Federal Reserve Board Chair Janet Yellen raised financial stability concerns Wednesday about a key benchmark rate that has remained at historically low levels since 2008.
In testimony before the Joint Economic Committee, Yellen reiterated that policymakers on the Federal Open Market Committee are keeping a close watch on potential risks that could arise in financial markets as a result of a near zero interest rate.
"The committee recognizes that an extended period of low interest rates has the potential to induce investors to 'reach for yield' by taking on increased leverage, duration risk, or credit risk," said Yellen, in prepared testimony.
Yellen, and other Fed officials, have pointed to a number of high risk areas that regulators are watching, including leverage lending and deteriorating underwriting standards, asset price bubbles and farm land.
Regulators have become increasingly worried that an extended period of low interest rates, along with expectations fostered by forward guidance, could be incentivizing the market to take on additional risks to boost margins, causing spikes in asset prices and a buildup of systemic vulnerabilities.
The Fed has kept its key interest rate to a range of between zero percent and 0.25% since December 2008, and while the central bank has begun taking steps in the direction of easing back its stimulus program starting in December, it has pushed off the possibility of raising rates into the distant future.
On Wednesday, Yellen said some reach-for-yield behavior is already evident in the lower-rated corporate debt markets and high-yield bonds.
"While some financial intermediaries have increased their exposure to duration and credit risk recently, these increases appear modest to date particularly at the largest banks and life insurers," said Yellen.
Still, she also noted that valuations in the equity market overall and other broad categories of assets, like residential real estate, still remain in the normal range.