Janet Yellen, chair of the US Federal Reserve, has highlighted the risks of ultra-low interest rates for financial stability, warning investors that share valuations are “quite high”.
At a seminar in Washington, Yellen was asked by International Monetary Fund (IMF) managing director Christine Lagarde about fears that near-zero borrowing costs distort markets and create bubbles.
The Fed chair said that while risks to financial stability in general were “not elevated”, she did have some specific concerns, including the fact that share prices have been unusually buoyant.
“There are potential dangers there,” she said, in remarks reminiscent of her predecessor Alan Greenspan’s infamous 1996 warning that some investors were showing, “irrational exuberance”.Yellen added that interest rates look artificially low, as investors “reach for yield”, or buying up risky bonds and pushing down the yields, which move in the opposite direction.
She said there could be a “jump” in long-term rates when the Fed decides to start tightening policy.US borrowing costs have been set at zero to 0.25% since the depths of the financial crisis in 2009. Yellen and her colleagues are expected to start raising interest rates later in 2015, if the US economy continues to improve.
When the Fed started to phase out, or “taper” its massive quantitative easing scheme in spring 2013, world markets were rocked by what became known as the “taper tantrum”, with several emerging market currencies plunging, and interest rates on some bonds shooting upwards.
Lagarde used her own remarks to the Institute of New Economic Thinking seminar on markets and ethics to call for a renewed crackdown on bankers’ bonuses, to tackle the “distorted” incentives that led to the global financial crisis.
Lagarde said despite a battery of regulatory reforms, “financial stability is still not well-entrenched”, more than seven years after the collapse of Lehman Brothers. US, UK and EU regulators have all urged banks to exercise pay restraint since the crisis.
A series of rules have been introduced, including the EU’s contentious cap on bonuses, which restricts the payouts to 200% of base pay, even with shareholder approval.But Lagarde insisted there was more to be done.
“Incentives related to compensation practices need to change, so that rewards are no longer so much tied to myopic actions and excessive risk-taking,”she said.
Lagarde added that the IMF’s research suggests bonuses should be tied to longer-term, rather than short-term gains; and that banks should use “clawback”, to force staff who have hit their firm’s performance to pay back part of their bonuses.
theguardian.com
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