Bloomberg News

Yellen Says Fed Watching Leveraged Loans for Risk of Imbalances

June 02, 2011

June 2 (Bloomberg) -- Federal Reserve Vice Chairman Janet Yellen said an increasing demand for leveraged loans warrants monitoring as a possible emerging “imbalance” that the Fed would curb if necessary through regulation.

The central bank will “continue to watch conditions in the leveraged loan market closely in the coming months, and we will speak out forcefully if we perceive pressures continuing to build,” Yellen said today in a speech in Tokyo. “Strong demand has been pushing prices higher in the syndicated loan market” and “inflows into this asset class have indeed been robust and prices have been rising quite rapidly.”

Yellen said in a brief discussion of the U.S. economy that the “current accommodative stance of U.S. monetary policy continues to be appropriate because the unemployment rate remains elevated and inflation is expected to remain subdued over the medium run.”

Chairman Ben S. Bernanke and the Federal Open Market Committee plan this month to complete a $600 billion bond purchase program aimed at reducing borrowing costs, spurring growth and raising employment. At their last meeting in April they said they’ll hold interest rates “exceptionally low” for an “extended period.”

Yellen defended the Fed’s purchase U.S. Treasuries as an “effective” policy in easing financial conditions, promoting recovery and reducing the risk of falling prices.

Few Restrictions

The former San Francisco Fed chief cited an increasing number of “covenant-lite” deals, while saying she sees few signs of serious asset-price imbalances in the U.S. Such loans are devoid of restrictions such as a mandate on maximum leverage, or debt to earnings before interest, taxes, depreciation and amortization.

Yellen used most of her talk at a Bank of Japan conference to say the Fed was increasing its resources to watch for emerging systemic risks, including those from rising asset prices and increased use of debt.

“At present, we see few indications of significant imbalances, and the use of leverage appears to remain well below pre-crisis levels,” she said in remarks prepared for delivery. “That said, I’ve noted some recent developments that warrant close attention, including indications of potentially stretched valuations in certain U.S. financial markets and emerging signs that investors are reaching for yield.”

Yellen said current valuations for most U.S. stock markets don’t seem out of line with historical averages, though valuations of smaller-capitalization equities seem “somewhat elevated.”

Regulatory powers should be used to address any asset price issues, and monetary policy would be a “last resort,” she said.

--Editors: James Tyson, Kevin Costelloe

To contact the reporters on this story: Steve Matthews at

To contact the editor responsible for this story: Christopher Wellisz at

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