Bloomberg News

Fed’s Yellen Says ‘Forceful Action’ Needed on Europe Crisis

November 15, 2011

(Updates with comment on stress tests in 16th and 17th paragraphs.)

Nov. 11 (Bloomberg) -- Federal Reserve Vice Chairman Janet Yellen said recent financial market turmoil underscores the need for “forceful action” by European leaders to curb the continent’s debt crisis.

U.S. banks “have manageable levels of direct exposure to the peripheral European countries but more substantial links to financial institutions in the larger European economies,” Yellen said today in a speech in Chicago. The central bank will do everything it can to limit harm to the U.S. from Europe, she said.

Yellen and her colleagues are concerned that Europe’s sovereign-debt crisis may damage the weak U.S. economic recovery. Fed Chairman Ben S. Bernanke said yesterday that the U.S. wouldn’t be able to escape consequences of a “blowup” in Europe.

“The continued rise in sovereign debt spreads for some countries, more generalized market volatility, and political turmoil that we have seen in recent days speak to the need for forceful action to stabilize the situation,” Yellen, 65, said at the Chicago Fed’s annual international banking conference.

The central bank’s Federal Open Market Committee said in a Nov. 2 statement that “there are significant downside risks to the economic outlook, including strains in global financial markets.” Bernanke said in a press conference the same day that the risks include “concerns about European fiscal and banking issues.”

Major Banks

Yellen reiterated those points in her speech today, saying that “further intensification of financial disruptions in Europe could lead to a deterioration of financial conditions in the United States.” Some unspecified “major European banks” get financing from U.S. money-market funds and “appear to be facing significant funding pressures,” she said.

“We are monitoring European developments very closely, and we will continue to do all that we can to mitigate the consequence of any adverse developments abroad on the U.S. financial system,” Yellen said.

Regulators are “actively engaged” in making sure U.S. financial firms are managing risks “appropriately,” and the Fed has currency-swap lines in place with other central banks to “limit the spread of funding stresses,” she said.

Yellen didn’t elaborate on the outlook for the U.S. economy or monetary policy in her remarks.

U.S. stocks remained higher after the remarks, with the Standard & Poor’s 500 Index up 2 percent to 1,263.85 at 4:14 p.m. in New York.

Budget Bill

European leaders are trying to contain a falloff in investor confidence that spread to Italy’s bonds this week. That country’s Senate approved a budget bill today, paving the way for a new government possibly led by former European Union Competition Commissioner Mario Monti. The spread between Italian 10-year bonds and German bunds narrowed 55 basis points to 456 basis points, or 4.56 percentage points.

Lucas Papademos, a former vice president of the European Central Bank who was sworn in as prime minister of a Greek unity government today, faces the immediate task of securing funds by implementing budget cuts to avert an economic collapse.

Last month’s European rescue package “indicates a strong commitment” from the continent’s leaders, “but many details of the plan were unclear, and the measures would require rigorous implementation,” Yellen said.

‘Chronic Situation’

Yesterday at the Chicago Fed conference, ECB Executive Board member Peter Praet said his institution isn’t authorized to purchase sovereign bonds to support debt-strapped euro-region governments. The ECB’s bond purchases are solely to restore transmission of its interest rates on financial markets and “cannot become a chronic situation,” Praet said.

Yellen devoted most of her talk to U.S. regulation and the 2010 Dodd-Frank Act overhauling American financial rules. The Fed will “soon” release a proposed rule on the tougher standards that large banks and systemically important nonbank firms will be subject to, Yellen said.

The central bank is likely to make the results of its bank stress tests at least partially available to the public, Yellen said in response to audience questions.

“Publishing all supervisory information we have, given the course of our work with the banks, is probably not something we’re contemplating,” Yellen said. “But information sufficient to give market participants information about the health of major financial institutions and their ability to withstand stresses and shocks I think is important,” she said.

‘Structural Risk’

Short-term funding markets are still an “important source of structural risk” for the financial system, with money-market funds “still susceptible to liquidity constraints,” Yellen said in her speech. In addition, “more needs to be done” to reduce vulnerabilities in the triparty repurchase agreement market, she said.

Yellen said she wouldn’t “rule out the possibility” of using interest rates to “support financial stability goals, at least on the margin.” Before the U.S. financial panic in 2008, most Fed officials said monetary policy shouldn’t be used at all to counter asset-price bubbles.

Last week, Bernanke signaled additional monetary stimulus may be needed to lower U.S. joblessness, saying potential actions including a third round of securities purchases are “on the table.” He warned in a Nov. 2 press conference that economic improvement will probably be “frustratingly slow,” with policy makers forecasting a 1 percentage-point drop in the jobless rate to about 8 percent over two years.

Yellen was president of the San Francisco Fed beginning in 2004 before being appointed vice chairman last year by President Barack Obama. The former economist at the University of California at Berkeley previously served on the Fed’s Board of Governors from 1994 to 1997 and chaired President Bill Clinton’s Council of Economic Advisers from 1997 to 1999.

--With assistance from Phil Mattingly in Washington. Editors: James Tyson, Kevin Costelloe

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net; Joshua Zumbrun in Chicago at jzumbrun@bloomberg.net.

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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