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if macro prudential tools are to play the primary role in the pursuit of financial stability, questions remain on which macro prudential tools are likely to be most effective, what the limits of such tools may be, and when, because of such limits, it may be appropriate to adjust monetary policy to get in the cracks that persist in the macro prudential framework. in weighing these questions, i find it helpful to distinguish between tools that primarily build through the cycle resistance against adverse financial developments, and those primarily intended to lean against financial excesses. tools that build resillience aim to make the financial system bedroom able to withstand adverse developments. for example, to hold loss absorbing capital make financial institutions more resilient in the face of unexpected losses. such requirements take on a macro prudential dimension when they are most stringent for the largest, most systemically important firms, thereby minimizing the risks that losses at such firms will reverberate throughout the financial system. resilience against runs can be enha

you gave a speech recently on the importance of macro prudential tools to curtail financial instability when a particular asset class gets overheated. the persistent low interest rate environment caused a reach for yield. the fed is taking the stance that regulatory tools such as increased capital requirements, countercyclical buffers, margining, central clears, requirements for derivatives will improve the resiliency of our financial system. so my question for you, rather than preventing asset bubbles from happening, we're now taking the approach that they're going to happen, and we're going to deal with them. is that an accurate statement? >> well, i think the steps that you indicated to strengthen the financial system do two things. they diminish the odds that bubbles will develop. for example, these rules diminish the chance that leverage will build up as an economy strengthens. we've taken steps and will take further steps to diminish the likely buildup in leverage in the economy. >> but -- you would agree that zero interest rate policy is tending to make people reach for yield now

responsibility in a way -- >> i changed a little bit. >> monetary policy, macro prudential tools to be used for financialployment and growth. are you independent? >> i think we are independent and appropriately so in the conduct of monetary policy. congress has established the goals we are to pursue and this is true in most countries there is not gold independents, but there is independence about how to carry out monetary policy and there is an awful lot of research that suggests macro economic outcomes are better when central banks have the ability to decide how to use their tools. they have to explain them, they have to be accountable. we are accountable to congress and i think that is very important. sometimes when central-bank state bonds financial stability mandates it becomes harder and i don't think independence is appropriate in absolutely every sphere of conduct that central banks become involved in. it is the conduct of monetary policy independence is important. we had the experience during the crisis of putting in place of very large number of liquidity programs. central banks become involved

speech recently on the importance of macro prudential tools to entail the financial stability if a particular asset classes overheated. the persistent low interest rate environment has caused a retreat -- regulatory tools such as increased capital requirements, buffers, marching, central clearing, requirements will improve the resiliency of our financial system. my question for you, rather than preventing asset bubbles from happening, we are now taking the approach that they will happen and we will deal with them. is that an accurate statement? >> the steps you indicated to strengthen the financial system do two things. they diminish the odds that doubles will develop. for example, these rules diminish the chance that as thee will build up economy strengthens. we have taken steps and we will to diminish steps the likely buildup in leverage in the economy. >> you would agree zero interest rate policy is tending to make people reach for yield now and bubblempetus toward creation and certain asset classes. >> it can be. that is why we are watching carefully. one particular area you are worried a

monetary policy, macro prudential tools that should be used for financial stability, are you independent? >> well, i think we are independent and appropriately so in the conduct of monetary policy. congress established the goals we are to pursue. i think had true in most countries that there's no goal independence but there is independence on how to carry out monetary policy. there's an awful lot of research that macro economic outcomes are better when central banks have the ability to decide how to use their tools. they have to explain them. they have to be accountable to congress. i think that is very important sometimes when central banks take on financial stability mandates it becomes harder. i don't think independence is appropriate in absolutely every sphere of conduct central banks become involved in. i think it's really the conduct is what's really important. we had had the experience during the crisis of putting in place a very large number of liquidity programs. when banks become involved in lender last resort activities for example the lines between what a central bank should

she thinks that what the fed should be doing to try to control financial stability concerns is what she calls macro prudentialeasures. regulatory measures, but only as a last resort would monetary policy be changed to address those concerns. >> she then shared the same returns as her predecessor, that some of those regulatory measures must pass congressional muster, but with so much tension in washington, what is the fed to do? chair believese that there are measures that the fed can take without legislative action. the fed is ine, control of banking regulation. they can try to encourage banks not to make risky loans, as an example, without asking congress for a resolution to that effect. >> last he can international settlements released its annual report and the bank said that impart a powerful and pervasive search for yields has gathered pace. out at the playing fed? how long can policymakers keep the benchmark rate near zero? >> they think they can keep it there for quite some time. there is a difference in view amongst central bankers on this front. waser governor jeremy stein a proponent of the view that

he talks about the limitations of the financials and only tried in smaller economies. >> stop. macro prudentialchange outcomes. >> correct. some can affect the overall system, which is good, and some are directed to look at definite asset classes and takes the ball away from raising interest rates, because in the fed's own words, raise interest rates, gets into all the cracks rather than that at an asset level. >> take it one at a time. works in smaller economy es. makes sense. you're telling me a handful of very smart people, many of which never worked outside of government or agency, can't probably control something like the u.s., might have better control for a country like israel? >> if you try to squeeze can one sector in a problematic situation, like alan greenspan used to say, i can't raise margin rates. remember back in the irrational exuberance age. can't do that. it was politically -- >> getting at the real crux of this. okay? if you don't like the outcome, isn't this about outcomes? they don't want to raise rates because the feedback might bite a rationing of credit. isn't this all t

light of your recent speech -- how you envision the fed using macro prudential tools instead of monetary policy to maintain financial stability and build resilience in the financial system? >> well, i think most importantly, we have substantially strengthened the capital and liquidity positions of banking firms and financial firms that we supervise more generally. our objective is to make sure that these firms are on solid footing and to the extent that the financial system or the economy are buffeted with shocks, that these firms will be resilient, that they can continue to lend to support the credit needs of our economy, even under adverse circumstances, and i would say our stress tests are a very important part of that as well. so first and foremost, the entire agenda from dodd-frank and more broadly coming out of the financial crisis to see a more resilient, better capitalized financial system, banking system, i'd say is the core of that effort. so if there were an asset price bubble and we did not intervene effectively to deal with that, and that bubble burst, we want to make sure that the financial system can

light of your recent speech -- how you envision the fed using macro prudential tools instead of monetary policy to maintain financial stability and build resilience in the financial system? >> well, i think most importantly, we have substantially strengthened the capital and liquidity positions of banking firms and financial firms that we supervise more generally. our objective is to make sure that these firms are on solid footing and to the extent that the financial system or the economy are buffeted with shocks, that these firms will be resilient, that they can continue to lend to support the credit needs of our economy, even under adverse circumstances, and i would say our stress tests are a very important part of that as well. so first and foremost, the entire agenda from dodd-frank and more broadly coming out of the financial crisis to see a more resilient, better capitalized financial system, banking system, i'd say is the core of that effort. so if there were an asset price bubble and we did not intervene effectively to deal with that, and that bubble burst, we want to make sure that the financial system can

financial markets. people do take risks when volatility is low. the fed is keeping an i on those risks. this is all part of macro provincial regulation. -- macro prudentialtion. -- regulation. this is not unlike what we saw last year with the tapered tantrum. they willingly traded growth for financial stability last year. she'd knowledge is that the big spike in rates slow the housing markets. and yet it took some froth out of certain markets. it is not entirely clear to me that she has used this as a negative thing. >> charles schumer and janet yellen going together. mean for thes average guy out there in america? it is a lot of monetary mumbo-jumbo. issue a liberal, a conservative, a monetarist? what does it mean for the average person? this debate we have seen. >> the average person should know you have nothing you have to fear at the moment from the fed. the fed is not going to dramatically adjust interest rates higher anytime soon. i happen to think it will be a bit sooner than people expect, but they will still be pursuing a very accommodative sense of monetary policy. they will let this run. saying they will maintain extreme accommodation for elon

light of your recent speech -- how you envision the fed using macro prudential tools instead of monetary policy to maintain financial stability and build resilience in the financial system? >> well, i think most importantly, we have substantially strengthened the capital and liquidity positions of banking firms and financial firms that we supervise more generally. our objective is to make sure that these firms are on solid footing and to the extent that the financial system or the economy are buffeted with shocks, that these firms will be resilient, that they can continue to lend to support the credit needs of our economy, even under adverse circumstances, and i would say our stress tests are a very important part of that as well. so first and foremost, the entire agenda from dodd-frank and more broadly coming out of the financial crisis to see a more resilient, better capitalized financial system, banking system, i'd say is the core of that effort. so if there were an asset price bubble and we did not intervene effectively to deal with that, and that bubble burst, we want to make sure that the financial system can

financial stability issues rather than on price stability and full employment. key steps along this path include completion of the transition to full implementation of basel iii, including new liquidity requirements; enhanced prudential standards for systemically important firms, including risk-based capital requirements, a leverage ratio, and tighter prudential buffers for firms heavily reliant on short-term wholesale funding; expansion of the regulatory umbrella to incorporate all systemically important firms; the institution of an effective, cross-border resolution regime for systemically important financial institutions; and consideration of regulations, such as minimum margin requirements for securities financing transactions, to limit leverage in sectors beyond the banking sector and sifis. second, policymakers must carefully monitor evolving risks to the financial system and be realistic about the ability of macroprudential tools to influence these developments. the limitations of macroprudential policies reflect the potential for risks to emerge outside sectors subject to regulation, the potential for supervision and regulation to miss emerging risks, the uncertain efficacy of new macroprudential tools such a

she made it clear that macro prudential relation is a first tool, as i think it should be, and when it comes to battling financialncial sector. i thought she could not have been more clear. >> its frame the debate. she believes that the fed cannot fix bubbles, right? >> i would not go that far. the fed is a major regulator. she talked about underwriting standards were the fed played a major role. she talked about capital standards where the fade that's where the fed plays a major role. ?> not in monetary policy >> she said interest rates were a last resort. >> this goes directly to your commodities, or you get a bubble once in a while. >> she talked about risk-taking. "bubbles"?hose thinkthe same time i credit is being highly constrained to the household sector, to the residential sector. we have this funny combination one potentialess area where things are overheating, and you would cut another area where things are not heating up enough, i would say. on a day when we get unemployment data, how interesting that one of the trends is that seniors are working longer because they cannot afford to retire. with intere

financial stability issues rather than on price stability and full employment. key steps along this path include completion of the transition to full implementation of basel iii, including new liquidity requirements, enhanced prudential standards for systemically important firms, including risk-based capital requirements, a leverage ratio, and tighter prudential buffers for firms heavily reliant on short-term wholesale funding, expansion of the regulatory umbrella to incorporate all systemically important firms, the institution of an effective, cross-border resolution regime for systemically important financial institutions, and consideration of regulations, such as minimum margin requirements for securities financing transactions, to limit leverage in sectors beyond the banking sector and sifi's. second, policymakers must carefully monitor evolving risks to the financial system and be realistic about the ability of macroprudential tools to influence these developments. the limitations of macroprudential policies reflect the potential for risks to emerge outside sectors subject to regulation, the potential for supervision and regulation to miss emerging risks, the uncertain efficacy of new macroprudential tools such

financial stability report. do you expect him to stick to the line or do you think you could perhaps talk about further macro prudential tools he could use here in the housing market? >> i think whereby now they're insisting mortgage lenders can afford a 3% mortgage rate hike and that the bamgs should be lenning 4.5% times salary hikes. i think this will take some time to feed through. >> if we do see wage growth staying at about 11%, do you think that leads carney to stay on hold for the rest of 2014? >> i think the wage numbers have a lot of volatility due to tax changes and bonus structures that have led to news in volatility. we're approaching for the 2% in wage growth. i think with the slack in the market being eroded, we should be looking at that. that may be the catalyst for the bank of england to snam higher rates. >> what about the minutes for next week? are you expecting to see the first dissent? >> i'm not sure it will happen next week. i think it's more likely to happen next week. >> james knightly, that you can for joining us. now, we have had some comments from jean-claude juncker, the commission chief. h

financial markets and banks, etcetera, more indirectly with interest rates. that's going to be their poef. >> but does it make sense for yellen to be talking at macro prudential if we look at the jobs even at 6.3%, isn't it an argument that rates right now are too low? >> what they're doing is -- and it's interesting because she qualifies her comments by later on saying she does acknowledge that there could be a risk in the credit markets. that is something very much on our radar. you could see -- i mean, not the talk too strongly about this, but credit crisis, you have the situation that is reminiscent of what happened before the credit crisis. it's kind of deja vu in the fact that you have two easy standards for lending to poor quality companies. rates spoke have narrowed substantially. finally, margin requirements are potentially, too low. what this does is it stores up a very big risk if people get worried about rate rise coming in and if they start to rush through the door, there may be be enough liquidity in the jobs markets. what happened in the u.s. markets? the u.s. credit markets have doubled since the financial crisis in terms of their size. who is