Fed's Yellen acknowledges risks to ultra-low rates

[October 12, 2010]  WASHINGTON (AP) -- Record-low interest rates may give companies an incentive to take excessive risks that could be bad for the economy, the Federal Reserve's new vice chairwoman warned on Monday.

Janet Yellen has supported the Fed's policy of ultra-low interest rates to bolster the economy and to help drive down unemployment. Her remarks, which don't change that stance, may be aimed at tempering critics. They worry she'll want to hold rates at record low levels for too long, which could inflate new bubbles in the prices of commodities, bonds or other assets.

Yellen, who was sworn in as the Fed's second-highest official last week, made clear she is aware of the risks.

"It is conceivable that accomodative monetary policy could provide tinder for a buildup of leverage and excessive risk-taking," Yellen said in remarks to economists meeting in Denver. It marked her first speech since becoming vice chairwoman.

Yellen has a long history with the Fed. Before taking her current job, she served as president of the Federal Reserve Bank of San Francisco since 2004. She also was a member of the Fed's Board of Governors from 1994 to 1997, when Alan Greenspan was chairman.

As vice chairwoman, Yellen will help build support for policies staked out by Ben Bernanke, the current chairman.

The Fed at its November meeting is expected to take new steps to energize the economy. It's likely to announce a new program to buy government bonds. Doing so would lower rates on mortgages, corporate loans and other debt. The Fed hopes that would get people and companies to buy more, which would strengthen the economy.

The new effort is expected to be smaller than the $1.7 trillion launched during the recession. Under that program, the Fed bought mostly mortgage securities and debt, although it did buy some government bonds, too.

The Fed has held its key interest rate at a record low near zero since December 2008. Because it can't lower that rate any more, it has turned to other unconventional ways to pump up the economy.

[Associated Press; By JEANNINE AVERSA]

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