Yellen and BoE reiterate reluctance to use monetary policy for bubbles

Already widely perceived to be a dove, Federal Reserve Chair Janet Yellen reminded everyone on Wednesday that she is unlikely to rely much on monetary policy to prevent financial bubbles. From Reuters:

Monetary policy faces “significant limitations” as a tool to counter financial stability risks, Federal Reserve Chair Janet Yellen said on Wednesday, adding that heading off the U.S. housing bubble with higher interest rates would have caused major economic damage.

Weighing in on a global debate, Yellen reiterated her view that regulation - not rate policy - needs to play the lead role in combating excessive financial risk-taking.

“The potential cost ... is likely to be too great to give financial stability risks a central role in monetary policy discussions,” Yellen said at an event sponsored by the International Monetary Fund.

However, if fear of bubbles is unlikely to push her to tighten monetary policy, better US economic growth could.

ADP reported on Wednesday that private employment rose 281,000 in June, the most since November 2012.

Another report on Wednesday showed that US factory orders fell 0.5 percent in May. However, excluding military equipment, orders rose 0.2 percent. Orders for non-military capital goods other than aircraft rose 0.7 percent.

The Bank of England has also been slow in tightening monetary policy to head off financial bubbles. On Wednesday, its chief economist, Andy Haldane, said that monetary policy is “a last line of defence” for preventing financial stability risks, not a first line of defence.

However, those risks could be increasing after UK house prices rose 1.0 percent in June, taking the annual rate of increase to 11.8 percent, the biggest since January 2005, according to a report from Nationwide on Wednesday. London house prices surged 25.8 percent from a year earlier, an annual increase not seen since 1987.

The strong housing market has boosted construction activity in the UK. Another report on Wednesday showed that the Markit/CIPS construction PMI rose to 62.6 in June from 60.0 in May.