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Yellen drives wedge between monetary policy, financial bubbles

Published on Jul 3, 2014 2:46 AM

WASHINGTON (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, she 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," Ms Yellen said at an event sponsored by the International Monetary Fund. She didn't close the door entirely, however, and she cited some areas that bore monitoring with an eye toward a possible tightening of regulation.

Analysts said Ms Yellen was pushing back against some Fed officials who believe financial stability should be given a more prominent place in formulating monetary policy.

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