Fed's Evans calls for possible revamp of U.S. financial regulation

FILE PHOTO: Chicago Federal Reserve Bank President Charles Evans looks on during the Global Interdependence Center Members Delegation Event in Mexico City, Mexico, February 27, 2020. REUTERS/Edgard Garrido/File Photo/File Photo

(Reuters) – Chicago Federal Reserve President Charles Evans on Tuesday raised the possibility that U.S. financial regulation and supervision may be due for an overhaul, given the new reality that interest rates are likely to be low for a long time.

The Fed recently undertook just such a review of its monetary policy framework, culminating in the adoption last August of a new strategy that targets 2% inflation on average and seeks to rectify shortfalls, but not overshoots, on the Fed’s full employment goal.

That new framework, designed to overcome the downward pull on inflation from persistently low interest rates globally, led the U.S. central bank to promise super-accommodative monetary policy for what could be years as it tries to push inflation upwards.

The expectation of an extended period of low rates raises concerns that investors take on excessive risks as they reach for yield, generating marketwide financial instability, Evans said in remarks prepared for delivery to a virtual meeting of the American Economic Association.

Responding to such concerns by raising rates or paring back the Fed’s asset purchases before the central bank’s economic goals are met would be a “lose-lose scenario (that) could not just threaten the achievement of our dual mandate objectives, but might not even improve financial stability either, given that financial stability is bolstered by a strong economy,” Evans said.

Instead of monetary policy, Evans said, the better tools to address financial stability concerns are regulation and supervision.

And though both have improved since their last overhaul in the aftermath of the 2007-2009 financial crisis, “more can and should be done,” Evans said. “Perhaps it is time for financial institutions and their supervisors to do the same—that is, review their business models and make their supervisory and regulatory strategies as robust and resilient as possible—in this low nominal interest rate environment.”

The proposal, made at the end of remarks that were largely repetitive of comments he made Monday, represents a potentially important addition to an already large to-do list for president-elect Joe Biden when he takes office on Jan. 20.

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