Janet Yellen, who served as Chairwoman of the Federal Reserve from 2014 until February 2018, made worrisome statements on Monday regarding the economic outlook for the US.
I do worry that we could have another financial crisis, Yellen told a New York audience.
Yellen echoed concerns cited by current Fed Chair Jerome Powell about leveraged loans and a lack of regulation over these corporate loans.
I think things have improved, but then I think there are gigantic holes in the system, said Yellen who was appointed by President Obama and served over a year under President Trump.
The tools that are available to deal with emerging problems are not great in the United States.
Earlier this year Yellen said she was
worried about the systemic risks in corporate leveraged loans. Yellen has observed corporate debt being packaged and sold in instruments all to similar the the Collateralized Debt Obligations (CDOs) containing subprime mortgage loans that flooded the financial markets from 2002 to 2007. These instruments were cited as a primary cause of the financial collapse of 2008.
Yellen’s statements in 2018 since leaving her position at the Fed, appear to be a significant change in her economic outlook. In 2016 and 2017 she was very optimistic. In 2016 she said she was not worried about a recession and in 2017 she said that she did not believe that we would see another 2008-style financial crisis in our lifetime because of financial reforms.
When asked about the current financial climate, Yellen only noted that
Interest rates are low. I believe they’re likely to remain lower than they’ve been in past decades. She noted that historically the Fed has been able to use interest rate cuts to stave off recessions, usually cutting rates by 5 percent when necessary. With the current short-term rate below 3%,
That means there’s much less scope to cut short term rates than there’s been historically in the United States.
Yellen’s comments come just after one of the worst weeks of 2018 for stocks, a week that saw the DJIA lose nearly 4% of its value. The selloff was at least partly driven by worries about economic stability and fears of rising interest rates. It was also a week that saw gains for gold, silver, and palladium. These precious metals showed surprising strength even with headwinds from lower oil prices and a stronger dollar. Gold appears to be seeing significant buying interest as a safe-haven asset for the first time since early 2018 when North Korean nuclear tests spooked investors.