Fed's Yellen urges Europe to act on crisis

Fri Nov 11, 2011 5:02pm EST
 
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By Ann Saphir

CHICAGO (Reuters) - The euro zone's debt crisis could substantially damage the U.S. economy if not contained, the Federal Reserve's No. 2 official warned on Friday as she urged bold action by Europe.

"Concerns about European fiscal and banking issues have contributed to strains in global financial markets that pose significant downside risks to the U.S. economic outlook," Fed Vice Chair Janet Yellen told a conference sponsored by the Chicago Federal Reserve Bank and the European Central Bank.

While U.S. banks have "manageable" direct exposure to sovereign debt in the smaller European countries, they have substantial links to banks in larger European countries, some of which are facing funding difficulties, Yellen said.

"In light of such international linkages, further intensification of financial disruptions in Europe could lead to a deterioration of financial conditions in the United States," she said. "We are monitoring European developments very closely, and we will continue to do all that we can to mitigate the consequence of any adverse developments abroad on the U.S. financial system."

In her talk, largely an overview of the regulatory steps the Fed has and will take to shore up the stability of the financial system, Yellen said she would not rule out using monetary policy as a stabilizing tool, "at least on the margin."

In a separate speech in Washington, San Francisco Fed President John Williams took a more aggressive stance.

"Although macroprudential policies are the appropriate first line of defense against financial instability, these defenses are not impregnable," Williams told a conference at the International Monetary Fund. "In all likelihood, monetary policy will need to play a more active role."

The Fed slashed interest rates to near zero in December 2008 in the midst of the financial crisis. It has kept them there since, and also bought $2.3 trillion in long-term securities to help support recovery from the deepest recession in decades by pushing borrowing costs still lower.   Continued...