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Economy

Janet Yellen sees stronger financial system but trade policy could disrupt

High asset valuations, credit risk also raise concerns from Amundi forum speakers

Federal Reserve Chairwoman Janet Yellen speaks to the media Wednesday following a Federal Open Market Committee meeting in Washington.

Trade policies, credit risk and the search for yield have the potential to trigger shocks to the financial system, warned speakers at the Amundi World Investment Forum 2018.

Speaking at the forum in Paris on Thursday, Janet L. Yellen, former chairwoman of the U.S. Federal Reserve, said she believes the financial system is "somewhat better positioned to cope" with another financial crisis.

Ms. Yellen cited stronger regulation and a safer financial system as backing up her hope that "a disruption would not end up triggering a full-blown financial crisis of the type we have seen."

She said the financial system is also better at monitoring financial stability risk.

Ms. Yellen was asked by Pascal Blanque, chief investment officer at Amundi, on what could trigger a disruption. She said trade policy or other events of that type were one risk. She also cited high asset valuations. "That doesn't necessarily mean that they will come down, or … that there is a bubble in those asset valuations … but I think it is pretty easy to envision shocks."

Ms. Yellen also cited American economist Hyman Minsky's idea that a long period of stability can induce instability over time. "I do think this is an issue and it may be that low interest rates is also something that can induce reach-for-yield-type behavior … and I think we have seen some of that in the aftermath of the financial crisis," she said.

On a separate panel considering macroeconomic regimes and central bank policies, speakers also addressed risks in the system.

Kenneth Rogoff, Thomas D. Cabot professor of public policy and professor of economics at Harvard University and former chief economist at the International Monetary Fund, said Fed tightening cycles are "painful, they have huge world effects" because the dollar dominates the global economy. "If the U.S. tightens, that's a big deal."

However, he said his real worry about the U.S. is President Donald Trump and whether Mr. Trump will continue to "leave the Fed alone" should he want a cut in interest rates.

And speaking on another panel made up of Amundi regional investment leaders, Ken Taubes, chief investment officer of U.S. investment management at Amundi Pioneer Asset Management, said he sees "excesses" in debt markets.

"The excesses in this part of the cycle have been in … corporate credit (and) investment-grade credit, where we see much leveraging going on. Bank loans have been underwritten with very, very poor covenants." He said a lot of bank lending in the last cycle that was "cracked down on" by the Fed has moved off of banks' books and into other parts of the financial system. "I think it's a good idea to upgrade the quality of your portfolio," said Mr. Taubes.