Fed Considering New Asset Bubble Policy
- May 14, 2008
Washington, D.C.–As the U.S. works to recover from the recent housing and credit market fallouts, the Federal Reserve is rethinking the way it handles asset price bubbles–which could result in the Fed using regulation or interest rates to battle increases, the Financial Times said Wednesday.Former chairman Alan Greenspan’s notion that central banks shouldn’t touch asset bubbles, concentrating instead on correcting the aftermath once they rupture, is being reconsidered.The Fed may approach asset bubbles differently, according to the Times, possibly using monetary policy to act proactively or setting interest rates higher when asset prices appear to be rising too rapidly.Although it has not come to any conclusions yet, a new asset bubble policy would be a huge departure from the Fed’s previous procedure. The Fed has historically been considered the least likely central bank to utilize a “lean against the wind” philosophy when asset prices are increasing, the Times said. Greenspan felt identifying asset bubbles before they burst was next to impossible, and trying to correct the situation before it fully played out would cause more problems.