In debate over bubbles, one Fed official warns against tighter policy

Sat Oct 19, 2013 7:26am EDT
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By Ann Saphir and Richard Valdmanis

CHICAGO/BOSTON (Reuters) - The Federal Reserve should be "extraordinarily careful" about hiking interest rates to head off potential risks to financial stability, a top U.S. central banker said on Friday, warning about consequences to the economy.

Another policymaker underscored the importance of the issue of asset bubbles as he laid out possible approaches to protecting the broader economy, but without endorsing any one.

The debate over whether tighter policies should be used to battle asset-price bubbles has simmered under the surface as the Fed has taken unprecedented steps to boost economic growth, including trillions of dollars in bond-buying and promises to keep interest rates low for long periods.

Since the implosion of the U.S. housing bubble touched off the financial crisis that reverberated around the world, the role of asset bubbles has become a regular source of scrutiny and debate.

Monetary policy is traditionally used only to target inflation rates, and in the United States to also encourage maximum sustainable employment.

Chicago Fed President Charles Evans said raising rates to tamp down risk-taking, when what the economy needs is support from low rates, is a "poor choice." He said there are more effective tools, such as supervision, and said they are better choices.

"If more restrictive monetary policies were pursued to generate higher interest rates, they would likely result in higher unemployment and a sharp decline in asset prices, choking the moderate recovery," Evans, a dovish Fed policymaker, told the Financial Management Association's annual meeting in Chicago.

"Such an adverse economic outcome is unlikely to set a favorable foundation for financial stability."   Continued...

An eagle tops the U.S. Federal Reserve building's facade in Washington, July 31, 2013. REUTERS/Jonathan Ernst