Why Asset Bubbles Involve So Much More Than Just Rising Prices

by Frank Shostak

According to the Financial Times from October 18, 2020, senior Federal Reserve officials are calling for tougher financial regulation to prevent the US central bank’s low interest rate policies from giving rise to excessive risk taking and asset bubbles in the markets.

Eric Rosengren, president of the Federal Reserve Bank of Boston, told the Financial Times that the Fed lacked sufficient tools to “stop firms and households” from taking on “excessive leverage” and called for a “rethink” on “financial stability” issues in the US.

If you want to follow a monetary policy…that applies low interest rates for a long time, you want robust financial supervisory authority in order to be able to restrict the amount of excessive risk taking occurring at the same time,” he said. Otherwise “you’re much more likely to get into a situation where the interest rates can be low for long but be counterproductive.

According to the Financial Times, one of the fears among some Fed officials is that the US central bank could be forced to raise interest rates earlier than it would like if financial sector risks are not kept under control and dangerous asset bubbles emerge.

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