Fed’s New Chief Will Confront an Old Problem: An Incipient Asset Bubble
With stock and property prices once again setting records, Jerome Powell may face some agonizing trade-offs
What if low inflation calls for low interest rates but those low interest rates make an eventual, destructive asset bust more likely? Should he lean against an incipient bubble by raising rates faster now, or plan to mop up the mess if assets collapse later?
.. no divine coincidence dictates that the same interest rate will achieve both 2% inflation and a stable financial system.
.. Before the global financial crisis, they concluded no: pre-emptively pricking bubbles seemed much riskier than letting them burst of their own accord. They are less dogmatic now.
.. In a 2015 speech, he said: “Tighter monetary policy might eventually be necessary” if dangerous risk-taking reappeared. A year ago, he went further: “The current extended period of very low nominal rates calls for a high degree of vigilance.”
The case for vigilance has only grown since.