Asset Bubbles Aren’t Yellen’s Problem
Speaking at an IMF sponsored event, Fed Chairwoman Janet Yellen warned of growing risk factors in several asset classes. Unfortunately, she doesn’t see the most aggressive monetary policy in American history as the cause.
Analysts said Yellen was pushing back against some Fed officials who believe financial stability should be given a more prominent place in formulating monetary policy.
Jeremy Stein, who stepped down as a Fed governor in May, had sparked the debate by arguing higher rates should at least be considered to help stamp out possible asset bubbles, and a number of regional Fed bank presidents have warned of the dangers of keeping rates near zero for too long.
But Yellen made clear she did not see a need for the U.S. central bank to alter its current course. “I do not presently see a need for monetary policy to deviate from a primary focus on attaining price stability and maximum employment,” she said.
She doesn’t dispute that monetary policy is playing role in creating bubbles. In fact, she recognizes that clearly with the mid-2000s housing boom. But it’s not her job to prick the bubble. And if the monetary policy being pursued under her watch is the culprit, well, I guess that’s not her problem either.
In his “Critique of Interventionism”, Ludwig von Mises warned that the unintended consequences of interventions would result in calls for further action. In short, intervention begets further interventions.
Fed monetary policy seems to be a good case of this. Not only is the Fed blowing bubbles with its QE policies, but now the person in charge of this wants further regulations to mitigate the pernicious effects of the original policy causing the problem.
I’m not sure if Yellen read Mises’ book, but maybe someone could post her a copy.
(Originally posted at Mises Canada.)