Fed Kashkari Warned Central Bank Against Fighting Bubbles with Rate Hikes

Minneapolis Federal Reserve Bank President Neel Kashkari on Wednesday warned against using interest-rate hikes to address unwanted asset bubbles, saying that bubbles are hard to identify and such hikes would likely do more harm than good.

Kashkari is a voting member this year on the U.S. central bank’s policy committee, and in March was the lone dissenter on a Fed vote to raise rates for the third time since the Great Recession. He has previously said he opposed the rate hike because he felt keeping rates low would result in more jobs for Americans who want to work.

Some Fed officials have worried that keeping rates too low for too long could create asset bubbles that could set the U.S. economy up for another recession. But the main reason Fed chair Janet Yellen and others have given for raising rates is not to tamp down bubbles, but to keep a now nearly fully employed economy from going into overdrive.

Kashkari’s latest essay argues that keeping a sharp eye out for potential bubbles and using supervisory powers to protect banks from failures are better options than raising rates.

“Given the challenges of identifying bubbles with any confidence and the costs of making a policy mistake, I believe the odds of circumstances ever making sense to use monetary policy to try to slow asset prices down are very low,” he wrote.

“I won’t say never but a whole lot of evidence would have to line up just right for it to be the prudent course of action.”

via CNBC

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza