Minneapolis Fed President Neel Kashkari said the central bank should keep the bubbles inflated.
OK, he didn’t say that exactly. But that was the message reading between the lines of a speech Kaskari delivered this week. Specifically, the Minneapolis Fed president said the Federal Reserve should not raise interest rates in an effort to prevent bubbles.
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. 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.’
The former Goldman Sachs Group executive was the lone dissenter when the Fed raised interest rates in March.
Artificially low interest rates inflate bubbles. (For an in-depth explanation of bubbles, click HERE.) They incentivize borrowing that wouldn’t otherwise occur. From the central bankers’ perspective, that’s the point. They want to ‘stimulate’ spending and ‘jump-start’ the economy. All of that easy money has to go someplace, so it flows into various assets. Where the bubbles inflate depends on the overall economic and government policy environment at the time. In the 1990s, easy money flowed into the dot-coms. In the years leading up to 2008, it rushed into the housing market.
This post was published at Schiffgold on MAY 18, 2017.