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Preventing Asset Bubbles

Daniel Tarullo, a member of the Board of Governors on the Fed until 2022, is not normally known for speaking to the press, but early this week he weighed it on the use of monetary policy to contain asset bubbles. His comments underlined a concern that a desired level of financial stability has not yet been achieved and would not be until worries of another financial collapse have been relieved . As interest rates remain low investors are turning toward high-yield corporate bonds and the risk that comes with them. While the demand for leveraged-loans and high-yield corporate bonds are up Tarullo does not believe that this is evidence for a bubble. Instead Tarullo suggests that in this present period of stability the Fed reestablish the criteria it uses to evaluate market conditions and the needs that come with it. Evaluating when tighter monetary policy and more regulations will enhance financial stability and slow or curb unsustainable economic buildup is essential to protecting tax payers from another bailout due to the bursting of some unforeseen bubble.

The significance of Tarullo’s statements is that he believes that Fed regulation is not enough to curb asset bubbles.

A flurry of subsequent rule-making is meant to reinforce the financial system, but some worry that the Fed’s unprecedented easy-money policies could fuel another damaging bubble.

Increased speculative investment at the moment is not at a level the Fed is concerned about and comments to the effect that the Fed is monitoring the situation closely have been made several times (though one may wonder about the credibility of those comments given the comments of the Fed in the early 2000s). Timing seems to be the key and at the moment the Fed has targeted next year as the point at which interest rates may be raised that is anything but certain. Market conditions will be the main determinant of relaxing Fed rates and with the relaxation should come a demand for less risky investments. If anything Tarullo’s comments have pointed to a continued goal of the Fed to weather economic turbulence and master the “soft landings” characteristic of Greenspan’s Fed in the 90s rather than some new position. However, if the policy will be a more watchdog outlook with intervention earlier instead of waiting to see how things play out the Fed may slow healthy economic growth.



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  1. dillard dillard

    I agree with Mr. Tarullo’s comments regarding a potential bubble coming from low interest rates which make lending easy and much less borrowing more attractive. This switch to higher-yield corporate bonds seems to potentially bring about an issue but with the current outlook and general demeanor the Fed has shown, people may begin to predict rises in interest rates. The concerns are elicited by the fact that rates have been low for some time, but I do not think a bubble is forming, or hopefully not. However, Tarullo’s input is extremely valuable and should be thoroughly taken to heart so as to prevent more financial struggles. I believe the U.S. economy is on the rise, but we need to let rates rise so people can begin to understand the true place our economy must be in the future.

  2. gjeong gjeong

    While I think that the economy has been recovering at a stable rate, I agree with Mr. Tarullo’s argument. Due to low interest rate, investors are attracted to invest in risky bonds. This can lead to a potential bubble in these risky bond market, which may lead to another financial crisis. However, at the same time, no one is clear on what kind of measures that the Fed has to take. Let’s hope that the new chair of the Fed makes her best decisions for the global economy.

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