Fed officials wary of creating speculative bubbles
Published 07/04/2010 | 05:00
US Federal Reserve officials at their March meeting stressed the importance of making sure record-low interest rates don't feed new speculative bubbles in stocks or other assets.
Still, some officials said the Fed's pledge to keep rates low for an "extended period" doesn't mean a fixed period of time. Rather, it depends on the strength of the economy.
Analysts have taken the pledge to mean rates need to stay at record lows for roughly six months to help underpin the recovery.
Fed officials argued that the pledge won't stop the Fed from boosting rates if the US economy showed signs of picking up substantially or if inflation took off.
On the other hand, the pledge "could last for some time" if the economy took a turn for the worse.
To aid the recovery, the Fed at its March 16 meeting held its target range for its bank lending rate at 0 to 0.25pc. It has stood at that level since December 2008. And it maintained a pledge -- in place for a year -- to keep rates at rock-bottom levels.
Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, for a second straight meeting was the sole opponent in keeping the pledge.
Mr Hoenig is worried that low rates could cause a build-up of "financial imbalances" and put the US economy's stability at risk. Analysts saw Mr Hoenig as concerned that holding rates too low for too long could feed some new speculative bubble in assets such as stocks or commodities.
Fed members noted the importance of closely monitoring financial markets and institutions to help detect risks at an early stage. They cited, in particular, the need to monitor asset prices and loan levels.