Federal Reserve Chairman Ben Bernanke said the central bank can’t turn a blind eye to price changes for stocks and homes when setting interest rates but should take action only when they threaten the overall economy.
“A central bank cannot ignore movements in stock prices, home values and other asset prices, but should respond to them only to the extent that they have implications for future output and inflation,” Bernanke said in a written response to questions raised by Rep. Jim Saxton, R-N.J.
Saxton, chairman of Congress’ Joint Economic Committee, asked Bernanke various questions following an April 27 hearing on the economy’s outlook.
Bernanke, however, suggested that the Fed shouldn’t try to identify and then prick speculative bubbles in home or stock prices that may develop.
There is little or no evidence that the Fed “is better able than the market to identify speculative bubbles and that it can successfully ‘deflate’ such bubbles without harming the broader economy,” he wrote.
Bernanke took over the Fed helm on Feb. 1, succeeding longtime chairman Alan Greenspan.
Both Bernanke and Greenspan have talked about the great difficulty in identifying when prices for stocks, homes or other assets have become overly inflated and turn into a bubble that could suddenly pop and send prices falling.
“Given our limited knowledge of the forces driving speculative bubbles, the more prudent approach is to respond only as the overall outlook for output and inflation merits,” he wrote.
Both Bernanke and Greenspan have said that trying to prick a bubble through higher interest rates could hurt the economy.
Bernanke’s written responses were dated Wednesday and released Thursday.
The Fed chief also said the central bank has not ruled out boosting interest rates again to head off inflation risks, but the timing of any additional rate increases will hinge on how economic activity and inflation unfold.
Saxton noted that Bernanke, in his April 27 testimony, didn’t close the door on future rate increases and that future rate decisions would depend more heavily on incoming economic barometers. Saxton asked Bernanke if that was “a fair summary of the point you were making?”
Bernanke replied: “Yes.”
To combat inflation, the Fed on May 10 boosted interest rates for the 16th time since June 2004.
At that meeting, the Fed kept open its options for future moves. Policymakers said another increase could be in store or the Fed could opt to pause its two-year-long rate raising campaign. Economists have mixed opinions about what will happen at the Fed’s next meeting, June 28-29.