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News Link • Federal Reserve

Fed Chief Edges Closer to Using Rates to Pop Bubbles

• Wall Street Journal

ATLANTA -- Federal Reserve Chairman Ben Bernanke cracked the door open a bit more to the idea of raising interest rates if a new financial bubble emerges.

He also mounted a vigorous defense against critics who say it was the Fed's low-interest-rate policies over the past decade that caused the last housing bubble. Instead, he said, the problem was lax regulation, which permitted banks to issue a slew of exotic mortgages that households later had trouble paying.

"We must be especially vigilant in ensuring that the recent experiences are not repeated," Mr. Bernanke said in a speech Sunday at the American Economic Association's annual meeting here. Better regulation is his first line of defense against future crises. But the Fed also needs to "remain open" to using the blunt tool of higher interest rates to avert or pop future asset bubbles, Mr. Bernanke said, particularly if other approaches aren't working.


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