An NYT piece this morning discusses the background for the Federal Reserve Board's next move on interest rates. At one point the article tells readers that for policy makers "the core issues are consumer price inflation and economic growth," not asset prices like the recent run-up in housing prices.
This is an accurate description of current policy, with the Fed having made the decision to ignore the growth of both the stock and housing bubble. (Arguably Greenspan helped to promote the housing bubble, for example by promoting ARMs and explicitly dismissing warnings of a bubble.) However, it is questionable whether ignoring financial bubbles is consistent with the Fed's legal mandate to promote price stability and full employment. The collapse of the stock bubble led to a recession and a long period of weak employment. The collapse of the housing bubble is likely to lead to even greater economic weakness.
Given the cost associated with the collapse of financial bubbles, it is not clear that it is sound policy for the Fed to ignore their growth, even if this is in fact current policy. It would be useful to point out that Fed policy on this issue is a matter for debate, not a given.
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