They say the US Federal Reserve is for ever blowing bubbles. Janet Yellen did little to counter that view this week with her reiteration that tighter interest rates are almost always the wrong tool to curb asset price inflation.
She was right, however, to hold the line. Central banks have a poor record of anticipating asset bubbles, let alone preventing them. There is no reason to suppose that their foresight has improved. In contrast, it is within the Fed’s power to bolster the economy’s resilience to bursting bubbles via tougher macroprudential controls. Bubbles will always be with us, she argued. The goal should be to make them less explosive.
Ms Yellen is in good company. Yesterday, Sweden’s central bank reversed its stance of tightening interest rates to head off asset price bubbles by slashing them to just 0.25 per cent.