Bernanke eases asset bubble concerns

US Fed chairman responds to worries that monetary easing is creating risks

PUBLISHED : Saturday, 23 February, 2013, 12:00am
UPDATED : Saturday, 23 February, 2013, 3:21am

Federal Reserve chairman Ben Bernanke minimised concerns that the US central bank's easy monetary policy has spawned economically risky asset bubbles in comments at a meeting with dealers and investors this month.

Three people with knowledge of the discussions said Bernanke made the remarks at a meeting in early February with the Treasury Borrowing Advisory Committee.

A Fed spokeswoman declined to comment.

United States stock prices have fallen over the past two days on speculation that the Fed may slow the pace of its purchases of Treasury debt and mortgage-backed securities, in part because of worries about asset bubbles. The Standard & Poor's 500 Index was at 1,502.42 at the close on Thursday, down from a five-year high of 1,530.94 on Tuesday.

Speculation about scaled-back asset purchases by the Fed was fanned by the release on Wednesday of minutes of the central bank's last policymaking meeting in January.

Many participants at the January 29-30 Federal Open Market Committee meeting "expressed some concerns about potential costs and risks arising from further asset purchases", with some noting that added buying "could foster market behaviour that could undermine financial stability", according to the minutes.

The 15-member treasury committee is made up of representatives of financial companies. It advises the Department of the Treasury on how to raise money to finance the government.

The panel met Treasury officials in Washington on February 5 before the government's quarterly debt refunding. While there, members of the group also met Bernanke, the three people familiar with the gathering said.

At its January meeting the Fed decided to continue buying US$45 billion a month of Treasuries and US$40 billion in mortgage debt without setting a limit on the duration or total size of the purchases. Policymakers also affirmed their pledge to keep the target interest rate near zero "at least as long" as unemployment remains above 6.5 per cent and inflation is projected to be no more than 2.5 per cent.

"There's a lot of disagreement about what role monetary policy plays in creating asset bubbles," Bernanke said on January 14 at the University of Michigan's Gerald Ford School of Public Policy. "It is not a settled issue."

The first line of defence if bubbles emerge "needs to be regulatory and supervisory" actions rather than changes in monetary policy, according to Bernanke.