At least since the global financial crisis of 2008, Federal Reserve officials have, by and large, denied or downplayed the idea that their zero-interest-rate policies and mammoth bond purchases have artificially inflated financial assets even as the Fed is buying trillions – with a capital T – of U.S. Treasury and mortgage-backed securities markets and more recently corporate bonds. Now the presidents of a few of the Fed’s regional banks are suggesting that the Fed study whether its monetary policies are encouraging overly risky investor behavior.
Loretta Mester, the president of the Cleveland Fed, conceded that prolonged periods of low rates could incite “higher levels of borrowing and financial leverage, increased valuation pressures, and search-for-yield behavior.”
“While monetary policy that leads to a stable macroeconomy encourages financial stability, it is also possible that in an environment with low neutral rates, a persistently accommodative monetary policy could, in some cases, increase the vulnerabilities of the financial system,” she said.
Boston Fed President Eric Rosengren went even further, suggesting that the Fed “rethink” financial regulation – but apparently not monetary policy – to rein in speculative behavior. Continue reading "Put The Blame On Me"