Feldstein, Rubin: Fed's Macroprudential Policy Inadequate

Wednesday, 13 Aug 2014 11:58 AM

By Dan Weil

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The Federal Reserve says that its "macroprudential" policy — i.e., regulatory powers — will be sufficient to prevent another financial crisis.

Harvard economist Martin Feldstein, chairman of the Council of Economic Advisers under President Reagan, and Council of Foreign Relations co-chairman Robert Rubin, a former U.S. Treasury secretary, aren't so sure.

They note three potential problems in a Wall Street Journal opinion piece.

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"First, since a wide range of assets and asset holders are involved, current tools are not nearly as broad and comprehensive as the existing range of systemic risks. Second, the situations are complex, making the design of an appropriate regime complicated and time consuming," they write.

"Third, it might take considerable time for the FSOC and the relevant agencies to reach a decision to act." The Financial Stability Oversight Council was established as part of the Dodd-Frank financial reform law. It can give the Fed authority over certain non-banks and can recommend policy changes to regulators.

In deciding when to raise interest rates, "the Fed should have a realistic view of the broad range of the existing systemic risks and of the limits of the government's macroprudential tools," the duo says.

"Our conclusion is not that the Fed should respond to those risks by raising interest rates now. Weak labor markets are and should be a deep concern and a pressing issue. But the Fed should also take into consideration the possibility of excesses brought on by low interest rates that could create financial crises."

Meanwhile, Washington Post columnist Robert Samuelson says that the economy must rid itself of almost all excess capacity without triggering price pressures — slack — before the Fed boosts rates.

But the Fed also must be careful not to delay its move for too long, lest inflation run out of control, he writes. Consumer prices rose 2.1 percent in the 12 months through June.

The Fed has kept its federal funds rate target at a record low of zero to 0.25 percent since December 2008.

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