The Federal Reserve is running the risk of creating another bubble, and needs an exit strategy from its credit easing policy, says former Clinton White House economist Nouriel Roubini.
“The sharp increase in the stock market and commodities, and narrowing of credit spreads since March, are partly due to a wall of global liquidity chasing assets and already causing asset inflation,” Roubini writes in The Wall Street Journal.
“Ben Bernanke and the Federal Reserve face a number of very difficult challenges in the years ahead.”
From 2002 to 2006, after the last recession, the Fed proceeded quite slowly because the recovery was tepid.
“This time around, the recession is more severe — unemployment is at 9.8 percent and is expected to peak above 10 percent, and we are experiencing actual deflation. Therefore, the incentive not to exit too soon will be greater,” says Roubini.
The key tasks for America’s central bankers, Roubini and his writing partner, Ian Bremmer, president of the Eurasia Group, include the following:
• Ignoring pressure to monetize deficits, which will increase inflation
• Developing an exit strategy from the monetary easing of the past year
• Accurately calculating asset prices and the risk of asset bubbles
“Establishing financial stability — in addition to price stability and growth — is the essential role of the central bank. Achieving this goal in a way that avoids moral-hazard distortions, and prevents another bubble in the next years will surely be one of the greatest challenges ever faced by the Fed,” writes Roubini.
Others seem to already be moving in the direction Roubini suggests. Australia's central bank is the first to raise its benchmark interest rate.
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