Tags: Bernanke | monetary | policy | stability

Bernanke: Monetary Policy Isn't the Best Tool to Ensure Financial Stability

By    |   Wednesday, 08 April 2015 03:10 PM

What's wrong with the Federal Reserve's massive easing program?

"Recently, opposition to accommodative monetary policy has coalesced around the argument that persistently low nominal interest rates create risks to financial stability, for example, by promoting bubbles in asset prices or stimulating excessive credit creation," former Federal Reserve Chairman Ben Bernanke writes on his blog.

"Let there be no mistake: in light of our recent experience, threats to financial stability must be taken extremely seriously," the Brookings Institution economist explains.

"However, as a means of addressing those threats, monetary policy is far from ideal. First, it is a blunt tool. Because monetary policy has a broad impact on the economy and financial markets, attempts to use it to 'pop' an asset price bubble, for example, would likely have many unintended side effects."

Instead the Fed should use its financial regulatory and supervisory powers to maintain stability, Bernanke says. "Effective financial oversight is not perfect by any means, but it is probably the best tool we have for maintaining a stable financial system."

The central bank has kept its federal funds rate target at a record low of zero to 0.25 percent since December 2008. Many economists believe the Fed will begin raising rates in September.

Mohamed El-Erian, chief economic adviser at Allianz, appears to disagree with Bernanke.
He criticizes the Fed for its cautious approach on raising rates.

"They should be a little bit less timid and recognize that the main risk to the economy comes from mounting financial imbalances that could threaten instability down the road," El-Erian tells CNBC.

Financial markets have grown addicted to central bank easing, and that addiction could cause a heap of trouble when central banks tighten the credit spigot, he says. "The market is in love with the central bank trade because it has paid off."

Experts agree the Fed's low-rate policy has played a major role in the six-year bull market that has seen the S&P 500 index triple. But now the Fed has begun to reduce its stimulus.

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What's wrong with the Federal Reserve's massive easing program?
Bernanke, monetary, policy, stability
Wednesday, 08 April 2015 03:10 PM
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