The Fed may be pushing for interest-rate hikes for the wrong reasons

BusinessInsider/Pedro Nicolaci da Costa/05-19-17

The central bank’s mandate is low, stable inflation and maximum employment, and Fed officials monitor a range of indicators to assess progress on those two goals.

But the Fed may be keen to hike rates for another reason: reigning in what it sees as excessively high prices in stocks and other financial markets.

If that’s its intention, it goes against what Fed Chair Janet Yellen and other key members of the rate-setting Federal Open Market Committee have said they would do.

… Neel Kashkari, the Minneapolis Fed president who is seemingly the last true remaining dove at the central bank, however, makes a solid case in an essay this week as to why this is a terrible idea. Here are his bullet points on the Fed’s limitations from the essay:

1. It is really hard to spot bubbles with any confidence before they burst.

2. The Fed has limited policy tools to stop a bubble from growing, even if we thought we spotted one.

3. The costs of making policy mistakes can be very high, so we must proceed with caution.

4. What we can and must do is ensure that the financial system is strong enough to withstand the inevitable bursting of a bubble.

5. Monetary policy should be used only as a last resort to address asset prices, because the costs to the economy of such a policy response are potentially so large.