No, Central Bankers Are Not Learning

In his eight years at the helm of the Federal Reserve, Ben Bernanke really never had to raise interest rates – he finished off Greenspan’s “baby steps” normalization campaign in early-2006, but, in the understatement of the decade, it was all downhill from there.

Absent a premature departure from the central bank, expectations are that current Fed Chief Janet Yellen will have to raise rates at some point, but, given recent economic reports in the U.S. and stories like Debt Traders to Fed: We Dare You to Try Raising Rates This Year at Bloomberg, it is not at all clear when that might happen.

Of course, asset bubbles are gestating (see The Federal Reserve Asset Bubble Machine for more on this timely subject) as they are wont to do under overly accommodative monetary policy and, with fiscal policy aimed at boosting economic recovery permanently absent around the world, central banks are the only game in town.

Or so the thinking goes.

Now that the European Central Bank has entered the game in a big way and Japan’s monetary policy continues to be off the charts (as detailed in It’s Official: The BoJ Has Broken The Japanese Stock Market), it was interesting to stumble upon this item ($) at FT Alphaville that included the following comment by former Fed Vice Chair Donald Kohn from 2004:

A second concern is that policy accommodation – and the expectation that it will persist—is distorting asset prices. Most of this distortion is deliberate and a desirable effect of the stance of policy. We have attempted to lower interest rates below long-term equilibrium rates and to boost asset prices in order to stimulate demand…

I believe that at least for a while the macro imperatives are likely to outweigh any threat to financial or longer-term economic stability from accommodative policy. Any unusual distortions in asset prices that might intensify a subsequent correction are probably small…In our situation, a high burden of proof would seem to be on policies that would slow the expansion, leaving more slack and less inflation in the economy in the intermediate run to avoid hypothetical instabilities later.

The FT Alphaville story includes this comment by ECB Board Member Benoît Cœuré that “it would be wrong to treat bubbles as a welcome replacement therapy to a sustainable growth model”, but as in the case of Janet Yellen’s “warnings” about the housing bubble via Fed transcripts from a few years back, this is much too little and far too late.

No, central bankers haven’t really learned anything when it comes to asset bubbles.