Fed conundrum;Dealing with soaring asset prices without hurting the economy.

Pensions & Investments, December, 1999 by Balder, John M., Jr.

The conundrum facing the Fed is what to do about soaring asset prices when wage and consumer price inflation remain relatively dormant. The Fed has little choice but to pay increasing attention to asset prices in its deliberations. For in the end, trees do not grow to the sky. Capitalism does not operate that way.

Inflationary pressures today are firmly embedded in the prices of financial assets. The longer an asset price bubble persists, the more severe the costs of unwinding it are likely to be. While traditional sources of inflation have remained dormant, financial liberalization and technological advances have introduced asset price bubbles financed by an enormous expansion of credit and liquidity. With the exception of three quarters of recession in...

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