With Asset Prices So High, Where's the FOMC?

US Banker, September, 2005

Are asset prices, which are fueled by higher profits and productivity, climbing too far too fast? Do they signal the approach of an unsustainable boom that the Federal Open Market Committee should stop? Bubbles are hard to spot beforehand, and even if they weren't, what's the best monetary policy response? Though consumers are happy to see their portfolios grow and their houses appreciate, others worry about a boom and bust cycle that presages another recession. The policy question is clear in principle, even if the answer is not. Few disagree the FOMC can use asset prices as predictors of inflation, and to the extent that some asset prices (long-term Treasurys, Treasury inflation-protected securities, consumer-price-index futures) help forecast inflation, it makes sense for the...