Not easy to identify asset price bubbles

Fed official adds it’s not practical to adjust US policy to surging Asian mkts

Federal Reserve Bank of St Louis President James Bullard said it is difficult to identify asset- price bubbles, and it’s not ‘practical’ to adjust US monetary policy to account for surging Asian markets.

‘It is very hard to identify a bubble,’ Mr Bullard said today in answer to a question after a speech in St Louis.

‘If there are problems in real estate markets in Asia, it is not very practical to say you should raise interest rates in the US.’ Mr Bullard was asked to respond to comments by officials in Japan, Hong Kong and China, who have said the Fed’s policy of keeping interest rates near zero may inflate asset prices and derail the global economic recovery.

Emerging economies ‘might overheat and experience financial turmoil,’ Bank of Japan Governor Masaaki Shirakawa said in Tokyo on Nov 16. Low rates and the dollar’s depreciation present ‘new, real and insurmountable risks to the recovery of the global economy,’ Liu Mingkang, China’s top banking regulator, said a day earlier.

MSCI’s emerging-markets stock index has risen 73 per cent this year, and Asian countries from Singapore to South Korea are trying to rein in surging real-estate prices.

Fed officials are debating how and whether to respond to rising asset prices in the US, where the Standard & Poor’s 500 Index has jumped 63 per cent from its 2009 low on March 9.

‘I think the issue is, where there are bubbles in the US – there was a tech bubble in the US and a housing bubble – should we react to that? That is what we are rethinking,’ Mr Bullard said. ‘But to extend that and say you are going to look at house prices somewhere else, that would be a step beyond.’

Fed chairman Ben S. Bernanke has said it’s hard to identify asset-price bubbles, and he suggested that the best safeguard may be for the central bank to use its supervisory authority to strengthen the financial system.

‘It is inherently extraordinarily difficult to know whether an asset’s price is in line with its fundamental value,’ Mr Bernanke said after a speech in New York on Nov. 16. ‘It’s not obvious to me in any case that there’s any large misalignments currently in the US financial system.’

‘As long as we can’t detect bubbles with great confidence, it seems unwise to adopt fighting them as a policy objective,’ Chicago Fed Bank President Charles Evans said in a speech in Paris on Nov. 13.

Source: Business Times, 20 Nov 2009