William C Dudley, New York Fed president, earlier this week called for central bankers to use the ‘bully pulpit’ to pop asset bubbles. Though Ben Bernanke, Fed chairman, has suggested that the Fed may be ready to consider addressing asset bubbles (until recently considered too difficult to identify to address), it was the first time that a Fed official spelt out which tools the Fed would use. Central bank officials have often used the red-herring that changing interest rates wouldn’t be effective in leaning against bubbles. (Sure – but aren’t there other tools?)
According to an interesting follow-up interview on NPR today, Mr Dudley tells Planet Money that he doesn’t think there is any “appreciable difference” between his views and those of Federal Reserve chairman Ben Bernanke.
Mr Bernanke hinted in his February testimony to Congress that the Fed – which had previously appeared not to see addressing asset bubbles as part of its mandate – may be on the verge of doing so, saying that there is no “obvious bubble” in the US economy but, if there were “then the response probably would depend on which asset it was, what part of the economy it was.” He went on to say that the Fed would “have to see what tools” it had to address it.
It turns out, of the tools Mr Dudley mentions, the bully pulpit – having central bank officials publicly talk about the bubble – is the first one he lists. Read more