Yellen: Fed could raise interest rates to pop bubbles

Janet Yellen

Federal Reserve Chair Janet Yellen said Wednesday the central bank is prepared to raise interest rates to pop price bubbles in assets such as corporate or junk bonds if financial distress in those sectors developed and standard regulation were insufficient.

Yellen emphasized, however, that raising interest rates is a blunt tool and should be used only if regulatory measures, such as requiring banks to hold more capital, fall short.

Her remarks at the International Monetary Fund were the most detailed yet from a Fed official on the controversial question of whether the central bank should rely on monetary policy — which is generally used to lower unemployment or head off inflation – to eliminate asset bubbles. The question became hotly debated after low interest rates helped fuel the mid-2000’s housing bubble, which led to the 2008 financial crisis and the Great Recession.

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