Federal Reserve Chairman Ben Bernanke announced on Sunday that it may be time to consider the necessity in raising interest rates to avoid a second financial crisis. However, he acknowledged the importance of strengthening the U.S. regulatory system, first and foremost.
Bernanke talked about the importance of adequate reforms to prevent dangerous build-ups of financial risks. But he feels using monetary means (increasing interest rates) as a supplementary tool is a good way to address those risks as well.
The reason he may be considering an increase in interest rates at this point is because the Fed was criticized in 2000 for keeping interest rates too low for too long. Some say this helped to fuel a housing bubble (a rapid increase in house values that reaches a level that no longer matches incomes) that sat at the root of the recent financial crisis.
Bernanke disagrees with this theory, saying that the housing bubble was likely result of exotic alternative mortgages – something that strengthened regulation could have helped. However, he does admit that raising interest rates may be necessary, in part, to avoid multiple asset bubbles.
Ultimately, he suggests that Americans keep an open mind as the Fed decides how to get a grip on the economy. Interest rates may be the route it decides to take.
If it does, at least we were warned.
How do you feel about the Fed considering an increase in interest rates?