May 05, 2016
May 2016, Josh Bivens and Dean Baker
Raising interest rates is a poor strategy for managing asset bubbles. Low interest rates did not cause the housing bubble of the early 2000s and higher interest rates would have been ineffective at preventing it. To deflate an asset bubble interest rates would have to be raised to levels that would cause enormous damage to the labor market. Fortunately, the Federal Reserve has numerous tools besides rate increases that would be more effective and inflict less collateral damage on the nonfinancial side of the economy.
