Dec. 30 (Bloomberg) -- Excessively low interest rates set by the Federal Reserve from 2003 to 2004 were the primary cause of the U.S. housing bubble, Stanford University Professor John Taylor said today.

“The main cause, the one that should be first on the list, is this very excessive monetary policy stimulus in the ‘02, ‘03, ‘04 period,’’ Taylor said in an interview with Bloomberg Radio. ‘‘That stimulated the housing boom.’’

Taylor, who also served as undersecretary for the Treasury from 2001 to 2005, designed a mathematical tool known as the ‘‘Taylor Rule’’ which estimates appropriate monetary policy based on inflation and employment. In a paper published last month, Taylor used his own rule to criticize Fed policy earlier this decade.

The Stanford economist also said that President-elect Barack Obama may over-use fiscal policy to pull the economy out of a yearlong slump, and he called on the Fed to improve communication now that the Federal Open Market Committee has cut the policy rate to as low as zero.

‘‘What is most important now is for the Fed to have, at least temporarily, an alternative framework for making decisions and for making that clear to people,’’ Taylor said.

Taylor also said the U.S. Treasury and the Fed were at fault for startling markets in September with inconsistent policies. He made similar points in his paper last month.

Unpredictable

‘‘This lack of predictability about Treasury-Fed intervention policy and recognition of the harm it could do to markets likely increased in the fall of 2008 when the underlying uncertainty was revealed for all to see,’’ Taylor wrote in the paper. ‘‘What was the rational for intervening with Bear Stearns, and then not with Lehman, and then again with AIG? What would guide the operations of the TARP?’’

The paper was based on a keynote lecture Taylor delivered in Ottawa on Nov. 14 in honor of David Dodge, former governor of the Bank of Canada.

The Fed under former chairman Alan Greenspan cut the benchmark lending rate to 1 percent in June 2003 and held it there for a year to ward off the risk of an ‘‘unwelcome substantial fall in inflation,’’ their statement at the time said. Ben S. Bernanke, the current chairman, was then a Fed governor and voted in favor of the move.

Once Fed officials began to raise interest rates in June 2004, they used the unorthodox strategy of telegraphing the pace of tightening would be ‘‘measured.’’

‘‘The more I look at it going back over time, the periods where we have deviated from the principles have not worked out,’’ Taylor said in the radio interview. ‘‘What seems to have gone wrong is the attempt to move away, to fix certain problems, or to reduce certain risks, and that has caused unanticipated things.’’

Taylor said future fiscal stimulus should be focused on ‘‘something that is going to help’’ struggling banks, borrowers and housing markets.

‘‘If it is a road-building plan, that may be all well and good,’’ he said. ‘‘Let’s not lead people to think that is going to solve a banking problem.’’

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net

Last Updated: December 30, 2008 16:48 EST