Blinder Says Fed Can’t Predict Bubbles as No Strategy Risk-Free

Former Federal Reserve Vice Chairman Alan Blinder said the central bank cannot accurately predict asset-price bubbles, and that no risk-free strategy exists as policy makers try to boost employment and the economy.

“It’s not just the Fed that’s not good at calling peaks of asset bubbles, nobody is any good at it,” Blinder said on Bloomberg Television’s “Market Makers” with Erik Schatzker and Stephanie Ruhle today.

Blinder spoke before Chairman Ben S. Bernanke told a Senate committee in Washington the Fed was evaluating the benefit of its policy in creating jobs against possible risks such as spurring asset bubbles. Bernanke said a “potential cost” of Fed policies that central bankers take “very seriously” is the possibility that very low interest rates, if maintained for a considerable time, could impair financial stability.

“What’s the other risk? The Fed gives up and just leaves the unemployment rate at around 8 percent, and he doesn’t want to see that,” Blinder, 67, said of Bernanke during the Bloomberg Television interview. “There is no risk-less strategy for the Federal Reserve to pursue.”

The Fed said in December 2012 that it would buy assets at a pace of $85 billion a month. The Federal Open Market Committee hasn’t specified an end date for the bond purchases, saying they will continue until the labor market improves ’’substantially.’’

Interest Rates

The FOMC has pledged to keep the main interest rate near zero as long as joblessness is above 6.5 percent and inflation is projected to be no more than 2.5 percent.

Minutes from the FOMC’s January meeting, released Feb. 20, showed several officials favored varying the pace of bond purchases, raising concerns that the bank will scale back its bond-buying program.

Fed staff members are probably “behind the scenes” planning an exit strategy, Blinder said. He said he thinks Bernanke has a broad idea of what will happen with the exit.

Blinder, an economics professor at Princeton University, served as Fed vice chairman from 1994 until 1996. He advised Democratic presidential nominee John Kerry during the 2004 election campaign.

To contact the reporter on this story: Jeanna Smialek in Washington at jsmialek1@bloomberg.net

To contact the editor responsible for this story: Kevin Costelloe in Washington at kcostelloe@bloomberg.net

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