Federal Reserve Chairman Ben S. Bernanke said he doesn't rule out using monetary policy to pop asset-price bubbles, while stressing that financial regulation is his preferred approach.
"Supervision, regulation of the financial system is the strongest, most effective" way to deal with bubbles, he said in response to a question at a Senate Banking Committee hearing considering his nomination to a second term. "I do not rule out using monetary policy if necessary, if that situation does become worrisome and threatening."
Bernanke said he sees no sign of "extreme misvaluations" in U.S. markets. Fed policy makers said for the first time last month that their decision to cut interest rates to zero may be fueling undue financial-market speculation, according to minutes of their Nov. 3-4 meeting released last week.
"It is inherently very difficult to know if asset prices are appropriate or correctly valued," Bernanke said today.
Fed officials are stepping up scrutiny of the biggest U.S. banks to ensure the lenders can withstand a reversal of soaring global-asset prices. Supervisors are examining whether banks such as JPMorgan Chase & Co. (JPM) and Goldman Sachs Group Inc. (GS) have enough capital for the risks they take, how much they know about the strength of their counterparties and whether risk managers have authority to influence bank practices and policies.
Some officials in Asia have suggested the Fed's record-low federal funds rate -- the central bank's interest-rate target for overnight loans between banks -- is pushing asset prices in their region too high. Liu Mingkang, chairman of the China Banking Regulatory Commission, warned Nov. 15 of "new, real and insurmountable risks to the recovery of the global economy."
Continuing the zero-rate policy may lead emerging economies "to overheat and experience financial turmoil," Bank of Japan Governor Masaaki Shirakawa said in Tokyo Nov. 16.
"There have been complaints about U.S. monetary policy contributing to bubbles abroad," Bernanke said today. "It needs to be understood that in the United States, monetary policy is intended to address both financial and economic issues in the United States."
He said other nations have their own ways of dealing with bubbles, including exchange rates and fiscal and monetary policies, he said.
Bernanke was asked to respond to comments by Nouriel Roubini, the New York University professor who predicted the global financial crisis. Roubini said last month investors are "chasing commodities" and there is a risk of new asset bubbles emerging as stock markets and commodity prices surge amid record-low lending rates.
"Mr. Roubini is very pessimistic about the economy," Bernanke said.
The Federal Open Market Committee said low rates might cause "excessive risk-taking" or an "unanchoring of inflation expectations," according to the minutes. Central bankers also said further dollar depreciation that might "put significant upward pressure on inflation would bear close watching."
Gold futures touched an all-time high yesterday as the slumping dollar spurred investor demand for an inflation hedge. The Standard & Poor's 500 index has jumped 67 percent since its 2009 low on March 9.