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Fed’s Yellen Sees Monetary Policy as Last Resort Against Bubbles

Janet Yellen, the nominee for chairman of the Federal Reserve, said the central bank should first try to stop asset bubbles through regulatory policy and only raise interest rates as a last resort.

“I would not rule out using monetary policy as a tool to address asset-price misalignments, but because it’s a blunt tool and because Congress has asked us to use those tools to achieve the goals of maximum employment and price stability, I would like to see monetary policy directed toward achieving those goals Congress has given us,” Yellen said today during her confirmation hearing. Supervisory tools should be the “first line of defense,” she said.

Yellen, the Fed’s vice chairman, said that she doesn’t see evidence of asset bubbles that threaten the rest of the economy.

“By and large, I would say that I don’t see evidence at this point in major sectors of asset price misalignments, at least of a level that would threaten financial instability,” she said in today’s testimony in Washington.

“Stock prices have risen pretty robustly but if you look at traditional measures,” such as price-earnings ratios, “you would not see stock prices in territory that suggests bubble-like conditions,” she said.

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