Fed Bubble Agonistes Persists as Zero Rates Prompt Great Debate

Financial-market bubbles are proving a more pressing threat than inflation to Federal Reserve officials who’ve bought trillions of dollars in bonds and kept the target for short-term interest rates near zero since 2008.

“There is a threshold out there somewhere” where markets will become too frothy or the balance sheet becomes too large and the central bank will have to react, said Michael Gapen, a former member of the Fed board’s Division of Monetary Affairs and now a senior U.S. economist at Barclays Plc in New York. “The problem since the beginning of quantitative easing three is there isn’t significant enough clarity for what is the stopping rule.”