Fed May Start Fighting Asset Bubbles: FT

The Federal Reserve may start using regulation or even interest rates to fight asset-price bubbles, instead of trying to limit the damage once they burst, as it has done until now, the Financial Times reported on its Web site.

Top officials are considering the shift in strategy, but they have not reached any conclusions and could end up reaffirming their hands-off approach, the paper said without citing sources.

One option is for the Fed to set interest rates higher than they would otherwise be when asset prices appear to be rising beyond levels justified by economic fundamentals, the paper said.

Fed Chairman Ben Bernanke, who rejected this approach in 2002 after the dot-com bubble burst and endorsed Alan Greenspan's view that the Fed should not "lean against the wind," is now willing to reevaluate it in the light of the housing and credit crises.

Using regulatory policies is regarded with more interest inside the Fed than using interest rates, as rates affect the economy and asset markets as a whole instead of acting directly on the specific bubble, the report said.

Instead, it said, officials are "intrigued by the extra possibilities" offered by a Treasury plan for regulatory reform which recommends giving the Fed wide authority to ask financial institutions to change behavior that poses a threat to financial stability.

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