Bubble Bursting Blueprint?

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Six years on, Bernanke still believes it is hard to know when a bubble is a bubble. But he and other top officials are reviewing the Fed approach following the second big and disruptive bubble in a decade. One option would be for the Fed to tackle bubbles with monetary policy, setting interest rates higher than they would otherwise be when asset prices appear to be inflating beyond levels justified by economic fundamentals.

Bernanke rejected this approach in 2002 but is willing to re-evaluate it in the light of recent events. Still, he and other top officials remain skeptical that "leaning against the wind" with interest rates is an effective strategy. They regard interest rates as a blunt tool for the job because they affect the economy and asset markets as a whole, not the specific market with a bubble.

By contrast, there is widespread interest inside the Fed in using regulatory policy more aggressively to try to contain bubbles. Officials are intrigued by the extra possibilities that could be opened up by proposed new powers set out in a Treasury blueprint for regulatory reform."

Look for further gains today, as the initial jobless claims were higher than expected, while New York area manufacturing activity came in lower than anticipated. Gains may be subdued overall as the action is still largely confined to the main ring - the oil pit.

Happy Trading.