Setting interest rates plays a role in averting crises, but whether they should be set according to asset prices is still an open question, Federal Reserve Bank of San Francisco President Janet Yellen said on Tuesday.
The crisis of the past two years has prompted many of us to re-examine the widely held view that monetary policy should respond to asset prices only to the extent that they influence the anticipated trajectories of inflation and unemployment, she said in a speech prepared for delivery in Hong Kong.
Former Fed Chairman Alan Greenspan came under heavy criticism for leaving rates too low, which was blamed by many for triggering a housing bubble that ultimately became a global financial crisis.
Yellen said the credit crisis has erased the division between setting monetary policy and regulation. In this vein, the Fed has to become more pre-emptive in identifying risky behaviours in financial markets before they become problems, she said.
She did not mention the outlook for the U.S. economy or policy in her speech.