"Markets flooded with cash, should Fed prep to stamp out risk?"

Markets flooded with cash, should Fed prep to stamp out risk?

by Jonathan Spicer at Reuters

http://www.reuters.com/article/2014/02/20/us-usa-fed-risks-idUSBREA1J20020140220

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(Reuters) - A debate is growing louder within the Federal Reserve over whether it should stand ready to raise interest rates to prick any risky asset bubbles that its regulatory tools might fail to address.

The 2007-2009 financial crisis left many wondering whether the U.S. central bank should have more boldly tightened policy in the preceding years to head off the explosion of risky mortgage debt on Wall Street.

Now, after holding interest rates near zero for more than five years and pumping trillions of dollars into the economy through bond purchases, the question of how best to deal with bubble-like signs could become a defining one for the Fed and its new chief, Janet Yellen.

If the economy continues to grow but inflation stays stubbornly low, concerns over financial instability could prompt Yellen to more quickly wind down the policy stimulus than she otherwise might.




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