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Is the Federal Reserve forever blowing bubbles?

With interest rates hovering at historic lows, some economists and investors fear the Fed's easy-money policy could create another asset bubble. But others don't see a need to hit the panic button just yet.

Feeding bubbles with low rates
The Fed gets blamed for creating bubbles because when rates are low, money is cheap for investors. That can encourage excessive risk taking and drive up asset prices, as in the dot.com boom of the late 1990s or housing prices in the middle of the last decade.

"Easy money is a key ingredient of crazy bubbles," said Lakshman Achuthan, managing director of Economic Cycle Research Institute. "This is why observers have said the Fed is just blowing up bubbles."

Critics have argued the central bank has a duty to "pop" bubbles before they inflate too large and cause economic havoc. Fed officials have responded that it's difficult to foresee an asset bubble forming, and that monetary policy is not an effective tool for bubble bursting.

But that was before an extended period of easy money was followed by the massive bubble in home prices, which sparked a crisis in the global financial system and the worst economic downturn since the Great Depression.

Fed Chairman Ben Bernanke argued in a speech on Jan. 3 that the Fed's monetary policy was getting too much of the blame for the run-up in home prices.

Not all economists agree.

But the Fed seems more ready to acknowledge the risks of a bubble today than ever before.

Bigger bubble worries
In the minutes of its November meeting, policymakers worried that an extended period of low rates "could lead to excessive risk-taking in financial markets" -- economic-speak for the creation of bubbles.

The minutes didn't identify any potential bubbles, but experts have pointed to a series of inflated markets, including U.S. Treasurys, commodities such as gold and oil and even in U.S. stock markets, which have rebounded more than 60% since their low-point a year ago.

But is the fear of another asset bubble enough to spur the Fed to tighten economic policy and start pushing up rates?

Many economists are doubtful. They think the Fed is less concerned with bubbles than with spurring economic growth.

"I think bubbles are something the Fed needs to watch," said David Wyss, chief economist at Standard & Poor's. "But I don't see much evidence that is the dominant issue for the Fed compared to 10% unemployment and lack of sustainable growth."

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