Fed Official Sees Key Role for Asset Prices

The rise and fall of asset prices such as stocks, bonds and homes will probably play a bigger role in setting U.S. interest rate policy in the future, Timothy Geithner, president of the Federal Reserve Bank of New York, said Wednesday.

“Policy, in some circumstances, will need to respond to asset price movements when those movements alter the central bank’s assessment of the risks to its outlook,” Geithner said in a speech to the New York Assn. of Business Economics in New York.

Geithner’s speech reignites the debate on asset prices as the Fed prepares for a new leader next month. Fed Chairman Alan Greenspan has been criticized by some economists for not raising interest rates to curb the 1990s stock market surge and the 50% rise in U.S. house prices since 2000.

Greenspan and Ben S. Bernanke, his nominated successor, say using interest rates to attack asset prices may damage the broader economy.

Geithner sees more room for the Fed to respond.

“As financial markets continue to broaden and deepen, the behavior of asset prices will play an important role in the formulation of monetary policy going forward, perhaps a more important role than in the past,” Geithner said.

The Federal Open Market Committee, which sets interest rates, currently focuses on so-called wealth effects, or how changes in stock and bond prices may affect consumer and business spending. Geithner’s comments suggest that the Fed should be more explicit about including those effects in its rate decisions and forecasts.

“Geithner is signaling to the market that, once again, the FOMC is very concerned about asset prices and how interest rates are continuing to drive asset price valuations higher,” said Mark MacQueen of Sage Advisory Services, which manages about $4 billion in bonds.