Comments from Janet Yellen, the vice chairman of the Fed, Monday reined in the most exuberant hopes in the markets.
In remarks to economists in Denver, Yellen warned that excessively easy monetary policy, involving ultra-low interest rates and an expansion in the Fed’s balance sheet, could create big problems down the line.
“It is conceivable that accommodative monetary policy could provide tinder for a buildup of leverage and excessive risk-taking,” Yellen said.
There is a buildup of leverage and excessive risk taking, complete with a speculative asset bubble, right in front of our noses: in the housing market, where it has been for years. The Obama administration is working night and day to try to reinflate the bubble, or at least to keep it from deflating much further, and the coming pause in foreclosures will only serve to further confuse the markets. If this is a sign that the Fed is coming to its senses, it is to be welcomed — but do not be too confident that it is.