The Fed is stuck in a bind:
With 10% unemployment, it can’t raise interest rates. With zero interest rates, however, it can’t prevent another asset bubble.
The problem, Stephen Roach, says is the Fed’s impossible dual mandate: protect the value of our money AND keep the economy humming.
That combination will cause the Fed to keep rates too low for too long.
“There is a great risk in the coming exit strategy,” said Roach, a former Fed economist. “They are lacking primarily a political will to execute the exit in a timely and expeditious fashion that will avoid the mistakes of the last crisis.” The traditional view of central bankers that asset bubbles are hard to spot and deflate with rates is “ludicrous,” he said.
“This is a failed flaw in the intellectual construction of modern central banking that must be addressed,” said Roach. “If we don’t fix this problem we’re doomed to repeat the failed asymmetric policies of the past and set ourselves up” for another crisis.