Yellen says policymakers need to pop bubbles

(MarketWatch) -- San Francisco Federal Reserve President Janet Yellen said late Tuesday that central banks need to deal with bubbles in asset prices before they get too big, although monetary policy may not be the best tool for the job.

Letting them go unchecked "can lead to grave consequences," she said in prepared remarks for a conference held in honor of economist Hyman Minsky in New York.
"Episodes of exuberance, like the ones that led to our bond and house-price bubbles, can be time bombs that cause catastrophic damage to the economy when they explode," said Yellen, a voting member this year of the Federal Open Market Committee.
The FOMC has cut interest rates close to 0% and, by buying up debt and making special bank loans, has pumped about $1 trillion into the U.S. financial sector. It meets against next week.

"I would not advocate making it a regular practice to use monetary policy to lean against asset-price bubbles," she said. "However, recent experience has made me more open to action."
At the moment, U.S. markets are still dealing with the aftermath of the housing-price bubble.

Over the past year, plunging home prices -- directly or indirectly --- sent some of Wall Street's trademark firms into the hands of liquidators or the U.S. government and shut down whole sections of the bond and money markets. Credit access has started to thaw this year, but many business and consumers borrowers are still finding it hard to borrow.

On Thursday, reports showed an economy still struggling to turn around.
First-time claims for unemployment benefits fell sharply last week, dropping to their lowest level since January. The Philadelphia Fed's manufacturing index improved much more than expected in April

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