IMF warns central banks on asset bubbles, markets

Federal Reserve vice chair Janet Yellen, at an

Federal Reserve vice chair Janet Yellen, at an International Monetary Fund-sponsored conference Tuesday in Washington, downplayed risks of another stock market bubble. (April 16, 2013) (Credit: Bloomberg News)

The International Monetary Fund Wednesday urged the Federal Reserve and other central banks to closely monitor their extraordinary efforts to jump-start economic growth, warning that the policies could inflate asset bubbles and destabilize financial markets.

The global lending organization said in a stability report that low interest rate policies, intended to spur borrowing, spending and investing, are providing "essential support" for economic growth and should continue. But it said the policies could have "adverse side effects," including excessive corporate debt, a stock market bubble and risky investments by pension funds.

The fund says there are few signs of asset price bubbles yet.

The global stability report was released in advance of meetings of the IMF and World Bank in Washington this week.

The IMF's warning echoes recent debates among Federal Reserve policymakers, who have pursued aggressive measures to help lower high unemployment. The Fed has said it will keep short-term interest rates at record lows until unemployment falls to 6.5 percent. And it is purchasing $85 billion a month in Treasury and mortgage bonds to lower long-term rates and encourage more borrowing.

The effect on interest rates has also encouraged investors to shift money into stocks and other riskier holdings and away from bonds. By driving up stock prices, the Fed hopes the lower rates will encourage consumer spending and economic growth.

Since the Fed launched the bond buying last fall, stocks have surged. The Dow Jones industrial average and Standard & Poor's 500 index both reached record highs this month.

At the Fed's policymaking meeting last month some officials argued its programs could lead to another stock market bubble or encourage investors to take on too much debt.

Janet Yellen, the Fed's vice chair, downplayed those risks Tuesday at a conference sponsored by the IMF. "I don't see pervasive evidence of rapid credit growth, a marked buildup in leverage, or significant asset bubbles that would threaten financial stability," she said.

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