Federal Reserve Vice Chairman Stanley Fischer sounds concerned that the central bank may lack some key tools needed both to prevent another financial crisis and to contain the fallout should one occur.

He told the American Economic Association on Sunday that the Fed is not as well-equipped with regulatory powers to rein in housing and other asset bubbles as some other central banks. And he questioned whether Congress had gone too far in limiting the Fed’s ability to intervene if a crisis erupted and threatened the financial system.

"We won’t know until it’s very late" whether the Fed has been constrained too much, Fischer said at the AEA’s annual meeting in San Francisco. That’s something "we have to worry about a great deal."

Fischer’s comments suggest that the central bank may need to rely more on monetary policy to restrain financial excesses than it has in the past. In fact, he told the conference that it might be necessary for the Fed to increase interest rates if financial markets were overheating, though the first line of defense should be the use of regulatory measures to head off bubbles.

In arguing that the Fed has less leeway to restrain speculative excesses than other central banks, Fischer pointed in particular to the property market, the epicenter of the last financial crisis. Faced with run-away real estate prices, many other countries have tightened loan-to-value or debt-to-income ratios to curb borrowing.

Critical Moments

"In the United States, responding to such problems with these tools would require inter-agency coordination" between the Fed and other government regulators, he said. That "could make their use cumbersome at critical moments."

On Dec. 18 the Fed and other agencies issued a thinly veiled warning to banks in which it “reminded” them about “existing regulatory guidance on prudent risk management practices for commercial real estate lending.”

Fischer also contrasted the congressional curbs placed on the Fed’s ability to act as a lender of last resort in a financial emergency with steps taken by Britain to expand such powers at the Bank of England.

Bear Stearns