Gradual Tightening
Fed policy makers have said they intend to raise rates gradually after their initial move last month and have penciled in four quarter percentage point increases for this year, according to the median estimate of projections released on Dec. 16.
Feldstein said that would still leave real rates negative after taking account of inflation, potentially promoting yet more speculation in markets that are already seriously overvalued.
Noting that excessively inflated markets can point to overheating in the economy as a whole, Fischer suggested that a decision to use monetary policy in such situations would ultimately be based on an assessment of the overall economic risks and benefits of such a move.
“The real issue of whether adjustments in interest rates should be used to deal with problems of potential financial instability is macroeconomic,” he said. "If asset prices across the economy -- that is, taking all financial markets into account -- are thought to be excessively high, raising the interest rate may be the appropriate step."