The Federal Reserve should use regulatory powers aggressively and pro-actively to limit the threat from future asset price bubbles, Frederic Mishkin, one of the Fed’s governors, said on Thursday reports the Financial Times.

Mr. Mishkin, a top academic economist who is intellectually close to Fed chairman Ben Bernanke, said “it falls to regulatory policies and supervisory policies to help strengthen the financial system and reduce its vulnerability to both booms and busts in asset prices”.

Such policies “could be made a standard part of the regulatory system and would be operational at all times”. But he also proposed using regulations dynamically to deal with bubbles as they emerge.

“Future bubbles will almost certainly create unanticipated difficulties, and as a result, adjustments to our policy stance to limit the market failure contributing to the bubble could be very beneficial if identified and implemented at the appropriate time,” he said.

His comments in a speech come as the US central bank is reconsidering its traditionally hands-off approach to asset bubbles after two bubbles – housing and the earlier dotcom bubble – in the space of a decade.

Mr. Bernanke is re-evaluating all the evidence, including the use of interest rates to tackle bubbles, but is inclined to favor using regulation more aggressively as Mr. Mishkin proposed on Thursday.

Read it here: Fed urged to control future asset bubbles