Did the Fed underestimate the housing and economic bubble?

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pohnpei397 eNotes educator| Certified Educator

It is certainly possible to argue that the Fed did underestimate the bubble that grew for much of the early 2000s until it burst, leading to the current economic crisis.  To argue this, we would point out that the Fed kept interest rates very low throughout this period in the early 2000s.  The Fed felt that inflation was low because they were only looking at consumer prices.  They did not look at things like housing and stock prices when deciding what to do with the money supply.

Because the Fed maintained loose, expansionary monetary policies, the bubble grew.  The Fed did not think that a bubble was actually in existence at the time.  We know now that there was a bubble.  This means that the Fed did in fact underestimate the housing and economic bubble in the early 2000s.