If the problem was the huge capital inflow, what will prevent a recurrence when the next wave of euphoria arrives, and later evaporates? One aspect is clear enough – far-reaching prudential rules should be put in place – e.g. restrictions on banks’ short-term borrowing and on foreign-currency-denominated borrowing.
We should seek to ensure that this does not translate into a lack of confidence in the Fed to maintain price stability. As we work to exit from this period of extreme monetary accommodation in a way that neither leads to higher inflation nor risks undermining the recovery, the public’s confidence in the Fed’s commitment to price stability will be crucial.