Third, because asset price bubbles can arise from market failures that lead to credit booms, regulation can help prevent feedback loops between asset price bubbles and credit provision. Our regulatory framework should be structured to address failures in information or market incentives that contribute to credit-driven bubbles.
So, when setting monetary policy, we have to consider what will be the effect of actions we take today on the economy and on inflation several months down the road. In practice, setting monetary policy means raising or lowering interest rates to maintain a balance between the demand for goods and services and the economy's capacity to supply those goods and services.