Roubini: Credit Bubble Is a Real Risk

While the sluggish economy "justifies a very slow exit" by the Federal Reserve from its monetary stimulus, the build-up in borrowing and asset prices sparked by the stimulus risk turning into a credit bubble, says New York University economist Nouriel Roubini.

"Eventually asset frothiness can become a credit bubble," he told Bloomberg TV. Fed policymakers have estimated it will take them two years to push the federal funds rate from its current record low of about zero to 2 percent.

"Another two years of this implies the credit bubble could be significant two years from now," Roubini said.

He thinks that once the economy is ready for an interest-rate hike, the Fed will wait another six to 12 weeks before acting to make sure the economy is strong enough to withstand the move.
"The worst thing they could do is to start the liftoff and then have to abort," Roubini said.

"So if the decision is made in June, [the rate rise] may come July or September."

Washington Post blogger Matt O'Brien thinks the Fed should have refrained from ending quantitative easing (QE) Wednesday.

QE is no magic bullet, but it's quite effective, he writes. "Especially at convincing markets that the Fed won't raise rates for a while, which is all it should be saying right now, because the only thing worse than having to do QE is having to do QE again."

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