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Fed Officials Watch Asset Prices for Signs of ‘Excessive Risk’

Nov. 25 (Bloomberg) — Federal Reserve policy makers said for the first time that their decision to cut interest rates to zero may be fueling undue financial-market speculation even as they called the dollar’s decline “orderly.”

The Federal Open Market Committee said its policy of keeping rates low might cause “excessive risk-taking” or an “unanchoring of inflation expectations,” according to minutes of its Nov. 3-4 meeting released yesterday. Central bankers also said further dollar depreciation that might “put significant upward pressure on inflation would bear close watching.”

The dollar weakened as investors wagered the central bank will tolerate further declines in a currency that has slid more than 6 percent against the yen in three months. Policy makers are wary of fueling a third asset-price bubble in about a decade as they hold the benchmark interest rate near a record low to revive growth, economists said.

“Financial markets have been doing much better than people might have expected,” said Marvin Goodfriend, a former policy adviser at the Richmond Fed who is now a professor at Carnegie Mellon University in Pittsburgh. “The Fed is saying to markets, ‘Don’t overdo it.’”

Fed Chairman Ben S. Bernanke, 55, will face lawmakers’ scrutiny when he appears on Dec. 3 before the Senate Banking Committee for a hearing on his nomination to a second term.

Senator Christopher Dodd, the committee’s chairman and a Connecticut Democrat, has blamed the Fed for lax supervision that led to a credit-fueled housing bubble. The bust in home prices, along with borrower defaults, led to the worst recession since the Great Depression.