Why interest rate hikes are a crummy way to pop financial bubbles

This hot new idea is just a bad new idea

Financial bubbles are formed and popped just as swiftly.
(Image credit: iStock)

Most arguments over what the Federal Reserve should do with interest rates hinge on the risks of inflation versus the need for more job and wage growth. Higher interest rates mean less risk of inflation, but also less job and wage growth. Lower rates mean more risk of inflation, but also more job and wage growth.

But there's another newly popular argument for higher interest rates: popping asset bubbles before they get dangerously big. The idea is that lower interest rates make risky behavior more attractive. And risky behavior leads to bubbles. So if you raise interest rates, you prevent bubbly behavior.

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Jeff Spross

Jeff Spross was the economics and business correspondent at TheWeek.com. He was previously a reporter at ThinkProgress.