The Federal Advisory Council, which is composed of 12 bankers who meet each quarter to advise the Federal Reserve, warned that the growth in student loan debt was similar to the nature of the housing crisis. The group also said that farmland prices are inflating a bubble.
Their warning came at a time when policymakers on the Federal Open Market Committee are debating on whether the benefits from their monthly purchases of bonds worth $85 billion outweigh the risk of financial instability. Fed Chairman Ben Bernanke said that the stimulus program was necessary to improve the economy.
Kansas City Fed President Esther George and Fed Governor Jeremy Stein were concerned about the extended period of low interest rates and its contribution to the risk of asset bubbles. According to the minutes of the FAC’s February 8 meeting, agricultural land prices are now far from what makes sense. They attributed it to the low interest rates.
The mortgage lending boom led to higher home prices. Student loan lending has placed pressure on tuition. Bankers said that both instances indicated a lack of underwriting discipline.
The Fed lowered its target interest rate to near zero in December of 2008, which was when the Fed pledged to keep it at that level until the jobless rate improves. The central bank also implemented three rounds of bond purchases, which are called quantitative easing. These have pushed its balance sheet to a record $3.3 trillion as of May 1.
