Friday’s strong jobs report has revived an old and tired debate about inflation and unemployment. Rather than celebrating the news that the jobless rate has dropped to 5.5 per cent, the lowest rate since May 2008, investors sold off stocks, based on expectations that the Federal Reserve will soon start raising interest rates to head off the threat of inflation. By noon, the Dow was down almost two hundred points.

That’s nothing to worry about, taken on its own. Stocks rise and fall every day. But the constant focus on the link between inflation and unemployment, which is evident in the minutes of the Federal Reserve’s Federal Open Market Committee and in the media discussion of what the Fed should do next, does present a real danger. It reflects an outdated economic paradigm that, twice in the past twenty years, has misled policy-makers and produced bad policy decisions.

During the late nineteen-nineties, and again in the mid-aughts, the Fed set interest rates based on the supposed threat of inflation. When that threat failed to materialize, it kept rates at low levels for long periods. Cheap credit, in turn, encouraged the development of speculative bubbles and other financial imbalances. And when the bubbles eventually burst, the economy went into recession. But rather than changing its policy framework to prioritize avoiding yet another speculative bust, top Fed policy makers once again committed themselves to focusing on inflation, publishing a target rate of two per cent. Bubble-prevention was delegated to the Fed's regulatory apparatus.

At the moment, thankfully, the threat of another bubble appears to be contained, despite ultra-low interest rates. Still, it can’t be ignored. Rather than obsessing about inflation, Fed chair Janet Yellen and her colleagues should be seeking to provide as much support as they can to the economy, consistent with preventing bubbles from forming in asset markets such as stocks, bonds, and, especially, real estate. That is where the threat lies, not in rising inflation.

Things used to be different. In the nineteen-seventies and nineteen-eighties, there was very real danger of a wage-price spiral (in which rising wages and prices become self-reinforcing, pushing inflation upward). In the fall of 1974, the rate of inflation topped twelve per cent; in 1980, it reached almost fifteen per cent. But in today’s globalized and technology-driven economy, workers have little bargaining power, and the prices of many products, such as electronics, have a tendency to fall rather than rise. The last time the inflation rate rose above six per cent was 1990—twenty-six years ago.

When prices are rising at an annual rate of less than two per cent, as they have been for most of the past three years, it’s silly to worry about another wage-price spiral emerging. Still, many people, including some at the Fed, refuse to learn the lessons of history. As the unemployment rate dipped below six per cent last year, Richard Fisher, the president of the Federal Reserve Bank of Dallas, repeatedly warned that wage and price inflation would start to rise. Friday’s jobs report confirmed that it hasn’t happened; average hourly earning rose by just 0.1 per cent in January. Over the course of the past year, it has risen by two per cent, which is a very modest rate of increase.

The fact that Fisher’s prediction didn’t come true shouldn’t surprise anybody. Economists have never been able to pin down the jobless rate at which inflation takes off—the so-called NAIRU, or Non-Accelerating Inflation Rate of Unemployment. Theoretically, the concept makes sense. Empirically, it’s extremely elusive, because it depends on many other things, such as the rate of productivity growth, tax rates, the labor-force participation rate, and the level of unionization.

At some point—a point we can’t predict in advance—tighter labor markets will lead to higher wages. And that wouldn’t necessarily be a bad thing. To the contrary, with median household incomes still well below their 2007 levels, and with labor’s share of overall income having fallen to historic lows, American families badly need a raise in pay. Back in the late nineteen-nineties, as the Fed stood pat, wages and incomes grew for an extended period without causing an inflationary spiral. This only happened after a big fall in unemployment, however. In 1999, the jobless rate hit four per cent. But by that stage, unfortunately, the dot-com bubble was also in place.

In short, the real policy dilemma isn’t the trade-off between inflation and unemployment. It’s the tradeoff between cheap money and financial instability. How long can the Fed keep interest at ultra-low levels without sparking another bubble and all that goes with it?

Stock prices are already high—very high. So are corporate profits, which explaines a good deal of the recent rise in the Dow and the S&P 500. But the market’s price-to-earnings ratio, a standard valuation metric, has also been going up, indicating possible overvaluation. And Silicon Valley and other technology centers are doing so well that Mark Cuban, the owner of the Dallas Mavericks, who became a billionaire during the last tech bubble, wrote a blog post earlier this week entitled “Why This Tech Bubble Is Worse Than the Tech Bubble of 2000.”

Real-estate prices are also rising, particularly in places that played a big role in the last bubble, such as Miami and San Francisco. At the national level, however, prices rose by just 4.5 per cent last year, according to the S&P/Case-Shiller 20-City Composite index. That doesn’t seem too alarming. Neither does the state of the mortgage market. To the chagrin of some potential buyers, banks seem still to be acting relatively cautiously when doling out credit.

Partly because of that caution, leverage ratios for households and banks, which tend to rise sharply during an asset-price bubble, are a good deal lower than they were a few years ago. Between the start of 2009 and the end of 2014, the ratio of household debt to G.D.P. declined by more than fifteen percentage points. Consequently, the cost of interest and principal repayments has become a bit less burdensome. At the end of 2007, households were using more than thirteen cents out of every dollar they earned to service their debts. Today, that figure is less than ten cents.

Some people believe that there is a bubble in the bond market, where yields (which move inversely to prices) have fallen to historic lows. But this argument isn’t clear-cut. To some extent, the bond-market rally reflects the actions of the Fed, which, until recently, was buying a lot of Treasury bonds through its policy of quantitative easing. The rise in bond prices also reflects the common perception that, going ahead, the rate of inflation will be negligible. This is a global phenomenon rather than something peculiar to the United States. (In some countries, short-term bonds are now returning negative yields.) If investors are right about inflation, the bond market may be behaving rationally.

Based on this brief survey, my tentative conclusion is that the Fed still has some room to maneuver. Some bubble indicators are starting to flash amber, but there is little sign yet of the kinds of alarming financial imbalances that emerged in the late nineties and mid-aughts. In any case, this is where the Fed ought to be focusing its attention. The “inflation threat” is a red herring.