By Michael S. Derby
Federal Reserve Bank of Boston President Eric Rosengren said cutting rates now may boost the risk of financial instability, which in turn could make the next downturn more severe when it comes.
There are "risks of tailwinds and costs to monetary policy being too accommodative," Mr. Rosengren said in the text of a speech to be delivered Friday at an event at New York University. "Additional accommodation is not needed for an economy where labor markets are already tight -- and risks further inflating the prices of riskier assets, and encouraging households and firms to take on what may be too much leverage."
Mr. Rosengren was one of three Fed officials who dissented against the Fed's decision to lower rates by a quarter-percentage point this week. Mr. Rosengren and Kansas City Fed President Esther George both favored keeping rates steady in the absence of a tangible downturn in the economy. St. Louis Fed leader James Bullard wanted a bigger decrease than his colleagues as "insurance" against rising risks to the economic outlook and as a means to boost still-low inflation.
Mr. Rosengren also dissented at the July Fed policy-setting meeting, when the central bank also cut rates. It is widely expected to lower rates again this year, but Fed officials are split on the matter and haven't given firm guidance.
Mr. Rosengren's speech focused on how lowering rates in a strong economy can boost risk taking and borrowing, which increase the prospects of a more severe downturn in the future.
"One potential cost of increased accommodation is that very low rates can encourage households and firms to take excessive risks," Mr. Rosengren said, adding "this could show up in the form of increased household and firm leverage, with prices for risky assets reaching levels that may not be sustainable over time."
Cutting rates in the current environment "involves pushing rates lower when asset prices, and in particular some risky asset prices, already seem inflated," Mr. Rosengren said. "I don't see current financial risks as causing a downturn, but such conditions have the potential to amplify a downturn, should it occur," he said.
Mr. Rosengren noted the risks posed by commercial real estate, which have long been a concern of his, as a possible vector to amplify trouble. Without naming any firms, Mr. Rosengren noted the particular concerns posed by co-working companies. He made this comment as the parent of office-sharing firm WeWork postponed its initial public offering amid investor doubts about its valuation and concerns about its corporate governance.
Office-sharing firms are particularly exposed to risks should the economy run into trouble, and could wound landlords in the process, Mr. Rosengren said. "In a downturn the co-working company would be exposed to the loss of tenant income, which puts both them and the property owner at risk if they cannot make lease payments to the owner of the building," he said.
"I am concerned that commercial real estate losses will be larger in the next downturn because of this growing feature of the real estate market, which could ultimately make runs and vacancies more likely due to this new leasing model," Mr. Rosengren said.
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(END) Dow Jones Newswires
September 20, 2019 11:36 ET (15:36 GMT)
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