Fed's Rosengren Says Cutting Rates Now Boosts Risk of Financial Instability
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
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.
Write to Michael S. Derby at
(END) Dow Jones Newswires
September 20, 2019 11:36 ET (15:36 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.