Boston President and CEO Eric S. Rosegren Federal Reserve Bank
Keith Bedford | Reuters
Boston Federal Reserve President Eric Rosnegren said Thursday that lower interest rates have put more risks on commercial real estate and the current economic downturn will be more severe.
A central bank official said he expects default and bankruptcy to hit which exacerbates the unemployment problem that disproportionately affects low-wage workers.
He added that regulatory authorities should be able to see situations that make an unforeseen crisis worse.
“Clearly, the deadly epidemic was bound to hurt the economy,” Rosengrain said. “Nevertheless, I am saddened that the slow build up of risk in the pre-recession low-interest rate environment will make economic recovery from the epidemic more difficult.”
The Fed has been at the center of the coronavirus epidemic crisis response, which has already lowered interest rates and implemented a number of programs to ensure market operations and lend money to the economy.
In recent days, it has adapted to a more bullish approach to monetary policy, vowing not to raise rates even if inflation continues beyond the Fed’s preferred 2% target.
The retail Fed also sees itself as a target in times of crisis like the economic crisis and dotcom bubbles. Rosengrain’s comments reflected concerns about the low-rate results that have prevailed for the past dozen years.
He noted that commercial real estate companies have “gradually increased risk with more gains, which increases returns with good results – but also increases losses when bad results occur.”
“This risk-taking growth is likely to take place in a low economic environment, as it won (and consequently) after the financial crisis and the Great Recession.”
He specifically cited “sustaining low rates for an extended period even after a low recovery in the economy”, while the Fed held short-term lending rates close to zero for more than six years after the end of the Great Depression. 2009.
“In those times,“ businesses and companies accumulate more risky assets to get more returns – potentially bidding on property prices at inadvisable levels, ”he said.
He said the consequences of the climate with defaults and failures in business are likely to be felt soon. He added that the impact on banks, especially small institutions, was probably due to poor performance of the stock market in the sector.
He also spoke about the impact on employment, especially workers in the service industries who have been hit hardest during the current recession.
“Increased risks in commercial real estate before the Covid-1P epidemic, and gains in the corporate sector, would have led to more bankruptcy and higher unemployment during this crisis, if less risk had been taken,” he said. .
While the capital position of banks is currently strong, lending standards are tight. Rosengrain said officials should consider the effects of a “yield-yield” environment because of the placement of the financial system at the center of many economic crises.
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