OCTOBER 12, 2020 – YEARS OF LOW RATES ARE HAMPERING THE RECOVERY
Last week, Boston Fed President Eric Rosengren expressed concern, saying years of low interest rates led to excessive risk taking in commercial real estate and will make the current economic downturn worse. He is expecting defaults and bankruptcies that will exacerbate the unemployment problem. Rosengren feels regulators should have anticipated the result and acted to mitigate the situation.
Commercial real estate firms have increased risk by taking on more leverage, as has the corporate sector, which will magnify losses in a downturn. Banks will be impacted as companies default, and unemployment will be greater in such an environment than should be, due to the excess risk profile.
The Fed has been in the midst of the pandemic recovery, slashing interest rates to zero and implementing programs to ensure market functioning and lending money to sectors of the economy most in need. The Fed has pledged not to raise rates even if inflation runs over their 2 percent target. Considering Rosengren’s comments, perhaps the Fed should learn from the past and rethink their current approach for years to come?