Rosengren Says Pre-Pandemic Low Rates Worsened Current Downturn

Federal Reserve Bank of Boston President Eric Rosengren said the long period of low interest rates before the coronavirus pandemic is contributing to the depth of the current recession.

“The slow build-up of risk in the low-interest-rate environment that preceded the current recession likely will make the economic recovery from the pandemic more difficult,” Rosengren said in the text of a speech he’ll deliver Thursday at an online event hosted by Marquette University.

“The increased risk build-up, such as the reaching-for-yield behavior in commercial real estate or increased corporate leverage, make economic downturns including this one more severe,” he said.

Rosengren, who previously supported interest rate increases after the jobless rate fell below his estimate of full employment, has long warned of the danger of corporate risk taking. He said the U.S. will have to improve its regulatory framework as interest rates are likely to stay low again for a number of years.

“In the United States, we do not have a cohesive set of regulatory and supervisory tools to moderate risk build-ups,” he said. “If we expect to remain in a low-interest-rate environment for a protracted period of time, we need to take more precautions against financial stability risks for when the next economic shock hits.”

Rosengren, who doesn’t vote this year on the policy making Federal Open Market Committee, didn’t provide a detailed outlook for the U.S. economy or discuss current monetary policy in his prepared remarks.

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