Fed insider warns of consequences of low rates

Boston Fed president Eric Rosengren is warning that low rates are negatively effecting asset prices, reports The Wall Street Journal.

As of March, commercial real estate lending totalled US$3.6 trillion, provided by banks, financial firms, pension funds and life insurers. Low-yield returns brought about by the Fed and its overseas counterparts are driving real estate prices, not supply and demand, Rosengren tells the WSJ in an interview.

He warns real estate prices could decline quickly in response to an economic shock, leading to large losses at leveraged firms and a subsequent broader economic downturn.

On September 9, Rosengren sent markets tumbling when he suggested raising rates could avoid financial instability — never mind such a move could stall job growth and inflation. Since he made the comment, the S&P500 has experienced greater swings after a relatively stable previous 43-day period.

Though rates aren’t expected to rise soon, an increase is expected in the coming months, with Rosengren pegged as a vocal supporter.

On Monday, futures traders on average were forecasting a 15% probability there would be a rate hike at the Fed’s meeting this week, and a 22% chance in November.

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