Rosengren: Low rates before crisis made matters worse

Register now

Since rates were "abnormally low" for an extended period prior to the coronavirus-caused economic downturn, recovering from the shock is likely to be "more difficult," , Federal Reserve Bank of Boston President Eric Rosengren said Thursday.

“Abnormally low rates for a long period during times when economic slack is no longer a concern can result in excessive risk-taking, as businesses and firms take on additional debt and accumulate more risky assets in search of better returns — potentially bidding up asset prices to unsustainable levels," he said in a virtual talk to Marquette University. "The financial pressures associated with such behavior build gradually, and only become clear in the next economic downturn.”

Rosengren opposed cutting rates in 2019 and dissented on the September 2019 rate cut and the July one before that.

“An important area of research, going forward, is to understand how the changes in risk-taking behavior have made the economy more susceptible to severe and protracted downturns that resist recovery,” Eric Rosengren, president of the Federal Reserve Bank of Boston, said.

“In the United States, we do not have a cohesive set of regulatory and supervisory tools to moderate risk build-ups," he said. "And while we do have the Financial Stability Oversight Council, we do not have a regulatory and supervisory body endowed with tools and structures that can be deployed to limit financial stability risks.” Which makes the U.S. "vulnerable" to shocks and recessions.

“In terms of this vulnerability to disruptions, it is possible that no one could have predicted that a worldwide pandemic would occur precisely in 2020 — but one could have anticipated that having highly levered firms and excessive concentrations of commercial real estate lending at some institutions would make the economy more vulnerable to a variety of disruptions, including a pandemic or other shock,” he said.

Financial instability is tied in with the pandemic, Rosengren said, "because losses due to financial shocks affect a wide range of stakeholders — not only shareholders, but also of course the workers in the affected industries."

The "unnecessary bankruptcies resulting from such shocks can cause a spike in permanent job loss and a significant scarring of labor market participants — particularly, though not exclusively, those at the lower end of the income distribution," he added. "These lower-wage workers, who tend to have little if any financial cushions, are the individuals least prepared to endure an economic downturn.”

Initial claims
Initial jobless claims dipped to a seasonally adjusted 840,000 in the week ended Oct. 3, from the previous week’s upwardly revised level of 849,000, originally reported as 837,000, the Labor Department said Thursday.

Economists polled by IFR Markets projected 823,000 claims in the week.

Continuing claims declined to 10.976 million in the week ended Sept. 26, from an upwardly revised level of 11.979 million a week earlier, first reported as 11.767 million.

The states with the largest rise in claims in the week ended Sept. 26 were: Maryland (3,619), Illinois (3,414), New Jersey (2,504), Michigan (2,358), and Massachusetts (1,886), while the states with the biggest drops were: Texas (7,075), Florida (6,655), Georgia (5,895), New York (5,112), and Oregon (2,317)

"New claims appear to have settled into a still historically high pattern, numbering in the 800,000 range since late August,” said Mark Hamrick, senior economic analyst for Bankrate. “The intermediate-term outlook remains quite concerning for several reasons, although we remain hopeful that the eventual availability of effective and safe vaccines will get us to a better place on a number of fronts."

Between traditional programs administered by the states and the Pandemic Unemployment Assistance Program, he said, “there were more than 1.3 million new claims for jobless aid” filed in the latest week.

“And that doesn’t even count the state of California where claims have remained persistently high as it pauses reporting new claims for a couple of weeks to work through backlogs and police against potential fraud,” he added. “Putting a damper on forecasts for broad, near-term economic improvement are the rising numbers of COVID-19 cases in the U.S. and the dim prospects for further substantial federal relief legislation. Many Americans are still facing the prospect of layoffs, and businesses of all sizes are facing the threat of failure, reduced sales and or capacity."

For reprint and licensing requests for this article, click here.
Monetary policy Eric Rosengren Federal Reserve Bank of Boston COVID-19 Coronavirus Economic indicators Jobless claims Federal Reserve FOMC
MORE FROM BOND BUYER