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As they debated the hazards associated with ultra-low interest rates, economists, bankers and veterans of the financial crisis emphasised the US Federal Reserve’s reduced scope to cut rates to combat recession.
In particular, they stepped up calls to increase the resilience of the banking sector — which helped spawn the crisis a decade ago— amid fears that institutions and individuals could enter the next downturn in a financially vulnerable state.
Eric Rosengren, president of the Federal Reserve Bank of Boston, which convened a conference on the issue, acknowledged that central banks were partially responsible for the low rates, and “we should be thinking about what the potential costs are”. [...]
The Fed has been cautiously lifting rates amid above-trend growth and an increasingly tight labour market, but many economists claim central bankers around the world will have to cut borrowing costs back down to near-zero levels when growth eventually stalls.
In a paper with his colleagues Joe Peek and Geoffrey Tootell, Mr Rosengren highlighted a risky scramble by smaller banks to fund commercial real estate in the present ultra-low interest rate environment. Some Fed officials argue that the property involved may be valued too high, raising questions about the quality of the banks’ collateral.
Olivier Blanchard, former chief economist of the IMF who is now at the Peterson Institute for International Economics, echoed calls to impose bigger capital requirements on big banks to give them more scope to lend during a slowdown — an argument also made by Lawrence Summers, the former Treasury Secretary.
Mr Summers, now a Harvard University professor, lambasted recent stress tests by the Fed as “comically absurd” for concluding that no big banks would be deficient in capital when tested for their resilience against a brutal slump.
Other economists at the conference argued in favour of higher inflation targets, which could give central banks more scope to cut rates. Mr Blanchard favoured giving the central bank the ability to purchase equities, and not just government debt, to stimulate growth if a major crisis struck again. [...]
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