By Michael S. Derby
Boston Fed leader Eric Rosengren warned on Monday many top central banks have a limited tool kit to deal with the next downturn, and added efforts to rollback regulations on banks may be exacerbating risks to the financial sector.
"With rates this low, there is very little room to reduce short-term rates should the economy stumble, as the Fed normally cuts rates well over 4 percentage points during a recession," Mr. Rosengren said in the text of a speech to be delivered at a conference in Norway.
Mr. Rosengren's comments were an effort to take stock of how a shift across the world toward a persistently lower interest-rate environment gives central bankers much less space to cut rates when trouble arrives.
Right now, after three quarter-percentage-point rate cuts this year the Fed's overnight target rate range stands between 1.50% and 1.75%. Other central banks have even lower rates, and all major institutions will likely need to turn to other tools to provide stimulus when the next downturn arrives.
cand has voted against all three of them so far in 2019. The Fed has lowered rates to help offset risks created by trade uncertainty and slowing global growth. Mr. Rosengren believes the economy is healthy right now and he would rather wait until real weakness arrived before lowering rates. He has also worried that cheaper borrowing costs increase the risk of financial instability by making it easier to take on risk.
In his speech, Mr. Rosengren flagged areas of concern in the financial sector, and he said the push to ease regulations on banks appears to be the wrong way to go.
"I am not sure that recent developments and proposals in bank regulation properly reflect the risks we are likely to face in a low interest rate environment that challenges bank profitability and provides less by way of monetary policy buffers," Mr. Rosengren said.
"Specifically, capital buffers should be rising now so that there is more room for them to decline if the economy falters. While this is true for the United States, it may be even more true in Japan and Europe," the official said.
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