Fed's Mester Warns Low Rates Can Fuel Financial Imbalances

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10/03/2019 | 07:13 pm

By Paul Kiernan

WASHINGTON -- Cleveland Fed President Loretta Mester said Thursday there was a risk of financial imbalances developing in an environment of low interest rates and that the central bank had relatively few tools to address such issues outside of monetary policy.

"You have to recognize that, if you're running very low interest rates, that you may be creating some financial imbalances that may come back to haunt you in the future," Ms. Mester said on a panel at the Brookings Institution.

In theory, Ms. Mester said, authorities would be able to use so-called "macroprudential" mechanisms such as closer oversight and targeted regulations to safeguard against instability in the financial sector, rather than the blunt instrument of interest rates.

But, in practice, "that's a hard thing to do because we don't really have that many macro-prudential tools," she said.

Ms. Mester reiterated the Federal Reserve's general view that financial risks are manageable at the moment, notwithstanding "some issues" related to high levels of corporate debt and elevated pricing for commercial real estate.

She didn't comment on the Fed's current interest-rate policy.

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