The Federal Reserve official who sent the market into its most
volatile week of the summer over fears of more aggressive interest-rate
increases couldn’t have been a more unlikely candidate for that
Boston Fed President Eric Rosengren
has a well-established reputation as one of the Fed’s leading
doves—advocates of easy-money policies aimed at spurring faster economic
growth. But more recently he has developed strong concerns that easy
money could be letting markets get out of hand the way they did before
the financial crisis. And he’s publicly urging his colleagues to act
before it gets too late.
“It’s not costless to get the
unemployment rate very low,“ Mr. Rosengren said in an interview Sept. 9.
“The tools we have are quite blunt,” so it’s better to get ahead of
potential problems, he said.
Rosengren wasn’t explicitly calling for the Fed to raise short-term
interest rates at its meeting this Tuesday and Wednesday. Officials are divided over when to move, making it likely they’ll wait until later this year. Futures markets put low odds on a rate increase this month.
he warns that the Fed needs to consider the effects of very low rates
in fueling bubbly asset prices. His main source of concern is commercial
real estate—the soaring market for office buildings, warehouses and
According to the Boston Fed, lending to the
sector totaled $3.6 trillion as of March, with just over half of that
provided by banks and the rest from financial firms such as pension
funds and life insurers.
Prices have been rising steadily across
the country since the end of 2009, the Boston Fed said. Mr. Rosengren
worries the gains are being driven in part by the scramble for returns
in the low-yield world brought about by the Fed and its overseas
counterparts, rather than by the fundamentals of supply and demand.
prevailing economic conditions change in response to a large negative
economic shock, commercial real-estate prices could decline relatively
quickly, leading to large losses at leveraged firms,” he said in an Aug.
31 speech in Beijing. That, in turn, could trigger a broader economic
downturn, he said.
The comments that sent markets tumbling came Sept. 9 in Quincy, Mass, when Mr. Rosengren said “a reasonable case can be made” for raising rates to avoid overheating the economy.
notably, he made the case for raising rates to head off financial
instability despite the fact that this would slow the Fed’s progress
toward its goals of fostering job growth and 2% inflation—an unusual
statement of the cost-benefit trade-offs.