Tags: credit | crunch

Rosengren: Don't Count on Low Rates to Help

Thursday, 04 Sep 2008 11:16 AM

Rates are low at 2 percent, but they're probably not helping the economy, says Federal Reserve Bank of Boston President Eric Rosengren.

According to Rosengren, a low interest rate provides less stimulus during a credit crunch than it otherwise would because low rates for inter-bank loans don't necessarily translate into lower costs for the majority of borrowers who rely on funding sources outside the fed funds market.

"Looking only at the federal funds rate during periods of significant economic headwinds will, in my view, provide a misleading gauge of the degree of monetary stimulus that the Federal Reserve has put in place."

Rosengren acknowledges that credit conditions would likely be worse if the Fed hadn't lowered rates and taken several steps to improve liquidity in the market, like opening the new Term Auction Facility.

The last time there was a significant credit crunch in the United States was in the early 1990s.

"It had been hoped by many observers that consolidation in the banking industry and growth in securitization would make a 1990s-style credit crunch less likely. Unfortunately, that is not how things have worked out," he says.

Ironically, rather than serving as a shock absorber for banking problems, Rosengren says securitization has actually made the problem worse.

"The loss of confidence in complex financial instruments and their ratings has dried up the demand for all but the simplest and least-risky securitizations," Rosengren says.

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Rates are low at 2 percent, but they're probably not helping the economy, says Federal Reserve Bank of Boston President Eric Rosengren.According to Rosengren, a low interest rate provides less stimulus during a credit crunch than it otherwise would because low rates for...
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2008-16-04
 

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