(Bloomberg) – Two Federal Reserve officials laid out sharply different takes on whether continued low interest rates might raise the risks of financial instability, highlighting divisions on the Federal Open Market Committee ahead of its September policy meeting.
Federal Reserve Bank of Chicago President Charles Evans argued at a conference in Beijing Wednesday that expectations for interest rates remaining low for a long time are becoming entrenched among investors, allowing the Fed to delay raising rates without running the risk of causing financial instability.
“Long-run expectations for policy rates provide an anchor to long-run interest rates,” Evans said in the text of his prepared remarks. “So, lower policy rate expectations act as a restraint on how much long-term rates could rise following a surprise over the near-term policy path.”
Speaking at the same conference, Boston Fed President Eric Rosengren warned that high commercial real estate valuations in the U.S. represented a risk to the banking sector in the event of an economic shock.
“One could envision a scenario where commercial real estate prices could decline significantly if underlying rents, occupancy rates and market interest rates become less favorable,” he said, according to prepared remarks. “Such a revaluation, in conjunction with an economic downturn, could make a recession worse than it would have been had policymakers normalized interest rates more rapidly.”
The central policy debate facing the FOMC involves whether the Fed needs to raise rates before inflation hits its 2 percent target in order to reduce the risks of either creating financial bubbles or overshooting on inflation. Either outcome could force the central bank to subsequently raise rates quickly, potentially pushing the economy back into recession.
Investors see a roughly 34 percent probability of a quarter percentage point rate rise at the FOMC’s Sept. 20-21 meeting, according to pricing in federal funds futures.