Bloomberg
Boston Fed President Eric Rosengren on Monday said the U.S. central bank should be careful not to cut interest rates too much now because it would push U.S. homeowners and businesses to take on more debt, thus making any recession more painful.
Lower interest rates cut the cost of debt, making it more attractive to households and firms.
“And if they get leveraged right before the economy has significant problems, we’re actually in much worse shape,” Rosengren said.
“We have to think about…how much we want households and firms to be leveraged going into whenever we actually do have a significant downturn,” he added, in an interview on Bloomberg Television.
Rosengren was one of two dissenters from the Fed decision to cut interest rates in July.
See: Fed cuts interest rates by quarter point, but rules out significant easing
At his press conference following the rate cut, Fed Chairman Jerome Powell said that he personally didn’t think financial stability concerns was a reason not to cut rates.
Powell said that there was a risk that the “highly leveraged business sector could act as an amplifier to a downturn” but said there was a high level of resilience in the financial sector gave him some comfort.
In his interview Monday, Rosengren downplayed fears of an imminent recession, saying he expected moderate GDP growth around a 2% rate over the rest of the year.
While global economies are weak, the answer is not for the Fed to ease, he said.
The cure for global weakness is for foreign countries to stimulate their own countries “rather than just the United States to be doing the easing,” Rosengren said.
Rosengren said he would make up his mind about monetary policy just before the September meeting.
“I think that we really can’t be determining monetary policy too far in advance,” he said.
The Boston Fed president said he could change his mind and support a rate cut if there are signs that consumer spending is slowing down.
Most economists think the Fed will cut interest rates by a quarter percentage point at its next meeting on Sept. 17-18.
Many investors are hoping that the Fed Chairman Jerome Powell signals a desire to cut rates by a half point during his speech at the end of the week from Jackson Hole.
Read: Investors might be disappointed in Fed’s message from Jackson Hole
Earlier Monday, President Donald Trump urged the Fed to cut interest rates by a full percentage point.
Stocks were trading higher on Monday, continuing their recovery from the sharp sell-off in the middle of last week. The Dow Jones Industrial Average DJIA, +1.07% was recently up 270 points.
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