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Fed President: Low Interest Rates Push Investors To Take On More Risk

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Fed President: Low Interest Rates Push Investors To Take On More Risk

If you are looking to buy a house, refinance your current mortgage, or make any big ticket purchases, it looks like you’ve got quite some time to borrow money at historically low interest rates.

That’s according to Dallas Federal Reserve President Robert Kaplan. During a CNBC interview, he said the central bank will keep interest rates at near-zero for at least the next three years. This comes as the US economy continues to climb out of the hole created by the coronavirus pandemic.

“I think we’re going to need to keep the Fed funds rate at zero … for the next probably 2½ to three years years,” Kaplan said in the interview. “It could be that long until we get on track, to have weathered the crisis and are on track to meet our full employment and price stability goals.”

Reason for Kaplan’s Vote

During the last FOMC meeting, Kaplan was one of two committee members to vote against the policy action. However, he said during his interview that he made that vote because he wants the central bank to have flexibility. He said he did not want it to commit to a specific timeframe.

“My dissent is about making commitments beyond that point. I think beyond that point, I’d rather see us keep some flexibility,” Kaplan said.

He added that they may keep interest rates low beyond the point that they would have raised them in the past. This may happen with the new inflation targets set out by the Fed.

“I don’t know if that’s going to be appropriate. Historically, it wouldn’t have been. With the new framework and our inflation targets, I think we’re going to be more accommodative than we have been in the past, but I don’t know if we want to be committing to keeping rates at zero until we meet these targets.”

On Low Interest Rates

He also explained his concern with low interest rates for such a long period of time. Kaplan said investors starved for interest income are forced further out on the risk curve to meet their needs.

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“I’m generally worried that if we keep rates at zero longer than we have to, that it forces people out onto the risk curve and they’ve got to take on more risk, you can’t have money in savings, you can’t have money in bonds by and large, especially in shorter bonds. And I think we saw a little bit of this in March, in that some of the selloff in March was COVID related and lockdown related, but part of it was forced selling in risk markets because people had too much risk on. And that’s what happens and that’s the danger if you go for a prolonged period of time and you get excess risk taking, when the markets do go down, it can be more severe and destabilizing.”

Coping With a Crisis

He said we need what the Fed currently does with interest rates and asset-buying because of the crisis. However, the Fed can only do so much and things could turn for the worse without more stimulus.

“Obviously, we’re doing extraordinary actions, not just the Fed funds rate but also what we’re doing with the 13(3) programs and asset-buying, but we need to because it’s a crisis,” Kaplan said. Here he was referring to the emergency lending enabled under the 13(3) powers of the Federal Reserve Act.

“One of the unusual things about this pandemic has been consumer income and consumer spending has stayed resilient, and a big reason why is fiscal support,” Kaplan said. “I think it would create downside risk if we weren’t going to get that fiscal support.”

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