Boston Fed President: Low Inflation Could Drive Reach for Yield

While the economic outlook in the near term remains positive, persistently low interest rates and continued economic growth could encourage investors to chase yield by taking on more risk, Federal Reserve Bank of Boston President and CEO Eric Rosengren cautioned today. Rosengren noted that the real estate sector—both residential and commercial—could be particularly susceptible to greater risk taking.

“It is important to see and understand the risk that sustained low interest rates could place more pressure on real estate asset prices through reach-for yield-behavior—a scenario that preceded the 1990 and 2007 recessions,” he said in remarks at an industry event in Connecticut. “In certain scenarios, financial stability risks could potentially emerge as a problem for the otherwise benign outlook.”

Rosengren said he also sees potential risks if inflationary pressures were to rise faster than anticipated. He added, however, that “if these risks remain contained, my view is we will likely have another year of good economic outcomes.”