High leverage points to slow recovery from pandemic recession By Reuters

High leverage points to slow recovery from pandemic recession By


© Reuters. The Federal Reserve Bank of Boston’s President and CEO Eric S. Rosengren speaks during the “Hyman P. Minsky Conference on the State of te U.S. and World Economies”, in New York

(Reuters) – The extensive build up of corporate leverage in the years before the onset of the coronavirus pandemic, especially in sectors like commercial real estate, will likely make the economic recovery from the COVID-19 recession more difficult, Boston Federal Reserve President Eric Rosengren said on Thursday.

Rosengren, in remarks to an online audience hosted by Marquette University in Milwaukee, reiterated his long-running concerns about the risks that persistently low interest rates pose to financial stability. He did not address the outlook for interest rate policy or provide a specific forecast for the economic outlook.

“Clearly a deadly pandemic was bound to badly impact the economy. However, I am sorry to say that the slow build-up of risk in the low-interest-rate environment that preceded the current recession likely will make the economic recovery from the pandemic more difficult,” Rosengren said.

“The increased risk build-up, such as the reaching-for-yield behavior in commercial real estate or increased corporate leverage, make economic downturns including this one more severe. These are issues that I and others spoke about quite extensively in the years before the pandemic hit, in particular with respect to questions about the need for accommodative interest rates when the economy was doing well, and the potential for a build-up of financial stability risks.”

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