{"id":247508,"date":"2010-01-29T12:36:29","date_gmt":"2010-01-29T17:36:29","guid":{"rendered":"http:\/\/blogs.wsj.com\/economics\/2010\/01\/29\/feds-kohn-banks-need-to-prepare-for-higher-rates\/"},"modified":"2010-01-29T12:36:29","modified_gmt":"2010-01-29T17:36:29","slug":"fed%e2%80%99s-kohn-banks-need-to-prepare-for-higher-rates","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/247508","title":{"rendered":"Fed\u2019s Kohn: Banks Need to Prepare for Higher Rates"},"content":{"rendered":"

The Federal Reserve<\/strong>’s number-two official issued a stern warning to investors, banks and other financial institutions Friday: Don\u0092t be complacent, interest rates are going up at some point and it will cause new market turmoil if you\u0092re not prepared.<\/p>\n\n\n\n\n
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\u0093We are in uncharted waters for monetary policy and the financial markets,\u0094 Donald Kohn<\/strong>, vice chairman of the Federal Reserve, said in a speech<\/a> to bankers at the Federal Deposit Insurance Corporation. Rattling off a long list of uncertainties about the outlook \u0096 a rising budget deficit, foreign demand for U.S. debt, the strength of the recovery \u0096 Mr. Kohn said bankers need to start preparing now for the risk that interest rates could move swiftly in unexpected directions, most likely up.<\/p>\n

\u0093Many banks, thrifts, and credit unions may be exposed to an eventual increase in short-term interest rates,\u0094 he warned, adding that long-term interest rates could also be pushed higher, in part because large government borrowing to fund budget deficits could crowd out private borrowing. Foreign demand for U.S. debt could also narrow if countries with large trade surpluses shrink those surpluses and thus accumulate fewer dollars.<\/p>\n

To counter the financial crisis, the U.S. central bank slashed short-term rates to near zero in December 2008 and said this week it expects them to stay at a record low for at least several more months. But Kohn warned there is considerable uncertainty at the Fed about how to proceed. \u0093Short-term rates will rise at some point, but when, how quickly, and by how much will depend on the outlook for economic activity and inflation,\u0094 he said.<\/p>\n

Several factors are behind the Fed\u0092s warning. First, officials are to high alert for new risks building in the financial system after the shocks of 2007 and 2008. Second, Fed officials also don\u0092t want investors to believe that the way forward for interest rates is necessarily predictable and calm. One critique of the Fed\u0092s monetary policy between 2003 and 2005 was that it set out a path of interest rate increases that was too predictable and helped to lull investors into a sense of complacency about risk.<\/p>\n

The Fed’s policy-making arm Wednesday left short-term rates at a record low to support a nascent recovery. But it was slightly more upbeat on the U.S. economy and confirmed plans to stop buying mortgage-backed securities in just over a month. In upgrading its reading of the U.S. economy, the Fed took a tiny step towards increasing interest rates in the future.<\/p>\n

Mr. Kohn said the recent financial crisis had emphasized the need for senior bank managers to actively engage in the measurement and assessment of risk exposures.<\/p>\n

“We have seen too well and too painfully in the past several years, in the largest banks and in the smallest, what happens when systems and management understanding are not commensurate with the risks being taken,” the central banker said.<\/p>\n

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The Federal Reserve’s number-two official issued a stern warning to investors, banks and other financial institutions Friday: Don\u0092t be complacent, interest rates are going up at some point and it will cause new market turmoil if you\u0092re not prepared. Kohn \u0093We are in uncharted waters for monetary policy and the financial markets,\u0094 Donald Kohn, vice […]<\/p>\n","protected":false},"author":850,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-247508","post","type-post","status-publish","format-standard","hentry","category-news"],"_links":{"self":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/247508","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/users\/850"}],"replies":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/comments?post=247508"}],"version-history":[{"count":0,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/247508\/revisions"}],"wp:attachment":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/media?parent=247508"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/categories?post=247508"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/tags?post=247508"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}