The Federal Reserve nudged interest rates lower this week to insulate the economy against the fallout from the US trade fight with China.
But the vote on the quarter-percentage-point reduction wasn’t unanimous, and on Friday we heard from two of the three dissenters, including Eric Rosengren, president of the Federal Reserve Bank of Boston, who said the central bank’s two rate cuts since July could increase financial instability and make the next recession even worse.
Rosengren also sounded what I’ll call the “WeWork Warning,” which should be of particular interest to anyone with a stake in the booming Boston office real estate market. More on that in a moment.
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The rebuttals by Rosengren and his counterpart at the St. Louis Fed, who took the opposite position and advocated for an even larger rate cut, underscore the unusually confusing conditions confronting the Fed as it attempts to extend an already record-long economic expansion.
On one side is Rosengren and Esther George, president of the Kansas City Fed, who believe rates were already low enough to support an economy that is holding up despite pressure from trade tensions and slowing global growth.
“Additional accommodation is not needed for an economy where labor markets are already tight,” Rosengren said in a speech at New York University, reiterating a point he and George had each previously made after the Fed’s quarter-point cut in July. Easing credit now “risks further inflating the prices of riskier assets, and encouraging households and firms to take on what may be too much leverage,” he said.
His bottom line: “I don’t see current financial risks as causing a downturn, but such conditions have the potential to amplify a downturn, should it occur.”
On the other side is St. Louis Fed president James Bullard, who said Friday that officials should err on the side of slashing rates too quickly.
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“It is prudent risk management, in my view, to cut the policy rate aggressively now and then later increase it should the downside risks not materialize,” he said in a statement. Although he is the lone Fed official backing such drastic action, Bullard has a fair amount of support from investors.
“They are going to be behind the curve when a bad economic data point hits,” said Matt Miskin, co-chief investment strategist at John Hancock Investment Management, referring to Fed chairman Jerome Powell and the six other members of the Federal Open Market Committee who pushed through the more modest drop in their benchmark rate, to a range of 1.75 percent to 2 percent.
Now back to Rosengren and Boston’s red-hot property market.
In his speech, he said low interest rates may encourage landlords to “reach for yield” by relying on middlemen such as WeWork that take out long-term leases in office buildings and sublease to individuals and companies for shorter periods.
According to Rosengren, some co-working companies use special purpose entities for leases, a setup that may allow them to “potentially walk away from unprofitable lease arrangements in an economic downturn without the property owner having recourse to the ultimate parent, the co-working company.”
WeWork is a major leaseholder in Boston and should soon surpass Fidelity Investments as the largest user of office space in the city.
“I am concerned that commercial real estate losses will be larger in the next downturn because of this growing feature of the real estate market,” Rosengren said.
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“Ask 10 economists for their opinion,” the lame old joke goes, “and you’ll get 11.”
Ten voting members of the FOMC got together for two days this week and emerged with three views of what’s best for the economy. That’s practically a consensus when it comes to the dismal science.
Rosengren’ make the most sense to me. But I hope that Powell and his middle-of-the roaders find a way to guide the economy to a soft landing. No matter where we stand, no one wants another crash.
You can reach me at larry.edelman@globe.com and follow me on Twitter @GlobeNewsEd.