Will the risk of overheating in the U.S. commercial real estate market prompt the Federal Reserve to move more quickly on rate hikes despite lackluster economic growth?
Perhaps, says Boston Fed President Eric Rosengren, it should.
Eight years of extremely low interest rates have pushed commercial real estate prices up rapidly, and they might also decline rapidly if economic conditions change, Rosengren said in remarks prepared for an event hosted by the Shanghai Advanced Institute of Finance this morning in Beijing.
Because many banks hold real estate debt, they might sustain losses that force them to decrease consumer lending, sending shock waves through the consumer-driven U.S. economy.
While Rosengren, a voting member of the U.S. central bank's monetary policy committee, isn't predicting such an event, it could "make a recession worse than it would have been had policymakers normalized interest rates more rapidly," he noted.
It's an important consideration for the Federal Reserve as its monetary policy committee weighs what would be only its second hike in short-term interest rates since they were cut to nearly zero to bolster the economy during the 2008 financial crisis.
While the central bank indicated it might raise rates as many as four times this year after a 25 basis-point boost in December, it later halved the forecast amid market volatility.
Rates, which now range from 0.25% to 0.5%, haven't been touched since, though Fed Chair Janet Yellen said this month that a strong labor market strengthens the case for an increase. Still, price inflation, the other half of the Fed's monetary policy calculus, remains below the central bank's 2% goal, as Rosengren noted.