Jerome H Powell: Low interest rates and the financial system

Speech by Mr Jerome H Powell, Member of the Board of Governors of the Federal Reserve System, at the 77th Annual Meeting of the American Finance Association, Chicago, Illinois, 7 January 2017.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Thank you for this invitation to discuss low interest rates and the financial system.  The framing of this topic raises the question of whether low interest rates have somehow undermined the stability and functioning of the financial system.  I will argue that "low for long" interest rates have supported slow but steady progress to full employment and stable prices, which has in turn supported financial stability.  Indeed, by many measures the U.S. financial system is much stronger than before the crisis.  That said, there are difficult tradeoffs to manage.  Over time, low rates can put pressure on the business models of financial institutions.  And low rates can lead to excessive leverage and broadly unsustainable asset prices - things that we watch carefully for and do not observe at this point.  I will begin by focusing briefly on the macroeconomic effects of low interest rates.  I will then turn to the condition of the financial system - in particular, its interplay with low rates.  As always, the views I express here today are mine alone.