Financial Update (First Quarter 2010)
Fed Vice Chairman Kohn Cautions Banks on Interest Rate Risk
The nation's banks, thrifts, and credit unions must be particularly mindful of interest rate risk, Federal Reserve System Vice Chairman Donald Kohn said in a January 29 speech on interest rate risk management at a symposium sponsored by the Federal Deposit Insurance Corporation. Noting the difficulty in predicting how interest rates will respond to monetary policy in normal times, Kohn warned that the task has become even more challenging under current circumstances.
"The usual uncertainty about changes in policy interest rates is compounded by uncertainties related to the possible special effects of the historically low levels of interest rates in the current recession, as well as the unprecedented increase in the size of the Federal Reserve's balance sheet and bank reserves as a result of our credit programs and large-scale asset purchases," he said.
Other elements could influence rates
Foreign demand for U.S. dollar–denominated assets could also influence longer-term rates. Prior to the crisis, the United States drew large inflows of foreign capital seeking higher returns. According to Kohn, this inflow helped push down long-term rates. However, the Group of 20 leaders' commitment to more balanced global growth could affect the amount of foreign capital made available to the United States, with a possible impact on long-term rates.
Robust interest rate risk management is key
February 26, 2010