NEW YORK Sept 20 (Reuters) - Boston Federal Reserve Bank President Eric Rosengren, explaining his dissent from the central bank's decision to cut interest rates this week, said Friday that lower rates could encourage businesses and consumers to borrow and take on "excessive risks."
Rosengren, who issued a statement on Friday morning that lower rates are "not costless," said in a speech here that he believes the U.S. economy is strong enough to withstand the risks presented by the trade war with China.
The Fed official once again pointed to a low unemployment rate as a sign that the economy is in a healthy place and said he believes below target inflation is "temporary."
Rosengren was one of three dissenters against Wednesday's decision to cut rates this week and one of two dissenters in July, when the Fed lowered its benchmark rate for the first time since 2008. On Wednesday, Kansas City Fed President Esther George and Rosengren called for no rate cut. St. Louis Fed President James Bullard wanted a bigger half-point rate cut.
Rosengren said he is worried that lower rates could put the economy on more tenuous ground by encouraging people and firms to borrow excessively. He pointed to the last recession, which he said was exacerbated by high debt levels.
"Its important to note that high leverage does not generally cause recessions, but high leverage can be an amplifier that makes recessions more severe," he said. "Once the recession occurred, borrowers and lenders pulled back, and debt multiples decreased significantly."
The Fed official also cited the rise of co-working spaces as one example of the ways that lower interest rates could encourage companies to take on more risk. He said that firms who own and run co-working spaces could face greater challenges in a downturn because they tend to rent their spaces to less mature companies, which could struggle to pay rent in a recession.
Rosengren acknowledged that President Donald Trump's prolonged trade dispute with China poses risks to the economy by affecting business investment and leading to retaliatory tariffs from other countries. But he said economic projections still call for the economy to grow by 2 percent, on real terms.
"The risks, while of concern, have not slowed the economy below its sustainable rate of growth," he said. "So far the economy seems to have weathered the impact of trade disruptions and slowing foreign growth." (Reporting by Jonnelle Marte Editing by Chizu Nomiyama)