By Karey Wutkowski
ARLINGTON, Va., Jan 29 (Reuters) – A senior U.S. Federal Reserve official warned on Friday that the uncertain path of interest rates poses risks for banks inattentive to the match of durations among their assets and liabilities.
Federal Reserve Vice Chairman Donald Kohn told a conference sponsored by the Federal Deposit Insurance Corp that the usual uncertainty about interest rates in coming months is compounded in the current situation by the fact that rates are near zero and the Fed has massively expanded the amount of reserves in the banking system.
“Borrowing short and lending long is an inherently risky business strategy,” Kohn said. “Intermediaries need to be sure that as the economy recovers, they aren’t also hit by the interest rate risk that often accompanies this sort of mismatch in asset and liability maturities.”
The Fed has pledged to keep benchmark rates exceptionally low for an extended period, and renewed that promise on Wednesday at its regular policy-setting meeting.
Kohn said the Fed would stick to that commitment if the economy follows the the trajectory expected by the Fed.