UPDATE 2-Fed’s Kohn warns on interest rate risk

(Adds details, background, byline)

By Karey Wutkowski

ARLINGTON, Va., Jan 29 (BestGrowthStock) – A senior U.S. Federal
Reserve official warned on Friday that the uncertain path of
interest rates in coming months 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 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 at
exceptionally low rates for a long time, and renewed that
promise on Wednesday at its regular policy-setting meeting.

Kohn said rates were likely to stay near zero for an
extended period if the economy follows the the trajectory
expected by the Fed.

When and how fast rates rise depends on the outlook for
growth and inflation, Kohn said. Economists expect only modest
growth accompanied by a slow decline in the unemployment rate
over the next few years, he said.

As part of its efforts to help the struggling economy, the
Fed began buying longer-term Treasury and mortgage-related
securities. Those purchases are winding down, and the impact of
the end of the buying on interest rates is likely to “modest,”
Kohn said.

Investing Research

(Reporting by Karey Wutkowski, writing by Mark Felsenthal,
Editing by Chizu Nomiyama)

UPDATE 2-Fed’s Kohn warns on interest rate risk