"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 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. The Fed vice chairman suggested that longer-term interest rates may well rise as the Fed raises borrowing costs.