Fed: US businesses' debt at highest level in over 2 decades

Jeannie Matthews
December 1, 2018

But Wednesday's report said this process could also create difficulties for markets and an economy that had grown accustomed to low rates for so long. Those trends, he said, were coinciding with inflation remaining "right on target" at the Fed's goal of 2 per cent annual price increases.

Shepherdson estimated that the Fed was still three interest rate hikes from the middle of the range for "neutral".

Fed Chairman Jerome Powell reiterated the central bank's concerns about corporate borrowing and deteriorating credit standards in a Wednesday speech.

The Federal Reserve is responsible for establishing interest rates, or the cost of borrowing money.

Since stock prices have reached record highs over the past few years, they have a lot more room to fall, the report notes, stating that "elevated valuation pressures imply a greater possibility of outsized drops in asset prices".

Powell has faced continued attacks from President Trump for gradually raising rates since the Fed chair took office in January.

Powell has faced an unprecedented backlash from the president.

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Mr. Powell is set to speak in NY on Wednesday about monetary policy and financial stability. "If it sells off enough, the Fed will blink", Bianco told Cheddar Wednesday. The Fed said the CLO market will be important to monitor. "They're making a mistake because I have a gut, and my gut tells me more sometimes than anybody else's brain can ever tell me". "I think he looks past that, but I don't think he looks past the potential effects of a further decline in the stock market", he added. "Not even a little bit", Trump told The Washington Post.

"I'm not happy with the Fed". "Not even a little bit".

Trump argued that the Fed's policies were damaging the economy and pointed to the recent stock market declines and General Motors' announcement Monday that it would cut up to 14,000 workers in North America and put five plants up for possible closure. The president's criticism shattered a two-decade White House tradition of avoiding comment on monetary policy out of respect for the Fed independence. The banks are considered to be so huge and interconnected that each could threaten the stability of the financial system if it collapsed.

Officials cited potential risks tied to nonfinancial corporate borrowing, including low premiums demanded by investors in certain business debt, such as leveraged loans and high-yield corporate debt. Businesses with weak balance sheets could prove problematic in the event of an economic downturn, as they would be less likely to weather selling and could exacerbate a dip in the market, Powell explained.

For his part, Bianco also said anxiety aside, old sources of risk ー like the banking system, the credit markets, the mortgage markets, or too much leverage ー won't cause the next financial crisis.

"I would not be surprised if they go with one more hike in December and then pause indefinitely to see what happens to the economy", Sohn said.

"My own assessment is that, while risks are above normal in some areas and below normal in others, overall financial stability vulnerabilities are at a moderate level", Powell said.

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