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Fed Chairman Weighs In On Corporate Debt Risk

Federal Reserve Chairman Jerome Powell offered his thoughts on rising corporate debt levels in the U.S. and abroad just weeks after the Fed released its latest financial stability report, which found that the U.S. economy “appears resilient.” USA Today on Tuesday (May 21) reported that Powell spoke during a banking conference in Florida, where he said the Fed is closely monitoring corporate debt levels, concluding that the risks are “moderate.”

While some economists consider current corporate debt levels to represent “a rerun of the subprime mortgage crisis,” others have said there is “nothing to worry about here,” he said. Reports added that Powell lands in the middle of these two schools of thought.

The biggest concern about rising corporate debt levels is the borrowing that is “financed opaquely, outside the banking” system, with Powell warning that shadow banking could “pose a new threat to financial stability.”

“The financial system today appears strong enough to handle potential business-sector losses, which was manifestly not the case a decade ago with subprime mortgages,” he noted, highlighting the difference between today’s corporate debt climate and the housing bubble that burst ahead of the 2008 financial crisis.

To combat shadow banking, regulations must see improvements, Powell said, and regulators must ensure that the financial services sector can withstand a significant economic downturn. The Fed’s Financial Stability Report, published earlier this month, acknowledged “historically high” corporate debt levels and “elevated” share prices.

“With financial volatility easing since the end of last year, the Federal Reserve Board’s Financial Stability Report suggests stretched asset valuations and risky corporate debt merit continued vigilance against a backdrop of low-to-moderate vulnerabilities in the household and banking sectors,” said Fed Governor Lael Brainard at the time.

The International Monetary Fund and Moody’s have also recently raised concerns about rising corporate debt levels, both in the U.S. and in other jurisdictions, including China.


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