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Federal Reserve Voices Concern Over Corporate Debt

Record levels of corporate debt in the U.S. have caught the attention of the Federal Reserve. According to Reuters on Tuesday (May 7), the Fed released its latest financial stability report and warned that U.S. share prices are “elevated,” while pointing to “historically high” corporate debt levels.

According to the regulator, between the beginning of 2018 and the start of 2019, leveraged loans have grown 20 percent, with the debt-to-asset ratio in the public sector among non-financial firms at a 20-year high. The level of loans provided to companies already in significant debt is up as well, nearing peak levels not seen since 2014. Those high financing levels were also seen just before the financial crisis, reports noted.

Even so, the Fed concluded that the U.S. economy “appears resilient.” In a statement provided to Reuters, though, Fed Governor Lael Brainard said there are some factors of the economy to watch.

“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 households and banking sectors,” she stated.

According to reports, the Fed cited the rapid surge in corporate debt levels in its last financial stability report as well, warning that an economic downturn could place some of the most indebted companies in a weaker position.

“The elevated level of debt could leave the business sector vulnerable to a downturn in economic activity, or a tightening in financial conditions,” the Fed stated in its latest report.

Household debt, however, has mostly remained aligned with the economy, the Fed said.

The International Monetary Fund and Moody’s are among the other bodies that have recently raised concerns over climbing corporate debt levels. In the U.S., Moody’s report, released in February, echoed Fed sentiment that an economic downturn could significantly increase the risk exposure for financiers linked to high corporate debt levels.

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