WASHINGTON (Reuters) – The risks of business failures in the United States “remain considerable” even as the economy emerges from the coronavirus pandemic, the Federal Reserve said on Friday in its half-yearly monetary policy report to Congress.
Corporate indebtedness “is now close to historic highs,” the US central bank said in the report. Even though large cash balances, low interest rates and renewed economic growth may alleviate short-term problems, “the risks of insolvency in small and medium-sized companies, as well as in some large companies, remain considerable.”
Fed Chairman Jerome Powell will present the report at hearings to the U.S. Senate Banking Committee on Tuesday and the House of Representatives’ Financial Services Committee on Wednesday.
After presenting his own summary of where the economy is, he will answer questions from lawmakers who are likely to focus on how much more help the economy needs from the federal government to get to the point where ongoing COVID-19 vaccinations make it safe to return to normal trade.
The Biden government is promoting a $ 1.9 trillion stimulus plan that has already overcome a major obstacle in the Senate, money in addition to the nearly $ 900 billion passed last year and the nearly $ 3 trillion appropriated at the start of the crisis. in 2020.
These federal payments, including one-off checks for families, increased unemployment insurance and small business loans, have led to faster-than-expected economic growth and less-than-expected financial stress between families and banks holding their mortgages. and credit card loans.
But while the balance sheets of banks and households remain in reasonable shape, the Fed’s reference to corporate debt highlights the potential economic hangover that will still come after a historically difficult year.
Along with business failures, the report noted how changes in the economy that are still underway could, for example, cut the already highly valued commercial property market and lead to “sharp drops” in prices – a potential blow to investors or creditors involved with these properties.
The report also noted that loans and spending used in some countries to combat the pandemic have made their financial systems “more vulnerable” than before, and the situation may be getting worse. Stress in some emerging countries, the report warned, could spread “and create additional tensions for the US financial system and economic activity”.
Next week will be Powell’s first appearance on Capitol Hill since Democrats conquered the White House and control of both chambers of Congress.
The Fed has pledged to keep its current policy of low interest rates and $ 120 billion in monthly bond purchases intact until the recovery is more complete. This can be tested in the coming months if, as expected, the reopening of the American economy begins to generate high inflation.
Howard Schneider reporting; Editing by Paulo Simão