WASHINGTON (Reuters) – Risks of continued business bankruptcies in the United States “remain considerable” even as the economy emerges from the coronavirus pandemic, the Federal Reserve said in its semi-annual monetary policy report to Congress on Friday.
Corporate borrowing “is now near record highs,” the US central bank said in the report. Although large cash balances, low interest rates and renewed economic growth may mitigate short-term problems, “the risks of bad debt in small and medium-sized companies, as well as in some large companies, remain considerable.”
Fed Chairman Jerome Powell will present the report in hearings before the US Senate Banking Committee on Tuesday and the Financial Services Committee of the US House of Representatives on Wednesday.
After presenting your own summary of the state of the economy, you will answer questions from lawmakers who will likely focus on how much more help the economy needs from the federal government to get to the point where ongoing COVID-19 vaccines make it safe to resume. normal trade. .
The Biden administration is pushing for a $ 1.9 trillion stimulus plan that has already cleared a major hurdle in the Senate, money on top of the nearly $ 900 billion approved late last year and the roughly $ 3 trillion earmarked at the start. of the crisis in 2020.
Those federal payments, including one-time checks to families, increased unemployment insurance, and small business loans, led to faster-than-expected economic growth and less-than-anticipated financial stress among households and banks that they keep their mortgages and credits. card loans.
But while bank and household balance sheets remain in reasonable shape, the Fed’s reference to corporate debt highlights the potential economic hangover yet to 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, shrink the market for commercial real estate that is already very valuable and cause a “sharp drop” in prices, a blow potential for investors or lenders. involved with those properties.
The report also noted that loans and spending used in some countries to fight the pandemic had made their financial systems “more vulnerable” than before, and the situation may be getting worse. Stress in some emerging market nations, the report warned, could spread “and put additional stress on the US financial system and economic activity.”
Next week will be Powell’s first appearance on Capitol Hill since Democrats won the White House and control of both houses of Congress.
The Fed has vowed to keep its current policy of low interest rates and $ 120 billion in monthly bond purchases intact until the recovery is more complete. That may be put to the test in the coming months if, as expected, the reopening of the US economy begins to generate rising inflation.
Reporting by Howard Schneider; Editing by Paul Simao