UPDATE 1-Fed sees ‘appreciable’ danger of ongoing U.S. enterprise failures
(Adds details from the report)
WASHINGTON, February 19 (Reuters). The risk of prolonged business failure in the US remains “substantial” even if the economy emerges from the coronavirus pandemic, the Federal Reserve said on Friday in its semi-annual monetary policy report to Congress.
Corporate borrowing “is now near historical highs,” the Federal Reserve said in the report. While large cash balances, low interest rates and renewed economic growth can dampen the problems in the short term, the risks of bankruptcy remain significant for small and medium-sized companies and some large companies.
Fed chairman Jerome Powell will present the report in hearings in the Senate Banking Committee on Tuesday and in the House Financial Services Committee on Wednesday.
After submitting his own summary of the state of the economy, he 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 Vaccinations 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, on top of the nearly $ 900 billion approved late last year and roughly $ 3 billion Trillion US dollars allocated at the start of the crisis in 2020.
These federal payments, including one-time checks to families, increased unemployment insurance, and small business loans, resulted in faster-than-expected economic growth and less-than-expected financial strain on the households and banks that hold their mortgages and card loans.
While bank and household balance sheets remain in reasonable shape, the Fed’s note on corporate debt underscores the potential economic hangover that lies ahead after a historically difficult year.
In addition to business failures, the report noted how ongoing changes in the economy, for example, can constrain the market for already highly valued commercial property and lead to “sharp falls” – a potential blow to investors or lenders with these characteristics involved.
The report also found that the borrowing and spending used to fight the pandemic in some countries had made their financial systems “more vulnerable” than before, and the situation could get worse. The report warned that stress could spill over into some emerging economies and create “additional stresses on the US financial system and economic activity.”
Next week will be Powell’s first Capitol Hill appearance since the Democrats won the White House and control of both chambers of Congress.
The Fed has pledged to maintain its current policy of low interest rates and monthly bond purchases of $ 120 billion until the recovery is complete. This could be tested in the coming months if the reopened US economy is expected to generate rising inflation. (Reporting by Howard Schneider Editing by Paul Simao)