The Fed sees a “considerable” risk of continued US business failures

WASHINGTON (Reuters) – The risks of ongoing trade failures in the United States “remain considerable” even as the economy emerges from the coronavirus pandemic, the Federal Reserve said Friday in its six-month monetary policy report to Congress.

Business loans “are now close to record highs,” the US central bank said in a report. Although high cash balances, low interest rates and renewed economic growth may reduce short-term problems, “insolvency risks for small and medium-sized firms, as well as for some large firms, remain considerable”.

Fed Chairman Jerome Powell will present the report in meetings to the US Senate Banking Committee on Tuesday and the US House of Representatives Financial Services Committee on Wednesday.

After presenting his own summary of the state of the economy, he will ask questions from lawmakers, who will focus on how much aid the economy needs from the federal government to get to the point where ongoing vaccinations COVID-19 safely resumes normal trade.

The Biden administration is pushing for a $ 1.9 trillion stimulus plan, which has already removed a major hurdle in the Senate, in addition to the nearly $ 900 billion approved at the end of last year and about $ 3 trillion allocated to the beginning of the 2020 crisis.

Those federal payments, including single checks to families, increased unemployment insurance and loans to small businesses, have led to faster-than-expected economic growth and less anticipated financial stress among households and banks holding mortgages, and credit card loans.

But while banks and household balance sheets remain in reasonable shape, the Fed’s reference to business debt highlights the potential economic hangover to come after a historically difficult year.

Along with business failures, the report noted how changes in the economy that are still ongoing could, for example, reduce the already highly valued commercial real estate market and lead to “sharp falls” in prices – a potential blow to investors or creditors involved. with those properties.

The report also noted that loans and expenditures used in some countries to combat the pandemic have made their financial systems “more vulnerable” than before and that the situation may worsen. Stress in some emerging countries, the report warned, could spill over “and produce additional strains for 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 pledged to keep its current policy of low interest rates and monthly bond purchases of $ 120 billion intact until a fuller recovery. This could be tested in the coming months if, as expected, the reopened US economy begins to generate rising inflation.