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Fed’s Financial Stability Report Warns of ’Elevated’ Corporate Debt

Fed’s Financial Stability Report Warns of ’Elevated’ Corporate Debt

Peter Hanks, Strategist

Talking Points:

  • The report outlined robust capital positions of US banks and tempered household borrowing as strongpoints in the US economy
  • Potential shocks that could pose a risk to corporations that have ‘elevated’ levels of debt exist
  • The Fed is scheduled to meet for the last time this year on December 19th with a subsequent press conference

The Fed’s first-ever financial stability report was released Wednesday and highlighted many facets of the US economy along with global themes that could impact domestic stability. The inaugural report found many areas of the US economy to be in good health but admitted that risks remain.

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Banks and households were two strongpoints according to the Fed which noted robust capital positioning by US banks and tempered household borrowing. Officials found the financial system to be less vulnerable to the credit crunches witnessed in the Great Financial Crisis a decade ago. Still, global risks remain.

Brexit, trade wars and weakened emerging markets like China were determined to be the headline risks and a crisis in these areas could substantially impact financial stability. Federal Reserve officials said of a potential crisis: “the resulting drop in asset prices might be particularly large, given that valuations appear elevated relative to historical levels.” In the same vein, corporate debt levels were also found to be ‘elevated’ and were highlighted as another risk.

Interestingly, the report highlighted the Fed’s own policy decisions as a risk and said markets globally needed to adjust to the fact of rising interest rates and “some adjustments could occur abruptly.” The inward-looking critique matches Federal Reserve efforts to increase transparency. The report itself is intended to increase transparency in the Fed’s decision making and will be released semiannually. In another campaign to increase broader understanding on the Fed’s position, each meeting in 2019 and beyond will be accompanied by a press conference.

View our Economic Calendar for upcoming Federal Reserve meetings and economic data from all the majors.

The next Fed meeting is scheduled for December 19th and will be accompanied by a press conference. Currently, implied probability of a 25-basis point hike at the December meeting rests at 79.6%.

The Dollar traded sideways following the report as it looked to other factors for price influence like the financial stability report from the Bank of England and a speech by Fed Chairman Powell in New York later Wednesday.

--Written by Peter Hanks, Junior Analyst for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX

Read more: US Dollar Strength in Focus Ahead of Powell; USD/CAD Nears Resistance

DailyFX forecasts on a variety of currencies such as the US Dollar or the Euro are available from the DailyFX Trading Guides page. If you’re looking to improve your trading approach, check out Traits of Successful Traders. And if you’re looking for an introductory primer to the Forex market, check out our New to FX Guide.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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