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Fed's Stability Checkup Downplays Wobbly Features

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Lipper Alpha Insight

By Breakingviews

The U.S. Federal Reserve's first stability checkup downplays some wobbly features. Chairman Jerome Powell says the financial system is in good health, echoing a report from the U.S. central bank on Wednesday. But risks like trade fights and corporate debt only get brief mentions.

The Fed has put greater emphasis on financial stability since the 2008 crisis. In a speech stressing its importance, Powell noted that banks are better capitalized than before the Great Recession. He also said there is "a great deal to like" about the U.S. economic outlook. For example, at 3.7 percent the unemployment rate is at a nearly 50-year low.

The Fed boss also suggested policy interest rates could be close to a neutral level, allowing critics of the central bank's steady rate increases - a group including President Donald Trump - to believe there might not be many more.

But there are concerns. Debt incurred by U.S. companies has reached a high level as a proportion of GDP and the Fed noted that risky high-yield bonds and leveraged loans have increased by 5 percent in the year to September, totaling more than $2 trillion. Rising interest rates and slowing economic growth could turn that into a problem. Even so, the sanguine Fed report concludes that "corporate credit performance remains generally favorable."

Trade tensions received even less attention. In October, the International Monetary Fund lowered its global economic growth forecast for 2018 to 3.7 percent from an earlier outlook of 3.9 percent, partly because of U.S. import tariffs and matching responses by other countries. Worldwide trade expansion is expected to decelerate to 4.2 percent from 5.2 percent in 2017.

Protectionism may intensify in 2019. Unless Trump and Chinese President Xi Jinping declare a ceasefire at their upcoming G20 meeting, the U.S. government is set to increase tariffs

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Lipper Alpha Insight (https://lipperalpha.refinitiv.com/) is a free daily news and commentary blog, giving financial professionals actionable ideas and insight to make sense of individual security news and events and stay on top of macroeconomic trends. We have a team of expert analysts that are constantly looking at the financial landscape in order to keep you up to date on the latest movements.

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