Growing ‘financial imbalances’ call out for more rigorous use of stress tests, other efforts, Fed gov tells group

Low spreads on corporate credit and risky corporate debt “at historic highs” suggest growing financial imbalances that should be addressed by a variety of means – including more rigorous use of stress tests and active monitoring of leveraged lending, a member of the Federal Reserve Board said Thursday.

In remarks to the Community Bankers Roundtable in Scranton, Pa., Federal Reserve Board Gov. Lael Brainard said financial imbalances should be addressed by activation of the countercyclical capital buffer, thorough use of stress testing and close tabs on leveraged lending. “I am mindful that low spreads on corporate credit, together with risky corporate debt at historic highs, suggest financial imbalances are growing,” she said.

In other comments, the Fed governor said the economy has been doing well so far this year, bolstered by confident consumers and a strong job market. “And after fluctuations earlier in the year, financial markets currently appear supportive of growth, with borrowing rates low and the stock market at all-time highs,” she said.

However, Brainard said that downside risks to the economy, if they materialize, could weigh on economic activity. “Taking into account the downside risks at a time when inflation is on the soft side would argue for softening the expected path of monetary policy according to basic principles of risk management,” she said. “Of course, my judgment about the actual path of policy will continue to be influenced by the evolution of the data and the risks.”

Fed Gov. Lael Brainard: Perspectives on the Economy from Scranton