‘Leveraged lending’ by business remains concern; Fed closely monitoring

In a press conference largely dominated by questions about the latest interest rate-cutting action by the Federal Reserve’s rate-setting committee (of 25 basis points), the chair of the agency’s board indicated Wednesday that high leverged lending at businesses remains a concern.

Federal Reserve Board Chair Jerome H. (“Jay”) Powell told reporters at the press conference that “historically high” leveraged lending is being closely watched by the central bank. “We have been monitoring carefully and taking appropriate steps,” Powell said.

But he quickly added that corporate debt is just one part of a larger framework that the Fed considers when gauging financial stability. However, he also said “it is something that we are paying quite a bit of attention to. It’s been part of the last couple of shared national credit exams. We’ve been monitoring it carefully and taking appropriate action.” He offered those remarks as he glanced at notes at the lectern from which he was speaking.

(In the brief video, FRB Chair Jerome Powell discusses risk to financial stability from leveraged lending.)

Powell said that the overall framework for gauging financial stability is made up of four parts – and that all four parts (with the lone exception of corporate debt) are in balance. He said the Fed monitors all four parts of the framework “all of the time; we don’t see large imbalances. It is notable for the lack of large financial imbalances.”

The four parts of the framework for gauging financial stability, Powell reminded the group, are: leverage in the financial system; funding risk; asset prices; and leverage in the non-financial sector – “households and businesses.” He indicated that only leverage in businesses is of noteworthy concern now.

In other comments, Powell declined to comment on a tweet from President Donald Trump the same day, which stated that “we’re seeing the greatest economy in history.”

“I’m going to maintain my long-time practice of not commenting on what any elected officed would say,” Powell replied, curtly. It was the last question at the press conference.

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