Debt does not pose a threat to the US economy

Debt does not pose a threat to the US economy

A senior Federal Reserve official said Monday that households, businesses and banks are in good financial health and do not appear to pose a major threat to the U.S. economy.

“In my view, our financial system is more resilient than it was in the mid-2000s,” Fed Governor Lisa Cook said in a speech at Duke University.

Household debt such as car loans, credit cards and mortgages “remains at modest levels,” Cook said.

Additionally, most debt is held by those with “strong credit histories or significant home equity,” she said.
She noted that corporate debt is approaching historically high levels, but companies appear to have the means to pay their bills due to strong profits. So far, high interest rates have not hurt them much.
At the same time, she added, banks and most other financial institutions “remain generally sound and resilient,” and enjoy a significant amount of financial support that often exceeds regulatory requirements.

“In the banking industry, the deposit volatility that we saw earlier this year has subsided,” Cook said, referring to a short period of deposits after the failure of the Silicon Valley bank.
However, Cook said she and other senior Fed officials are closely monitoring the financial system for emerging signs of stress.
She said the amount of leverage, or money involved in potentially risky investments, is “high” among private hedge funds that typically serve private clients.

It also said lending to commercial real estate entities was riskier due to lax demand for office space in major cities and coastal areas since the start of the pandemic, with many people continuing to work from home.
If more payment delinquencies occur, it could lead to increased pressure on the financial system, she said.
Rising long-term bond yields are another threat, she said, but added that the expectation of “higher interest rates in the near term does not appear to be causing the increase.”

However, even if current risks appear low, the Fed should remain on guard, Cook said. For example, the failure of Silicon Valley Bank earlier in the year came as a surprise to the central bank.
“We cannot — and do not expect — to anticipate all potential risks. The financial system is too complex and evolving too quickly for this to be possible,” Cook said.
“What we can do is remain vigilant in the face of emerging vulnerabilities and build resilience to a variety of potential shocks.”
Cook did not mention the huge and growing US national debt. Other Fed officials have previously said the debt is unsustainable in the long term.

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