By Nick Timiraos and Andrew Ackerman
Federal Reserve Chairman Jerome Powell said financial regulators
must take seriously potential dangers that rising levels of
business debt pose to the U.S. economy but said some comparisons to
last decade's subprime mortgage bubble overstate the risks.
"Fifteen years ago, everyone was talking about whether
households were borrowing too much," Mr. Powell said in remarks
prepared for delivery in Fernandina Beach, Fla., at a conference on
financial markets. "Today everyone is talking about whether
businesses are borrowing too much."
Views about the risks from rising corporate borrowing "range
from 'This is a return to the subprime mortgage crisis' to 'Nothing
to worry about here,'" said Mr. Powell. "At the moment, the truth
is likely somewhere in the middle."
With his speech, Mr. Powell joined a growing list of policy
makers and other commentators warning about potential excesses in
business debt, including his immediate predecessor, former Fed
Chairwoman Janet Yellen, and officials at the Bank of England and
the International Monetary Fund.
Mr. Powell said corporate borrowing behavior was reminiscent of
the subprime mortgage boom. He said debt has hit new highs due in
part to "aggressive underwriting" using financial vehicles that
sell different pieces of debt to different investors, often outside
the banking sector.
"Business debt has clearly reached a level that should give
businesses and investors reason to pause and reflect," he said. Not
only are debt levels high, but recent growth has been concentrated
in riskier forms of borrowing.
While business debt growth appeared to have moderated somewhat
since early 2018, the pause could be temporary, he added. Any
additional sharp increase in debt, absent support from economic
fundamentals, "could increase vulnerabilities appreciably," he
said.
If the economic and financial conditions deteriorated, overly
indebted companies could face significant strains, forcing more
layoffs and cutbacks in investment, which could make any downturn
more painful, he said.
"Investors, financial institutions and regulators need to focus
on this risk today, while times are good," Mr. Powell said.
At the same time, Mr. Powell pushed back against some of the
more alarmist views about corporate borrowing, calling some
comparisons to the subprime mortgage crisis "not fully
convincing."
Mr. Powell said the financial system today "appears strong
enough to handle potential business-sector losses, which was
manifestly not the case a decade ago with subprime mortgages."
Moreover, the increase in business debt reflects a steady
"upward plod" over a long expansion, he said, as opposed to the
spike in mortgage lending between 2004 and 2006. While the mortgage
boom was fueled in part by a housing bubble, business credit
doesn't appear to be rising because of an asset bubble.
"Seen this way, the current situation looks typical of business
cycles," he said. "The mortgage credit boom was, because of its
magnitude and speed, far outside historical norms."
Mr. Powell focused potential remedies on improving the
monitoring of financial risk-taking between domestic and
international regulatory agencies. Regulators "cannot be satisfied
with our current level of knowledge about these markets," he
said.
Mr. Powell didn't go as far in his policy recommendations as his
colleague, Fed governor Lael Brainard, who last week said the
central bank should reconsider recent efforts to ease certain
postcrisis regulation and capital rules given these
constraints.
"Because interest rates will do less than in past cycles,
regulatory buffers will need to do more," she said. She called it a
"bad time to be weakening the core resilience of our largest
banking institutions."
Mr. Powell's remarks represent the latest attempt to better
define the Fed's stance toward financial stability risks after the
last two expansions, in 2001 and 2007, respectively, ended with
asset bubbles that burst.
Fed officials have signaled they aren't likely to raise interest
rates soon, meaning they don't appear at all inclined to use higher
interest rates to try to tamp down financial excesses.
Fed officials have struggled over the years with how to manage
that balancing act. Former Fed Chairman Alan Greenspan first warned
of "irrational exuberance" in the U.S. stock market in 1996, the
first in a series of remarks highlighting potentially
underappreciated risks in equity markets. Markets climbed higher
for several more years.
Write to Nick Timiraos at nick.timiraos@wsj.com and Andrew
Ackerman at andrew.ackerman@wsj.com
(END) Dow Jones Newswires
May 20, 2019 19:14 ET (23:14 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.