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 email@example.com and Andrew Ackerman at firstname.lastname@example.org
(END) Dow Jones Newswires
May 20, 2019 19:14 ET (23:14 GMT)
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