“Even if central bank policies are fully anticipated by the public, some adjustments could occur abruptly, contributing to volatility in domestic and international financial markets and strains in institutions,” the report said.
On the bright side, banks and other financial institutions are seen as well capitalized and thus in a good position to absorb shocks. Consumer debt also has kept pace with GDP increases, indicating little threat there.
For businesses, though, there could be issues, particularly among those that have added to already high debt levels.
So-called leveraged loans have surged recently, as have companies whose bonds are rated near the bottom of the investment-grade ladder and are thus susceptible to slipping into junk territory.
“High leverage has historically been linked to elevated financial distress and retrenchment by businesses in economic downturns,” the report said. “Given the valuation pressures associated with business debt … such an increase in financial distress, should it transpire, could trigger a broad adjustment in prices of business debt.”
The Fed noted that the share of investment-grade debt classified at the low end of the range has “reached near-record levels” of $2.25 trillion, or about 35 percent of the total corporate bonds.
Correction: This is the first time the Fed has issued the financial stability report. An earlier version indicated otherwise.
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