In addition to remarks that suggested fewer rate hikes, Fed Chairman Jerome Powell highlighted the risks posed by heavily leveraged companies at his speech before the Economic Club of New York on Wednesday.
Although Powell described an economy that “is close” to achieving maximum employment and price stability,” he noted that “there are reasons for concern,” including the rising debt loads and growing interest burdens of highly leveraged firms and the deteriorating quality of debt underwriting.
Firms with high leverage and interest burdens have been increasing their debt loads the most, according to the Fed’s first Financial Stability Report that was released on Wednesday and a focus of Powell’s speech.
“Some of these highly leveraged borrowers would surely face distress if the economy turned down, leading investors to take higher-than-expected losses – developments that could exacerbate the downturn,” said Powell.
He doesn’t expect such losses would pose a risk to the U.S. financial system, only to those investors who own such “vehicles like collateralized loan obligations” of highly leveraged firms. Powell noted that the Fed will continue to monitor developments in this sector.
(Related: CLOs Are Hot. Plan Accordingly.)