Fed Chief Concerned With Rising Debt of Highly Leveraged Companies

The excessive debt load of businesses and households is one of four vulnerabilities identified by the Fed as playing a prominent role in past financial crises. These vulnerabilities are distinct from shocks in the framework that the Fed uses to monitor risks to the stability of the financial system but can amplify them.

The three other vulnerabilities, according to Powell, are excessive leverage in the financial sector and funding risk for banks and nonbank financial entities, and financial bubbles.

Powell was generally sanguine about these vulnerabilities currently.  He said the Fed does not detect excessive leverage, funding risk or asset valuations although valuations of riskier forms of corporate debt and commercial properties “are in the upper ends of the post-crisis distributions.”

(Related: U.S. Household Debt Soars Past 2008′s Q3, NY Fed Says)

“We see no major asset class, however, where valuations appear far in excess of standard benchmarks as some did…. in the late 1990s dot-com boom or the pre-crisis credit boom.”  …We do not see dangerous excesses in the stock market… Overall financial stability vulnerabilities are at a moderate level.”

Asked by economist Martin Feldstein if Fed monetary policy should take into account financial stability, Powell said, it was “preferable to use regulatory tools” for that purpose but he noted that the Fed should keep in mind the crises that ended past business cycles, namely, the savings and loan crisis, dot.com bubble and mortgage bubble, which precipitated the financial crisis.