WASHINGTON- The United States may still face a wave of debt defaults and “significant declines” in asset prices because of the coronavirus pandemic and recession, the Federal Reserve warned on Monday, in a stark reminder the economy is far from out of the woods.
“As many households continue to struggle, loan defaults may rise, leading to material losses” for lenders, the Fed said in its latest biannual Financial Stability Report. Business debt “has risen sharply as businesses increased borrowing to weather the period of weak earnings. The general decline in revenues associated with the severe reduction in economic activity has weakened the ability of businesses to services these obligations.”
Asset prices “remain vulnerable to significant declines should investor risk sentiment fall or the economic recovery weaken.”
The comments were issued on a day when US stock markets surged on news that a coronavirus vaccine may be on the horizon — a possible boon to businesses and households globally. – Reuters
In the Fed’s last report on financial stability, in May, the central bank warned of “severe” risks facing the country as economic activity cratered. Over the intervening months the worst outcomes have been avoided, partly due to Fed lending and other actions taken to keep financial markets functioning, and partly due to other government transfer and grant programs that let households and businesses continue paying their bills.