February 22, 2021 | less than a minute read

Federal Reserve warns of bankruptcy risks

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Michael J. Venditto

Partner

Get in touch

Michael J. Venditto

Partner

The race to vaccinate Americans is likely to bring an end to the pandemic in the months ahead, but the outlook for the U.S. economy is far less certain. On Friday, the Federal Reserve Board delivered its Monetary Policy Report to Congress. While providing statistics suggesting that U.S. businesses could rebound when the pandemic ends, the report noted significant risks of business bankruptcies as well as a steep drop in commercial real estate prices.

Businesses have taken on significant amounts of debt over the past year as they struggled to deal with the economic and financial fall-out (including forced shutdowns) from COVID-19. As a result, the Fed reported that "business leverage stands near historical highs." Despite low interest rates and the prospects for improved earnings, it cautioned that insolvency risks for businesses of all sizes remain considerable. The risks of leverage are exacerbated by the uncertainties created by shifts in consumer spending and high levels of household debt, which point to decreased demand for consumer goods and services.

Observing that "commercial real estate prices remain at historically high levels despite high vacancy rates," the report also warned that commercial real estate appears susceptible to sharp declines, particularly "if the pace of distressed transactions picks up or, in the longer term, the pandemic leads to permanent changes in demand."

The COVID-19 pandemic continues to weigh heavily on economic activity and labor markets in the United States and around the world, even as the ongoing vaccination campaigns offer hope for a return to more normal conditions later this year. While unprecedented fiscal and monetary stimulus and a relaxation of rigorous social-distancing restrictions supported a rapid rebound in the U.S. labor market last summer, the pace of gains has slowed and employment remains well below pre-pandemic levels. In addition, weak aggregate demand and low oil prices have held down consumer price inflation. In this challenging environment, the Federal Open Market Committee (FOMC) has held its policy rate near zero and has continued to purchase Treasury securities and agency mortgage-backed securities to support the economic recovery. These measures, along with the Committee's strong guidance on interest rates and the balance sheet, will ensure that monetary policy will continue to deliver powerful support to the economy until the recovery is complete.

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