Continued Business Failures Pose ‘Considerable’ Risk To Economy, Federal Reserve Says

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Andrew Jose Contributor
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Ongoing business failures in the United States continue to present “considerable” risks to the national economy, the Federal Reserve stated Friday in its semi-annual monetary policy report to Congress.

Business borrowing has grown during 2020 from already high levels, taking business leverage to near record highs, according to the report, which Federal Reserve Chair Jerome Powell will present in hearings before the Senate Banking Committee on Tuesday and the House of Representatives Financial Services Committee on Wednesday. (RELATED: We Get It, Janet Yellen Is A Woman. But What Is She Likely To Do As Treasury Secretary?)

Although large cash balances, low interest rates, and renewed economic growth may reduce problems in the upcoming term, considerable insolvency risks at small and medium-sized firms, as well as at some big firms, remain, the report stated.

The Biden administration is working towards a $1.9 trillion stimulus plan that has already overcome a major hurdle in the Senate. The plan would be on top of the nearly $900 billion approved in late 2020 and the approximately $3 trillion allotted at the beginning of the crisis in 2020, according to Reuters.

Those federal payments, which include onetime checks to families, increased insurance for unemployment and loans to small businesses, has reportedly led to faster-than-anticipated economic growth and less-than-expected financial stress on households and the banks holding mortgages and credit card loans.

Another area the Federal Reserve report highlighted concerns in is commercial real estate prices.

“Commercial real estate prices remain at historically high levels despite high vacancy rates,” the report said, adding that, however, they “appear 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.”

Amid this risk, nearly $430 billion in commercial real estate debt will mature this year, according to Seeking Alpha. Property owners who have fallen behind on debt repayments will face three options: to put more money in their properties, sell at “fire-sale” prices, or hand over their property to the bank. The repercussions will likely extend beyond the real estate industry, Seeking Alpha reported.

The Federal Reserve has vowed to continue its current low interest rate policy and that of maintaining $120 billion in monthly bond purchases until the recovery is more closer to completion, according to Reuters. This approach, however, might be tested in coming months if, as hoped, the reopened U.S. economy starts generating rising inflation.