Federal Reserve Governor Lael Brainard on Friday called for “heightened vigilance” by the central bank for risks facing the financial sector in this era of low interest rates.
“The current combination of very low credit spreads and high levels of indebtedness among risky nonfinancial corporates, including through leveraged lows, merits heightened vigilance,” Brainard said in a statement.
“Over the medium term, the low-for-long environment and the associated incentives to reach for yield and take on additional debt could increase financial vulnerabilities,” she said.
Brainard’s comment came as the Fed released the latest of its twice-a-year reports on financial stability.
Fed Chairman Jerome Powell this week said the overall level of vulnerabilities facing the financial system “remain at a moderate level.”
In the report, the Fed said that the core of the financial sector appears resilient, with leverage low and funding risk limited relative to levels of recent decades.
“With the exception of riskier corporate debt, commercial real estate and farmland markets, measures of risk appetite have been reduced from the elevated levels of 2017 and 2018,” the report found.
Borrowing by businesses is historically high relative to GDP, the report said.
By contrast, household borrowing remains at a modest level.
The largest U.S. banks remain strongly capitalized, but several large banks have announced plans to reduce their voluntary capital buffers.
Estimates of the total amount of financial system liabilities that are most vulnerable to runs, including those issued by nonbanks, remain modest, the report found.