The Street: The Fed Is Ready to Cut Rates. But Debt Exceeds the Level of the Great Recession

Article by Jacob Sonenshine in The Street

The Fed recently restored market confidence that low rates will be there to support economic growth. That’s exactly the problem on a longer-term basis, UBS says.

Stocks continued to rise Tuesday after Federal Reserve Chairman Jerome Powell continued to restore investors’ confidence in the current economic expansion. But how long does the U.S. economy have before the low-rate environment causes an implosion?

Powell said in his testimony before Congress that “the current stance of monetary policy will likely remain appropriate,” implying that the Fed will lower interest rates if the economy needs it.

With low interest rates powering economic expansion and the stock market, a longer-term risk – the U.S. debt-to-GDP level – is beginning to look scarier.

Data from both the St. Louis Federal Reserve and UBS’s office of global wealth management shows that U.S. corporate non-financial debt was 46.5% of GDP in 2019. In simpler terms, in 2019, 46 cents of corporate non-financial debt was outstanding for every dollar of productivity in the U.S.

That ratio is higher than it was just before the financial crisis that caused the Great Recession, when debt-to-GDP was 45.5%.When everything came crashing down, the ratio eased to roughly 38% by 2010. But the debt level steadily rose throughout the current economic expansion, reaching a hair above 45% by 2017.

A higher debt burden means that if the GDP side of the equation falls off, companies may have trouble paying back their lenders. If credit defaults ensue, banks could have a liquidity event. This could put an economy running currently at around 2% into a shock. A recession could follow.

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