According to the Federal Reserve officials, the US economy might face a wave of insolvencies in the short term. They also warn that dollar-denominated assets might fall in value drastically. The reasons are obvious: the COVID-19 pandemic and a protracted recession.
The Fed’s semi-annual report reads that the coronavirus-driven crisis left most households in dire straits. For this reason, a great deal of households could default on their debt repayment. If this scenario comes true, a lot of lending institutions could face bankruptcy, Fed economists voice concerns.
Besides, American companies are also heavily in debt as they had to expand borrowings due to lockdown measures. Unfortunately, companies are not able to fulfill their financial commitments on the back of sharp contraction of their activities.
Specialists point out that exchange-traded assets are the most vulnerable under fragile economic conditions. They are likely to take a nosedive amid global risk aversion and limping economic recovery.
Earlier, general cash injections from the government mitigated the strain on businesses and households. In the spring, the regulator launched programs of soft loans to businesses and slashed the official funds rate to nearly zero. Such emergency measures enabled US companies to stay afloat. However, risks from the COVID-19 aftermath could outweigh the beneficial effect of the Fed’s moves.
