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Fed Warns: Default Wave And Asset Declines Still Possible

Asset Decline
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EDITOR NOTE: Two things are coming to a head. On one hand, we see a massive wave of debt defaults headed our way, potentially triggering a “significant decline” in asset prices, according to the Fed. On the other hand, the newly developed Pfizer vaccine, available as soon as the end of the year, can prove a real boon to US businesses, bolstering the economy. The time between the two is what matters. Near-term, as debts give way to default, as pandemic cases rise, and as vaccine distribution gets under way, we’re likely to see an unsettling wave of volatility--economically and socially. And if the dissemination of the vaccine faces roadblocks, or if the success of the vaccine proves less effective, then our prospects of American freedom and prosperity will be rendered highly-questionable at best.

WASHINGTON, Nov 9 (Reuters) - The U.S. may still face a wave of debt defaults and “significant declines” in asset prices because of the coronavirus pandemic and recession, the Federal Reserve warned on Monday in a stark reminder that the economy, while recovering, is far from out of the woods.

“As many households continue to struggle, loan defaults may rise, leading to material losses,” for lenders, the Fed said in its latest biannual Financial Stability Report. Business debt “has risen sharply as businesses increased borrowing to weather the period of weak earnings. The general decline in revenues associated with the severe reduction in economic activity has weakened the ability of businesses to services these obligations.”

Asset prices “remain vulnerable to significant declines should investor risk sentiment fall or the economic recovery weaken.”

The comments were issued on a day when U.S. stock markets surged to record levels on news that a coronavirus vaccine may be on the horizon -- a possible boon to businesses and households globally.

In the Fed’s last report on financial stability, in May, the central bank warned of the “severe” risks facing the country as economic activity cratered. Over the intervening months the worst outcomes have been avoided, partly due to Fed lending and other actions taken to keep financial markets functioning, and partly due to other government transfer and grant programs that let households and businesses continue paying their bills.

“So far, strains in the business and household sectors have been mitigated by significant government lending and relief programs and by low interest rates,” the Fed said on Monday.

Banks, their reserves bolstered by regulations put in place after the 2007 to 2009 financial crisis, “remained well capitalized throughout,” even while absorbing losses from the pandemic.

But, despite hopeful results from a vaccine announced on Monday by Pfizer, a renewed surge in coronavirus cases has again begun overwhelming local hospitals and led some localities to being imposing new restrictions.

That, along with the problems in global credit markets that could erupt if the virus is not controlled, remain the key short term risks, the Fed said.

“In the near term, risks associated with the course of COVID-19 and its effects on the U.S. and global economies remain high,” the Fed reported. (Reporting by Howard Schneider Editing by Chizu Nomiyama)

Originally posted on Reuters

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