Fed’s Kaplan says U.S. corporate debt a reason for rate hike pause

By Ann Saphir

SAN FRANCISCO (Reuters) – A $5.7 trillion borrowing binge by U.S. companies could make a slowdown in the world’s biggest economy even more painful and is one more reason the Federal Reserve was wise to put interest rate hikes on hold, Robert Kaplan, president of the Dallas Fed, said.

“It’s something that I’m aware of, which sort of reinforces for me why I feel we should be taking no action for some period of time,” Kaplan said in an interview with Reuters ahead of the publication on Tuesday of an analysis of U.S. corporate debt.

Companies with big debt loads may be more likely to cut spending and hiring in a downturn, “and the danger is that with a sufficient enough slowing, you’ll have a greater deterioration in credit quality than you would otherwise, which could in turn amplify the slowdown,” Kaplan said.

He said that is “yet another reason why I think we are wise — inflation is not running away from us — I think we are wise to take a very patient approach.”

The Fed in January put three years of rate hikes on hold, citing weakening global growth and an expectation for slower U.S. growth ahead as it said it would be “patient” before making any further moves.

Companies gorged for years on cheap debt made possible by the Fed’s near-zero interest rates after the financial crisis. With America’s corporate debt load now equating to a record 46 percent of gross domestic product, a growing number of bankers and investors have urged the Fed to pay more attention.

It appears now that it is. Though Fed Chair Jerome Powell told Congress last week he does not view leveraged loans and other forms of risky debt to be big threats to financial stability, he does believe high corporate indebtedness could make any U.S. downturn worse

Kaplan’s essay on Tuesday added meat to that argument.

“Vigilance is warranted as these issues have the potential to impact corporate investment and spending plans,” Kaplan said in the essay on corporate debt.

U.S. central bankers have had extended discussions about corporate America’s rising debt load, Kaplan said. And while he is not clanging the alarm bells over it, he said, “Is it a concerning factor that, along with other factors needs to be taken into account? Yes.”

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