Rand adds to gains after cheering dovish US Fed

Rand adds to gains after cheering dovish US Fed

American corporations have elevated their debt loads to potentially risky levels, the Federal Reserve said Wednesday in a report that raised concerns about the financial system 10 years after the 2008 crisis erupted.

"Business sector debt relative to (gross domestic product) is historically high and there are signs of deteriorating credit standards", the Fed report stated. It described funding risks in the financial system as low, meaning the chance that mispricing of one asset - in 2007, for example, housing - triggers a run by investors that puts the solvency of USA banks at risk. It cited the strong capital position of banks, household borrowing generally in line with incomes, and a system now less vulnerable to the sort of runs or credit crunches that almost shut down the global economy in the 2007 to 2009 financial crisis.

Many economists and investors latched on to Powell's assessment that interest rates remain just below "neutral", suggesting a departure from comments the chair made in October that the economy is "a long way from neutral at this point, probably".

Yet even in areas where the Fed report indicated potential trouble, the risks were muted. Companies held about $2.1 trillion on hand to service the monthly payments, but most of that cash is on the balance sheets of a handful of giant companies at the top of the market, according to a CNBC report.

On the positive side, the Fed was mostly sanguine about the US housing market, which caused the financial crisis a decade ago. Some companies' level of debt over assets is near its highest mark in 20 years.

The Fed has included its views on financial stability in other documents and presentations.

Financial stability has remained a central focus at the Fed because of the easy-money policies employed to nurse the economy back to health in the years following the crisis. The report aims to put on public display what the central bank is watching and how those parts of the market are behaving. But market watchers have been hoping for relief in the wake of stock market volatility in recent weeks that was due in part to worries about the Fed.

The dollar weakened against other major currencies on Thursday as markets took Federal Reserve Chairman Jerome Powell's comment that USA interest rates were just below neutral as a signal that a three-year rate-hiking cycle is nearing an end.

Federal Reserve officials said they specifically did not draw a staff conclusion about the overall state of financial stability, leaving that up to policymakers.

"We do not detect a broad-based buildup of abnormal or excessive leverage", of the sort that, as in the 2007 to 2009 financial crisis, led lending to evaporate and amplified what became the worst economic downturn since the Great Depression, Powell said.

But they compared the situation today, when leverage is low among households and banks, to the pre-crisis situation when much of the USA had overborrowed. Banks have built stronger capital cushions against economic shocks.

When triggered, it forces lenders to set aside additional capital - up to 2.5 percent of risk-weighted assets - when times are good.

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