Unequal recovery among low-paid workers and small businesses, corporations enjoying increasing revenues, and risks caused by inconsistent stock market trends accompany the U.S. economy in post-COVID-19 rehabilitation. The Federal Reserve released its semi-annual Financial Stability report, depicting key financial trends.
Full report here:
People and SMEs:
Households with the strongest credit scores and well-established businesses improved their balance sheets at the end of 2020 thanks to government support to the economy. Households' cash on hand and deposits nearly doubled in the second half of last year, reaching almost $3T.
Household and business debt risk exposure declined. New credit was mainly issued to high credit score borrowers. Short-term business delinquencies have decreased dramatically, and moderately in the long term.
Simultaneously, low-income, low-credit score households, and the smallest businesses continued to struggle, indicating an uneven recovery. COVID-19-caused job cuts disproportionately affected financially vulnerable families: "lower-wage workers and racial and ethnic minorities."
Personal delinquencies increased by the end of 2020 among borrowers with subprime credit ratings. Access to credit, on which small and medium businesses rely, shrank in the past year, leaving them more perceptive to economic turmoils.
Skyrocketing stock prices, internet-driven "meme" stock trades, and complex hedge fund financing schemes gave rise to systematic risks. As investors seek new growth opportunities in the recovering economy, this risk becomes embedded into interdependent financial instruments and deals. This could lead to equities quickly losing their record-high positions, affecting highly leveraged life insurance companies and hedge funds.
Commercial real estate remains at high risk with weakened demand.
At the beginning of the pandemic, the financial crisis pointed to the need for "structural fixes" to money market fund operations due to elevated liquidity risks.
Banks "remain well-capitalized."
Economic complications of the ongoing health crisis in Europe could affect the U.S. economy and financial system through significant credit losses.