Transcripts of the monetary policymaking body of the Federal Reserve from 2002–2008.

Well, that’s always a possibility. It’s our view, however, that the basic health of the corporate balance sheet has improved and has improved quite noticeably over the last year or so. We’ve seen a decline in default rates. We’ve certainly seen a significant drop-off in the interest share of cash flow, aided by a low interest rate environment. Whatever the cause of this recent decline in spreads, it obviously is reducing the cost of capital to businesses. Now, as I indicated in my remarks, if businesses don’t have reasonable projects available then the decline in spreads might not provide the stimulus to investment spending that we’re anticipating. But we’re fairly confident that it has been helping to reduce the cost of capital.

As for spreads widening again, that is always a possibility, as I said earlier. If there were any significant doubt about the likelihood of a reasonable step-up in the pace of activity and therefore some reemergence of concerns about whether the improvements in corporate health that have occurred thus far can be sustained going forward, that could cause a rise in spreads. That, in our view, obviously would be part of a very bad patch for the economy going forward. However, within the context of our forecast, we believe it’s quite reasonable to expect some further narrowing of these spreads, which are still high by historical standards.

Keyboard shortcuts

j previous speech k next speech