5 July 2023
The Federal Reserve has issued a fresh warning about the state of the US economy. According to a research note by two Federal Reserve economists, the number of non-financial firms facing financial distress has reached historic levels. The economists highlight that the recent tightening of US monetary policy, coupled with the high percentage of distressed firms, could have significant effects on investment, employment, and overall economic activity. The economists estimate that the impact may be particularly noticeable in 2023 and 2024. The Fed also cautions that its own policies may push distressed companies closer to default, potentially leading to a wave of unforeseen layoffs. The analysis suggests that the effects on employment could be even more significant than estimated, as bankruptcies and associated layoffs may not be fully captured by the data.