Federal Reserve officials don't seem particularly concerned that stock valuations have plunged. They are, however, sensitive to significant movements in credit markets. The central bank would probably pull back on its plan to aggressively tighten monetary policy if corporate America showed signs of having trouble raising debt financing.
But despite some historic losses in credit markets this year, we're not anywhere close to that point. Corporate balance sheets are in some of the strongest positions in 20 years, and defaults are expected to stay “comfortably below” the long-term average of 4% this year, Goldman Sachs Group Inc. analysts wrote in a note last week. Bank of America Corp. credit analyst Eric Yu concurs. "Even if we are headed into a recessionary scenario, we think that high-yield defaults will peak at under 6%,” he wrote in a research note last week. “We suggest taking materially more risk here."