WASHINGTON—The Federal Reserve said Friday the U.S. financial system remains “substantially” safer than before the 2007-09 recession but noted a significant expansion in business debt and weaker lending standards.

In its semiannual report to Congress Friday, the Fed echoed policy makers’ recent statements that the U.S. economy appears to be on solid footing, with gross domestic product growing “a little less than” 3% in 2018.

Fed...