WASHINGTON, April 19 (Reuters) – The Federal Reserve’s latest survey of people connected to the U.S. central bank cites persistent inflation and persistently high interest rates as key risks to financial stability. Geopolitical issues and the 2024 US presidential election were also mentioned. “This may cause serious shock.”
In its semi-annual survey of 25 market participants, academics and other stakeholders, the Fed said Friday that “stakeholders are concerned about trade and other foreign policy concerns related to escalating geopolitical tensions. “We have identified several areas of uncertainty, including problems.” He also mentioned the policy uncertainty surrounding the November US election, which will pit incumbent Democratic Party Joe Biden against former Republican President Donald Trump.
The findings are included as part of the Fed’s latest Financial Stability Report, which examines issues such as leverage and risk-taking across the economy to identify potential problems.
The report comes more than two years after the Fed began its most aggressive rate-hike cycle since the 1980s in an effort to slow soaring inflation, a move that pushed the economy into recession and caused financial stress. It was widely expected that this would worsen the sector.
The latest report, like previous reports through the Fed’s War on Inflation, shows little evidence of broader risks to the financial system even though borrowing costs are at their highest level in a quarter century.
But this overall impression of resilience poses a potential problem for Fed officials who feel that a slowdown in the economy is necessary for inflation to sustainably return to the central bank’s 2% target. It may be suggested. The strength of household and corporate balance sheets, the stability of banks, and the absence of impending bubbles or other threats ensure that economic slowdowns do not flow through the financial and credit channels that have typically been an important part of monetary policy transmission. It suggests that.
Interviews with officials continued through March, and Fed officials began to question the continued decline in inflation and said they might not cut rates as quickly as expected.
This has added to the uncertainty over monetary policy, which is the most cited risk along with inflation, but also the escalating violence in Israel and across the Middle East, the ongoing war in Ukraine, and the The level of “uncertainty” has further increased. U.S. politics was the second most cited potential threat to the financial system.
But overall, in what has become the Fed’s standard framework for assessing financial vulnerabilities, the system remains largely stable despite high policy rates and the ongoing inflation struggle. characterized.
There were several areas of concern, including falling commercial real estate values and rising leverage at some large hedge funds.
Stocks and real estate values are high, and the report, like many analysts in recent days, cited rising consumer debt delinquencies and other signs of stress in some household finances.
But there was little sense of widespread coverage.
Private debt as a share of national economic output has declined, businesses have maintained their ability to repay their debts at a “solid” level, and overall household debt has remained “modest”, all indicators of stability.
The Fed said in its report that “the banking system remained healthy and resilient” with strong capital and liquidity levels.
The report said that while “credit for small and medium-sized enterprises appears to have tightened,” the number of companies reporting cash shortages “remained at a low level.”
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Report by Howard Schneider. Editing: Paul Simao and Cynthia Osterman
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