Federal Government Financial Stability Report: Biggest Risk of Persistent Inflation and Tighter Policy

The Fed released details of its semi-annual financial stability report. They say there:

• Persistent inflation and tightening monetary policy remain the most cited potential risks to the financial system.
• “Political uncertainty,” including escalating geopolitical tensions and the upcoming U.S. election, cited by 60% of respondents as a potential risk to financial stability.
• Stresses in commercial real estate and the banking sector are less frequently cited as a risk to stability than in the Fed’s fall 2023 survey.
• Nearly two-thirds of respondents cited political uncertainty as a risk, a significantly higher figure than in the October report.
• Cyber ​​attacks, US-China tensions and conflicts in the Middle East are also listed as risks, while the non-banking sector and the war between Ukraine and Russia were removed from the list of risks. risks.
• Hedge fund leverage hits highest level since data collection began
• Concerns about uninsured deposits and other factors continued to generate funding pressures for a subset of banks
• 1,804 of the more than 9,000 eligible institutions used the Bank’s term financing program; 95% of them had assets less than $10 billion

The Federal Reserve’s Financial Stability Report is a biannual publication that assesses and details the stability of the financial system in the United States. Key elements of this report include:

1. Risk analysis: It identifies and analyzes potential risks to financial stability, which could include issues such as asset price volatility, corporate and household borrowing, leverage within the financial sector and financing risks.

2. Current assessment: The report provides an assessment of current conditions in the financial system, noting any vulnerabilities that could pose risks to stability.

3. Potential shocks: It assesses the sensitivity of the system to shocks of national and international origin, such as economic slowdowns, geopolitical tensions and major political changes.

4. Regulatory and policy developments: The report also addresses the impact of regulatory and legislative changes on financial stability, including new rules or changes to existing regulations.

5. Economic outlook: Although primarily focused on stability, the report often includes information on the broader economic environment, including aspects such as inflation rates, employment and economic growth, all of which influence financial stability.

6. Stress tests and scenarios: The report could include the results of stress tests carried out on banks to assess their resilience in the face of adverse economic scenarios.

The purpose of the Federal Reserve’s Financial Stability Report is to promote market transparency by providing in-depth analysis of the robustness of the financial system and to alert lawmakers, regulators, and the public to potential risks that could harm the financial stability. This helps develop policies and take actions to mitigate identified risks.

Click here for the full report.