(Bloomberg) — A report from the Federal Reserve raised concerns about persistent inflation risks, the potential for big losses in the U.S. office market and funding pressure on some banks.Thank you for reading this post, don't forget to subscribe!
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The Financial Stability Report released on Friday is the second after a number of banks failed following rapid interest rate hikes. The collapse earlier this year sent bank stocks trading wildly for weeks and forced regulators to take extraordinary steps to protect uninsured depositors at Signature Bank and Silicon Valley Bank.
The report, which is not a forecast, said deposit flows have stabilized across the banking sector. “However, a subgroup of banks are facing funding pressures, reflecting concerns over uninsured deposits and other factors,” the Fed said.
The central bank’s market, research and academic contacts indicated growing concerns about inflationary pressures, which could potentially lead to a more restrictive monetary policy stance – and the potential for larger losses in residential and commercial real estate. Three-quarters of survey participants highlighted those concerns, up from more than half of all participants in the May report.
Fed officials have raised interest rates by more than 5 percentage points since March 2022 and signaled they are willing to keep policy on hold for a second consecutive month next month, after a recent rise in bond yields boosted financial conditions. It has become tight.
The report focuses on four areas of risk.
Asset valuations: Equity prices rose faster than expected. Residential and commercial property prices remained high.
Borrowing by businesses and households: The Fed said household debt was at a “modest level” relative to GDP and concentrated among prime-rated borrowers.
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Financial sector leverage: The banking system remained strong and resilient, with risk-based capital ratios near the average level over the past decade. However, higher interest rates were reducing the fair value of long-maturity, fixed-rate assets. Moreover, leverage at the largest hedge funds was still high.
Funding Risk: Most US banks had stable funding and high levels of liquid assets. But some of them faced funding pressures, reflecting “concerns over uninsured deposits and other factors.”
The Fed, a stable system that measures how well Wall Street can meet funding demand even in the face of shocks, has held the key since former Chairman Paul Volcker began his attack on inflation in the late 1970s. Interest rates have been increased at the fastest pace.
The Fed was slow to anticipate the pickup in price increases and accelerated its pace of tightening with four 75 basis-point hikes last year. Regional banks’ bond losses began to raise questions about their stability. The Fed has raised rates from 5.25% to 5.5%.
In Friday’s report, the central bank pointed to risks to global economic activity – including continued disruptions to regional trade in food, energy and other goods – arising from the Israel-Hamas conflict and the Russia-Ukraine war. It also highlighted concerns about the possibility of slower economic growth in China.
“Given the size of its economy and financial system, financial stress in China could exert greater downward pressure on global markets through disruptions in economic activity, a decline in risk sentiment, and possibly a sharp appreciation of the dollar,” the Fed said. can affect America.” Said.
–With assistance from Craig Torres.
(Updated with geopolitical details of the report in the last two paragraphs.)
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