(Reuters) – Concerns over higher inflation and tighter monetary policy have become the biggest concerns for market participants, displacing the covid-19 pandemic, the Federal Reserve said on Monday in its latest report on financial stability.
the growing use of stablecoins and "so-called meme stocks" as issues that deserve attention and pose new types of potential risks to the financial system.
About 70% of market participants polled by the Fed flagged inflation and tighter Fed policies as their biggest concerns over the next 12 to 18 months, facing vaccine-resistant COVID-19 variants and a potential Chinese regulatory crackdown.
The Fed is struggling with the inflation risk itself when it debates. when interest rates may need to rise and at this point investors expect the central bank to be forced to act faster than politicians themselves anticipate.
's report largely showed that the financial risks were well contained.
"Fiscal and monetary policy adjustment, together with continued progress with vaccinations, continued to support a strong economic recovery." indicated the report. "Despite the tragic human toll, the Delta variant has left a limited imprint on US financial markets." Housing prices rose broadly, but there were few signs of erosion in issuance standards or speculative behavior.
While the overall credit quality of bank portfolios has largely improved over the past six months, the Fed noted interest rates on crime for commercial real estate borrowers and other affected industries of the pandemic remains high. It also flagged that leverage remained high for life insurance companies and hedge funds.
But the Fed identified concerns, led by uncertainty during the pandemic, degrees of state aid and the expected economic recovery.
"Uncertainty during the pandemic and when aid programs expires can pose significant risks to households' balance sheets, "the report said.
& # 39; Meme & # 39; shares
specifically exploring the rapid, social media-driven volatility of certain stocks such as GameStop and AMC Entertainment Holdings Inc.
While wild fluctuations in their prices and other "meme" stocks have had a limited impact on financial stability, the Fed said that the problem raises some potential concerns. First, younger investors flocking to these companies tend to have higher household debt burdens, making them more vulnerable if asset prices crash.
In addition, the Fed said that risk appetite among investors was at levels not seen since the "dot com" boom of 2001
Risk management systems at financial institutions, the Fed said, may not be calibrated to take into account the new high-risk investment strategy for
"A potentially destabilizing result could occur if an increased risk appetite among private investors recedes rapidly," the report found.
The Fed also highlighted the growing use of "stablecoins," which are digital currencies whose value is assumed to be pegged to a traditional currency such as the US dollar.The rapid adoption of these products have caught the attention of regulators, who are concerned that they may be susceptible to driving and lack proper supervision.