U.S. Fed Warns of Potential Significant Declines in Asset Prices

The U.S. Federal Reserve warned on Thursday that rising asset prices are posing threats to financial stability as prices may be vulnerable to significant declines if risk appetite falls.

 

“Prices of risky assets have generally increased since November with improving fundamentals … However, valuations for some assets are elevated relative to historical norms,” the Fed said in its semi-annual financial stability report.

“Looking ahead, asset prices may be vulnerable to significant declines should investor risk appetite fall, progress on containing the virus disappoint, or the recovery stall,” the report said.

 

The report also warned that the perceived risks associated with the course of the pandemic and its effects on the U.S. and foreign economies remain “relatively high”.

 

“A worsening of the global pandemic could stress the financial system in emerging markets and some European countries. Further, if global interest rates were to rise abruptly, some emerging market economies could experience additional fiscal strains,” the report said.

 

In a statement accompanying the report, Fed governor Lael Brainard also noted that valuations across a range of asset classes have continued to rise from levels that were already elevated late last year.

“The combination of stretched valuations with very high levels of corporate indebtedness bear watching because of the potential to amplify the effects of a re-pricing event,” she said.

Brainard suggested that strong microprudential safeguards and macroprudential tools will be important to address risks to financial stability and enable monetary policy to focus on its maximum employment and average inflation goals.

 

Source: Xinhua