Daily Management Review

US Elections And Inflation Are Two Major Threats To Financial Stability, According To A US Fed Poll


US Elections And Inflation Are Two Major Threats To Financial Stability, According To A US Fed Poll
The Federal Reserve's most recent survey of U.S. central bank contacts identified persistent inflation and higher-for-longer interest rates as the main threats to financial stability. Geopolitical unrest and the 2024 U.S. presidential election were also identified as "a potentially significant source of shocks."
"In its semi-annual survey of 25 market participants, academics, and other contacts, the Fed noted several areas of uncertainty including trade policy and other foreign policy issues related to escalating geopolitical tensions," the Fed stated on Friday. "They also mentioned the policy uncertainty surrounding the November U.S. elections," in which Republican former President Donald Trump will run against Democratic incumbent Joe Biden.
The Fed's most recent Financial Stability Report, which examines topics like leverage and risk-taking across the economy in an effort to discover possible trouble spots, contained the poll results.
The report was made public more than two years after the Federal Reserve began the most aggressive cycle of rate hikes since the 1980s in an attempt to curb a sharp increase in inflation. It was widely anticipated that this action would cause the economy to enter a recession and exacerbate banking sector strains.
Even if borrowing costs are still at their highest points in 25 years, the most recent report—like those that came before it—does not provide much indication of systemic concerns to the financial system.
However, the overall sense of resilience can raise red flags for Fed officials who believe a slowdown in the economy is necessary for inflation to steadily return to the bank's target of 2%. The soundness of the banks, the robustness of the balance sheets of households and businesses, and the absence of any impending bubbles or other dangers imply that a slowdown won't occur through the financial or credit channels, which have historically played a significant role in the transmission of monetary policy.
The S&P 500 fell about nine tenths of a percent, the Nasdaq fell more than two percent, and the Dow gained more than half a percent.
Interviews with contacts continued until March, at which point Fed officials started to express scepticism regarding an ongoing decline in inflation and hinted that rate reduction would not occur as quickly as anticipated.
The second-most cited potential threat to the financial system was the level of "policy uncertainty" resulting from the escalation of violence in Israel and throughout the Middle East, the ongoing war in Ukraine, and the state of U.S. politics. While that increased uncertainty about monetary policy, inflation was still the most frequently cited risk.
However, despite high policy interest rates and the ongoing battle against inflation, the system was described as being mostly stable throughout what has come to be the Fed's standard methodology for evaluating financial risks.
A few things to be wary of were the falling value of commercial real estate and the increasing leverage of some of the larger hedge funds.
The research, like many analysts of late, noted the high valuations of stocks and real estate in addition to the growth in consumer debt delinquencies and other indicators of stress among certain households.
However, broad-based sense was lacking.
A "robust" capacity to service debt was maintained by enterprises, the overall amount of household debt was "modest," and private debt as a percentage of the country's economic output decreased. These are all signs of stability.
The Fed stated in the report that "the banking system remained sound and resilient," with high levels of capital and liquidity.
The report stated that even while credit "appeared to tighten for small firms," the proportion of businesses reporting a lack of funding "remained unchanged at a low level."