Fed Systemic-Risk Fears Cloaked in Cautious Financial-Stability Report
As we noted Friday afternoon, the Federal Reserve then released its semi-annual financial-stability report in an effort not only to comply with its protocols, but likely also to attract as little attention as possible, with the release and even the report saying only as much about growing risk as the Fed thinks is essential to preserve its credibility. In this report, we provide an in-depth assessment not only of the Fed’s latest risk landscape, but also of the steps it recommends be deployed to mitigate it to the extent these are also noted in a largely statistical analysis. As is often the case, the Fed uses aggregate or average data to assess household financial risk, a methodology we fear obscures distributional effects for the majority of households. The data – e.g., re non-financial business leverage – are also often as of the end of the report’s data run, not forward-looking. Where projections are forward-looking – e.g., re non-investment grade or private business leverage – the Fed report generally notes concerns without making clear how acute these may be or the probability that drivers that could significantly and adversely affect them. Still, as noted earlier today, its discussion of residential-mortgage risk is surprisingly sobering. The Fed also remains deeply troubled by prime and tax-exempt MMF run risk.