Fed Systemic-Risk Assessment: Some Worries, No Troubles
The latest Federal Reserve financial-stability assessment continues the Fed’s practice of detailing vulnerabilities without drawing bottom-line conclusions; the Board once did so, but ceased this practice after opining that the financial system’s risk was “moderate” shortly before the 2020 crash. The Board’s report now also says that it assesses vulnerabilities, not the likelihood of near-term shock. Survey respondents do make this assessment, with this report showing a striking increase in concerns about policy uncertainty in light of continuing inflation and the higher-for-longer rate outlook. The Fed continues to fear vulnerabilities due to historic levels of hedge-fund leverage, life-insurance illiquidity, and MMF redemption risk. The Fed seems to be less concerned about these risks than the IMF’s recent financial-stability assessment, although new big-bank stress tests now include an exploratory scenario related to hedge funds (see Client Report STRESS32). The report does not voice the concerns about private credit laid out in recent Fed research or by the IMF.