WASHINGTON—A new Financial Stability Report from the Federal Reserve identifies a number of near- and long-term vulnerabilities facing the financial system, including historically-high corporate debt, reduced capital buffers at large banks, deteriorating market liquidity conditions, and slowing global economic growth. Separately, the Fed has also released a statement following a recent meeting at the White House.
The report analyzes four vulnerable areas related to asset valuations, borrowing by businesses and households, financial leverage, and funding risk, reported NAFCU, which synopsized some of the Fed's findings:
- Asset valuations: While asset prices are high relative to income streams in several markets, the Fed determined that risk appetite measures are aligned with historical norms for most markets.
- Borrowing by businesses and households: Business borrowing relative to GDP is at a historic high, "with the most rapid increases in debt concentrated among the riskiest firms amid weak credit standards."
- Leverage in the financial sector: While large banks remain well capitalized, a number have indicated they will soon reduce voluntary capital buffers.
- Funding risk: "Estimates of the total amount of financial system liabilities that are most vulnerable to runs, including those issued by nonbanks, remain modest."
In addition, the report features breakout boxes on recent trends, including:
- Liquidity of U.S. Treasury and equity futures markets
- Decline in interest rates
- Global stablecoins
- Insights from market outreach related to trade frictions, global recession concerns, and more
White House Meeting
Separately, the Federal Reserve issued a statement that subtly but forcefully stressed it will not be influenced by the White House. Following a meeting between Fed Chair Jeremy Powell, Treasury Secretary Steven Mnuchin and President Trump at which the economy, growth, employment and inflation were discussed, the Fed said Powell’s comments “were consistent with his remarks at his congressional hearings last week. He did not discuss his expectations for monetary policy, except to stress that the path of policy will depend entirely on incoming information that bears on the outlook for the economy.
“Finally, Chair Powell said that he and his colleagues on the Federal Open Market Committee will set monetary policy, as required by law, to support maximum employment and stable prices and will make those decisions based solely on careful, objective and non-political analysis,” the statement concluded.
The White House issued a statement calling the discussion “cordial.”