Rising asset prices pose an increasing threat to financial system, the Federal Reserve warned in its semi-annual financial stability report on Thursday.
Governing Board Member Lael Brainard said the situation requires monitoring and stressed the importance of keeping the system safe. Investors have bought up stocks, corporate bonds and cryptocurrencies, and have poured billions into so-called SPACs and traditional IPOs.
Fed Chairman Jerome Powell and other Fed members were repeatedly asked if they were worried about rising prices, to which Powell said that as long as interest rates remain low, current asset valuations are justified. However, the Fed notes that there is a danger if the market sentiment changes.
The combination of high valuations with very high levels of corporate debt warrants attention because this may intensify sell-off during decline.
The report also notes particular vulnerability of pandemic-sensitive sectors such as energy, travel and hospitality. The Fed also sees potential threats from the money market and open-ended funds.
Overall, the Fed rated the current state of the financial system as good, noting that household balance sheets are in good shape and corporations are supported by an improving economy and low interest rates.
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