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Late last week, the Federal Reserve Board (“FRB”) released its semi-annual Financial Stability Report.
In a statement released with the report, FRB Vice Chair Lael Brainard said that over the past six months, “household and corporate debt has remained generally stable and, overall, Households and businesses have maintained their ability to cover debt service, despite rising interest rates.” .” She also noted that ”
The report notes that the FRB’s monitoring framework “distinguishes between shocks and financial system vulnerabilities” and “focuses primarily on assessing vulnerabilities, emphasizing four broad categories and how these categories could interact to amplify stresses in the financial system”. system.” The four categories of vulnerabilities are (1) valuation pressures, (2) corporate and household borrowing, (3) leverage within the financial sector, and (4) funding risks. report preview notes that since the release of the May report, “the economic outlook has weakened and uncertainty about the outlook has remained elevated, noting that”[i]Inflation remains unacceptably high in the United States and is high in many other countries as well.”
Regarding vulnerability to funding risk (and perhaps showing some foreknowledge to our lead article on FTX this week), the report noted that stablecoins remained vulnerable to runs. The report included a discussion of digital assets and financial stability, noting the problems and volatility in the crypto market in the spring of this year. This discussion noted that the ”
The report identified several near-term risks that “could be amplified” by the four financial vulnerabilities, including high inflation, geopolitical risks (noting Russia’s invasion of Ukraine), market fragilities and possible shocks caused by a cyber event.
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