May 30, 2024

Policy Uncertainty Could Be Growing Risk to US Financial Stability

Policy Uncertainty Is Leading Risk to Financial System, Fed Report Shows

3 hr 51 min ago

Uncertainty is becoming one of the biggest risks to the financial system, overtaking worries about commercial real estate, according to a semi-annual Federal Reserve report assessing the stability of the financial sector.

Nearly three-quarters of finance professionals surveyed by the Federal Reserve viewed persistent inflation and high interest rates as the top risk, just as they did in the previous edition of the survey. However, the latest survey showed professionals think “policy uncertainty” is now the next-biggest threat, jumping ahead of commercial and residential real estate risks.

“Contacts noted several areas of uncertainty including trade policy and other foreign policy issues possibly related to escalating geopolitical tensions,” the report said. “They also noted policy uncertainty associated with the U.S. elections in November.”

In addition to the survey results, the report also reviewed other vulnerabilities in the financial system. Another major risk the report identified was elevated valuations of some assets. The report pointed to stocks with price-to-earnings ratios that were near historical highs, while residential real estate pricing was also above fundamental levels. 

“Valuations rose further to levels that were high relative to fundamentals across major asset classes. Equity prices grew faster than expected earnings, pushing the forward price-to-earnings ratio to the upper end of its historical distribution,” the report said.

However, other areas of the financial sector appeared in good shape. Borrowing by businesses and households was in line with expectations, and domestic banks were sound, with sufficient levels of funding, the report said. 

-Terry Lane

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