Inflation tops pandemic as investors concern, according to U.S. Fed
The Federal Reserve Board building, Washington, D.C., U.S., July 1, 2020. /CFP

The Federal Reserve Board building, Washington, D.C., U.S., July 1, 2020. /CFP

Concerns over higher inflation and tighter monetary policy have become the top concern for market participants, pushing aside the COVID-19 pandemic, the Federal Reserve said on Monday in its latest report on financial stability.

At the same time, the semiannual report also flagged the growing use of stablecoins and "so-called meme stocks" as issues that merit attention and pose new types of potential risks to the financial system.

Roughly 70 percent of market participants surveyed by the Fed flagged inflation and tighter Fed policy as their top concern over the next 12 to 18 months, ahead of vaccine-resistant COVID-19 variants and a potential Chinese regulatory crackdown.

The Fed is struggling with inflation risk itself as it debates when interest rates may need to rise, and at this point investors expect the central bank will be forced to act sooner than policymakers themselves anticipate.

The focus on inflation marks a return, in a sense, to more normal concerns as the pandemic eases, and the Fed's report largely portrayed financial risks as well-contained.

"Fiscal and monetary policy accommodation, along with continued progress on vaccinations, continued to support a strong economic recovery," the report stated. "Despite the tragic human toll, the Delta variant has left a limited imprint on U.S. financial markets."

The Fed found that vulnerabilities in businesses and households were generally down, thanks in part to low interest rates and government support programs. Home prices were up broadly, but there was little sign of erosion in underwriting standards or speculative behavior.

While the overall credit quality of bank portfolios broadly improved in the last six months, the Fed noted delinquency rates for commercial real estate borrowers and other industries impacted by the pandemic remain elevated. It also flagged that leverage remained high for life insurance companies and hedge funds.

But the Fed did identify concerns, led by uncertainty over the course of the pandemic, degrees of government support, and the expected economic rebound.

"Uncertainty over the course of the pandemic and the expiration of relief programs may pose significant risks to household balance sheets," the report stated.

Source(s): Reuters

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