The Federal Reseve Bank issues strong words of caution
- 6 months ago
The Federal Reserve recently issued a cautionary note in regards to the risks of financial stability, the report says trade tensions, geopolitical uncertainty and rising corporate debt may all lead to severe consequences.
With no surprise the central bank pointed to the standoff between Washington and Beijing and an unstable political environment can drive assets prices higher and therefore create a disturbing effect.
“An escalation in trade tensions, geopolitical uncertainty, or other adverse shocks could lead to a decline in investor appetite for risks in general," the report said.
"The resulting drop in asset prices might be particularly large, given that valuations appear elevated relative to historical levels."
High leveraged loans are on the increase as companies with weak bonds are facing the doom of being rated as junk and according to the report this is not good at all.
"High leverage has historically been linked to elevated financial distress and retrenchment by businesses in economic downturns," the report said.
"Given the valuation pressures associated with business debt ... such an increase in financial distress, should it transpire, could trigger a broad adjustment in prices of business debt."
In the meanwhile at the Economic Club in New York, Fed Chair Jerome Powell is expected to speak about the framework for monitoring financial stability.
Source: Smart Trend Team