According to Bloomberg, the Federal Reserve noted in its semi-annual financial stability report that the U.S. government’s debt burden is seen as the biggest risk to financial stability, outweighing ongoing inflation issues. The report shows that 54% of respondents believe that fiscal debt sustainability is a significant risk, up from 40% half a year ago.
The report also noted that more debt issuance by the Treasury could squeeze private investment or limit policy responses in a recession. Household borrowers hold a smaller share of debt, and high default rates partly reflect increased borrowing during and after the pandemic.
The Fed said funding risks had eased but remained "significant." Stablecoin assets have grown significantly since the last report, with a market capitalization of over $170 billion. The Fed warned that these digital assets are structurally vulnerable to runs and lack a comprehensive federal prudential regulatory framework.
The report also noted that most lenders have reduced their reliance on uninsured deposits and instead increased deposits through brokers and other short-term funding sources.