The Federal Reserve expressed its concerns in a subdued tone. This week, the Federal Reserve released a 67-page financial stability report, accompanied by 72 charts, which is an important document for traders that provides a comprehensive assessment of the overall health of the financial system. If the report mentions risks in certain specific areas, it could change market confidence in future investments and capital flows.
The report is divided into five sections: asset valuation, corporate and household borrowing, leverage in the financial sector, financing risks, and recent risks facing the financial system. Wall Street is undoubtedly most concerned about the fifth section, where the Federal Reserve repeatedly mentioned the risks of overvaluation and rising volatility in the US stock market. The Federal Reserve frequently communicates with domestic and international policymakers and scholars to understand the risks they are concerned about. The Federal Reserve summarized three major potential risks: 1. Intensification of global geopolitical tensions: This could suppress economic activity, raise inflation, and exacerbate volatility in global financial markets. The current combination of high asset valuation pressure, rising geopolitical and policy uncertainty increases the likelihood of sudden withdrawals from risk assets in the market. These changes could lead to asset price declines and losses for related companies and investors, including those in the United States.
2. Domestic and international economic slowdown: In the United States, unexpectedly weak economic activity could trigger a sharp adjustment in asset prices, especially in the high-valuation stock and real estate markets. A sharp downturn in other countries' economies could prompt investors to withdraw from risk assets, leading to increased volatility and broader pressure on global financial markets.
3. Shocks from cyber incidents may damage the US financial system: Shocks from cyber incidents, particularly cyber attacks, could spread to the financial system through complex connections between financial institutions, market infrastructure, and service providers.
Meanwhile, the Federal Reserve conducted a survey among professionals from brokerage firms, investment funds, research and consulting companies, and academia, and the results were surprising. Financial professionals are no longer concerned about inflation, but rather about rising debt, potential economic recession, and global trade risks, all of which pose the greatest threats to the stability of the financial industry. This sentiment may intensify after Trump's election victory.
· First, at the top of the list is 'sustainability of US fiscal debt', rather than inflation.
· Second, the escalation of the situation in the Middle East ranks second, with concerns about energy supply disruptions.
· Third, policy uncertainty ranks third; high policy uncertainty can suppress market sentiment.
· Fourth, US economic recession. Respondents mentioned more frequently than in the previous survey that the US economy may experience a downturn. Some respondents indicated that the potential weakness in the labor market could be more severe than currently expected.
· Fifth, persistent inflationary pressure and monetary policy tightening. The high inflation and monetary policy tightening that received significant attention in previous surveys have seen a decrease in mention frequency in this survey.
The fifth point may seem to be brushed over but is actually very important; in the last survey, persistent inflation and the Federal Reserve's tightening monetary policy were listed as primary risks, but in this survey, it has significantly declined.
Overall, this report is a profound examination by the Federal Reserve of the macroeconomic and financial market conditions, and the risks emphasized in the report could become core issues in the 'Trump 2.0 era'.
Connecting this report with the speeches of Federal Reserve officials this week will deepen your understanding, especially that sentence 'interest rates will slightly decline'.
