Risks to financial stability in the current economy were downplayed by Federal Reserve Board Chair Jerome H. (“Jay”) Powell during a press conference Wednesday, as he asserted that the four components of stability were generally positive.
However, Powell did say that a major breach of cybersecurity, particularly at a very large banking firm, is a risk that he remains concerned about.
He made the comments at the press conference discussing this week’s meeting of the Fed’s rate-setting Federal Open Market Committee (FOMC). The Fed indicated it is ready to consider at least three interest rate increases in the year ahead to deal with rising inflation.
In responding to a reporter’s question about financial stability, Powell indicated that the four “broad categories” of financial stability remain positive. He told the group that:
- Asset valuations are “somewhat elevated,” but he said nothing about that being a concern.
- On excessive borrowing by households and businesses, Powell said households are “in very strong financial shape.” He said businesses “actually have a lot of debt, but their default rates are very, very low, but nonetheless it is something we are watching.”
- Funding risk, the Fed chair said, is “by and large low among financial institutions,” but the Fed does see money market funds as a vulnerability.
- Leverage among financial institutions is low, he said, in the sense that capital is high.
In terms of what the Fed is watching more closely, Powell cited cyber risk. “I think we know how to deal with bad loans and things like that,” Powell said. “But a cyber attack, were it to take down a major financial institution or financial market utility, is a major financial stability risk that we haven’t actually faced yet.”
He also noted any emergence of a new COVID variant having a major impact on the economy (although the Fed doesn’t now see that as a risk to financial stability).
As for risk from crypto currencies, Powell downplayed that as a current risk to financial stability. “I do think they are risky, they aren’t backed by anything, and I do think there are consumer issues” in terms of consumers understanding how they work. He did, however, indicate that stablecoins – which, he noted, are not properly regulated – could pose an issue without regulation. He called that, however, a longer term issue.