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Political uncertainty could pose a growing risk to US financial stability
Political uncertainty is generating risks for the financial system, Fed report shows
April 22, 2024, 5:16 pm EDT
Uncertainty is becoming one of the biggest risks to the financial system, surpassing concerns about commercial real estate, according to a biannual Federal Reserve report assessing the stability of the financial sector.
Nearly three-quarters of finance professionals surveyed by the Federal Reserve considered persistent inflation and high interest rates as the main risk, as they did in the previous edition of the survey. However, the latest survey showed that professionals consider “political uncertainty” to now be the next biggest threat, surpassing commercial and residential real estate risks.
“Contacts noted several areas of uncertainty, including trade policy and other foreign policy issues possibly related to escalating geopolitical tensions,” the report said. “They also noted the political uncertainty associated with the US elections in November.”
In addition to the survey results, the report also analyzed other vulnerabilities in the financial system. Another major risk identified by the report was the high valuations of some assets. The report pointed to stocks with price-to-earnings ratios near all-time highs, while residential property prices were also above fundamental levels.
“Valuations have risen further to elevated levels relative to fundamentals across major asset classes. Stock prices grew faster than expected earnings, pushing the future price/earnings ratio towards the upper limit of its historical distribution,” the report states.
However, other areas of the financial sector appeared to be in good shape. Loans granted to companies and families were in line with expectations and national banks were solid, with sufficient levels of financing, the report states.
-Terry Lane