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WASHINGTON - Persistent inflation and higher-for-longer interest rates were cited as key risks to financial stability in the Federal Reserve's latest survey of U.S. central bank contacts, with geopolitical troubles and the 2024 U.S. presidential election also mentioned as"a potentially significant source of shocks.
The report was released more than two years after the Fed launched the most aggressive interest rate hiking cycle since the 1980s in a bid to slow a surge in inflation, a move that was broadly predicted to tip the economy into recession and aggravate stresses in the financial sector. But that overall impression of resilience also suggests potential problems for Fed officials who feel the economy needs to slow in order for inflation to sustainably return to the central bank's 2% target. The strength of household and business balance sheets, the stability of the banks, and the lack of imminent bubbles or other threats suggest that a slowdown won't come through financial or credit channels that have typically been an important part of monetary policy transmission.
While that added to uncertainty about monetary policy, which along with inflation was the most cited risk, the level of"policy uncertainty" flowing from the escalation of violence in Israel and throughout the Middle East, the ongoing war in Ukraine, and the state of U.S. politics, was the second-most cited threat to the financial system.
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