Federal Reserve staff have become more wary about the risks that elevated asset prices pose to financial stability after a run-up in the stock market in recent months.
They judged asset-valuation pressures to be “notable” at the Fed’s July 25-26 policy meeting, according to minutes of the gathering published Wednesday. That was a step-up in concern from their assessment of “moderate” risks in May, when they last made a financial-stability presentation to the Federal Open Market Committee.
In trying to ascertain risks to the stability of the financial system, the Fed focuses on a number of variables, including the health of the banking system and the amount of leverage in the economy as well as asset-price valuations. That’s what happened some 15 years ago, when the bursting of a house-price bubble drove the economy into what was then its deepest downturn since the Great Depression. That prompted the central bank to ramp up surveillance of financial-stability risks.
Among other factors, they cited residential and commercial property prices, calling them “high relative to fundamentals.” House prices have begun to rise again and price-to-rent ratios are near those seen in the mid-2000s, before the bursting of the mortgage-market bubble, according to the minutes.
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