- Credit-crunch risks, commercial real estate and persistent inflation top worries for the Federal Reserve.
- The central bank’s own experts expressed their concerns in a periodic Financial Stability Report.
- The Fed also warned that a credit contraction could lead to a slowdown in economic activity.
The Federal Reserve’s own economists are most worried about banking stress, stubborn inflation and commercial real estate right now, a new report showed.
The central bank released its periodic Financial Stability Report on Monday, which presents the monetary authority’s current assessment of stability in the US financial system. The last time it published such a report was in November 2022, before the implosion of Silicon Valley Bank unleashed chaos across the banking system.
“Frequently cited topics in this survey included persistent inflation and tighter monetary policy, banking-sector stress, commercial and residential real estate and geopolitical tensions,” the report said.
Of key concern for the Fed was risks of a credit crunch in what could spur an economic slowdown.
“Concerns about the economic outlook, credit quality, and funding liquidity could lead banks and other financial institutions to further contract the supply of credit to the economy,” the Fed said in its report.
“A sharp contraction in the availability of credit would drive up the cost of funding for businesses and households, potentially resulting in a slowdown in economic activity,” it added.
Credit contraction fears have taken hold following the collapse of Silicon Valley Bank, Signature Bank, and First Republic Bank, with Morgan Stanley’s top stock strategist Mike Wilson claiming that a credit crunch has already begun.
The Fed also rang the alarm on commercial real estate (CRE) as work-from-home trends have reduced demand for office space in what could lead to a correction in the value of commercial property prices. Rising interest rates also elevate the risk of refinancing issues for commercial real estate borrowers.
“The magnitude of a correction in property values could be sizable and therefore could lead to credit losses by holders of CRE debt,” the report said. To that effect, the Fed said it has ramped up its monitoring of the performance of CRE loans and expanded examination procedures for banks with significant CRE concentration risk.
Overall, the Fed noted that the banking sector has “remained resilient” in the face of trouble, and highlighted that “domestic banks have ample liquidity.”