Financial Stability Report... Risks Including Hedge Funds
[Asia Economy New York=Correspondent Baek Jong-min] The U.S. central bank, the Federal Reserve (Fed), has warned that asset prices, including stocks, could experience a sharp decline. This appears to be an attempt to preemptively alert the market to latent risk factors amid growing market interest in whether the Fed will implement early rate hikes or taper asset purchases.
In its semiannual Financial Stability Report released on the 6th (local time), the Fed assessed that the financial system is generally stable but risks are increasing. The report stated, "High asset prices partly reflect low Treasury yields," but also pointed out that "the valuation of some assets remains high compared to historical standards." The Fed added, "In such an environment, if risk appetite declines, asset prices could be vulnerable to significant drops."
The U.S. economic media outlet CNBC reported that the Fed's stance warns of the possibility that the recently surged stock market and other asset markets could sharply reverse into a downturn.
The Fed specifically identified stock market bubbles, hedge funds, and commercial real estate hit by COVID-19 as financial market risk factors. It did not rule out concerns that a worsening of the COVID-19 pandemic could disrupt the U.S. economy and delay recovery.
The report particularly forecasted that if the global COVID-19 situation deteriorates again, speculative hedge funds could collapse, impacting financial markets, especially in emerging markets and some European countries. A major foreign media outlet noted that the Fed paid attention to the sell-off caused by Archegos Capital, operated by Korean-American Bill Hwang.
The New York Times (NYT) described the Fed's report as focusing on risky investments that could inflate expectations for economic recovery and the resulting market volatility.
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