In a semi-annual report published on Monday, the Federal Reserve warned of worsening liquidity conditions in key financial markets amid rising risks from the war in Ukraine, monetary tightness and high inflation.
“According to certain measures, market liquidity for the recently released US Cash Treasury securities and equity index futures has declined since the end of 2021,” the US central bank said in its Financial Stability Report.
“While the recent liquidity drop has not been as extreme as in the past few episodes, the risk of a sudden significant drop appears higher than normal,” the report said. “Besides, since Russian “Invasion of Ukraine, liquidity has been somewhat tense at times in oil futures markets, while some other affected commodity markets have been subject to significant laxity.”
infectious threat
In a statement accompanying the release of the report, Fed Governor Lyle Brainard said the war has led to “large price movements and margin calls in the commodities market and exposed a potential channel through which large financial institutions are exposed to contagion.” I can come.”
“From a financial stability perspective, since most participants access the commodity futures market through a large bank or broker-dealer who is a member of the respective clearing house, these clearing members are exposed to risks when clients are exposed to unusually high face margin calls,” Brainard said. , “The federal Reserve Working with domestic and international regulators to better understand commodity market participants’ exposures and their relationships with the core financial system.”
The S&P 500 index of US stocks fell on Monday to its lowest level in more than a year and is now down nearly 17% from a record high on January 3. The fall in asset prices coincided with a move towards faster monetary policy. Central banks around the world, including the Fed, to address ongoing inflationary pressures.
“Increased inflation and rising rates in the United States may negatively affect domestic economic activity, property prices, credit quality, and financial conditions more generally,” the report said. It also called for US home prices, which it said “may be particularly sensitive” to shocks given the high valuation.
The Fed last week authorized a half-cent increase in its benchmark interest rate, marking the biggest single increase since 2000, and its chairman, Jerome Powell, later told reporters that this would be accompanied by an additional half-point increase. The move was on track to follow. each of its next two policy meetings in June and July.
In the report, the Fed also reiterated concerns over the financial risks posed by stablecoins, a fast-growing cryptocurrency designed to maintain a stable value in relation to hard currencies such as the US dollar. The coins are “vulnerable to running” and there is a lack of transparency around the assets used to back the tokens, it said.
“Furthermore, the increased use of stablecoins to meet margin requirements for leveraged trading in other cryptocurrencies could increase volatility in demand for stablecoins and increase redemption risk,” the report said.