New York — The Federal Reserve Board said Monday that the surge in inflation in Ukraine and the Russian war have replaced the coronavirus pandemic and are the greatest threat facing the global financial system.
The observations are included in the Fed’s semi-annual financial stability report, which focuses on trade and investment trends, as well as a wide range of economic issues. This report is not an economic forecast and does not attempt to predict the next risk to the financial system. But it highlights areas of interest to central bankers.
The Federal Reserve said the Ukrainian war was a big part of the deterioration and economic uncertainty has increased since the bank’s last report. Banks also emphasized large fluctuations in asset prices from treasury to equities as investors reassess risks in a highly inflationary environment.
“Even before the invasion of Ukraine, inflation is higher and more sustainable than expected, and uncertainty about the outlook for inflation poses risks to fiscal conditions and economic activity,” the Federal Reserve said.
The Federal Reserve said that sustained high inflation may require central bankers to raise interest rates quickly. Debt levels, which the Federal Reserve has raised but have not yet stated as a major concern, could become unsustainable for some companies.
“Further unfavorable surprises in inflation and interest rates can have a negative impact on the financial system, especially when it comes to declining economic activity,” the bank said.
For individuals, inflation could be unemployed as the FRB raises interest rates, which could impact the housing market through rising mortgage rates, banks said.
The report reflects the Fed’s beliefs and could be part of the background for central banks to conduct annual stress tests for the country’s largest banks in the coming weeks. The Fed used a previous report to highlight last year’s interest in pandemics and “meme” stocks such as GameStop and AMC Entertainment.
In a statement, Federal Reserve Board Lael Brainard also cited recent volatility in commodity markets as a potential risk location. The energy market turn has been in the spotlight for the past few weeks, but there have been significant volatility in other commodity markets, especially in industrial metals such as nickel, zinc and lithium.
“The Federal Reserve is working with national and international regulatory agencies to better understand the relationship between commodity market participant exposure and the core financial system,” she said.