Cryptocurrency or stablecoins do not fall among the ten most risky financial investments in the world, according to the May 2022 financial stability report conducted by staff from the Federal Reserve Bank of New York.
The Federal Reserve routinely engages in discussions with domestic and international policymakers, academics, community groups, and others to gauge the set of risks of particular concern to these groups.
As part of its market intelligence gathering, staff from the Federal Reserve Bank of New York solicited views from a wide range of contacts on risks to U.S. financial stability.
From late January to mid-April, the staff surveyed 22 contacts, including professionals at broker-dealers, investment funds, research and advisory organizations, and universities.
Since the previous survey results were published in November, the Russian invasion of Ukraine has emerged as a top source of risks, raising short-term concerns over higher energy prices and cyberattacks as well as long-term concerns about foreign divestment from U.S. assets.
Risks related to persistent inflation and tighter monetary policy, the most cited potential shock from the fall 2021 survey, remained top of mind in the spring 2022 survey, contributing to heightened concerns over risks asset valuations and corporate fundamentals.
The number of risks that ranked highly last year declined in prominence, including diminished concern over the effect of COVID-19, climate-related shocks, and cryptocurrencies or stablecoins. This discussion summarizes the most cited risks in this round of outreach.
Russian invasion of Ukraine
A majority of respondents cited the situation in Ukraine as a substantial source of uncertainty with high potential for financial disruptions.
Many were attentive to the adverse effects of a large rise in energy prices, including increased short-term inflationary pressures, negative effects on global growth, vulnerabilities at energy-sensitive corporates, and the potential for acute distress at CCPs or exchanges.
Contacts also highlighted the risks of distress at European banks due to exposure to Russia or to heavily affected European firms.
Additionally, while cyberattacks have appeared on the list of the most cited potential shocks in previous reports, the discussion of cyber risks in this survey round was focused largely on Russian state-sanctioned cyber threats as an escalation of the conflict. You can read more of such stories at Credible News.
Several respondents raised concerns regarding the longer-term structural consequences of sanctions on Russia, with particular attention given to the decision to restrict access to foreign reserves and the SWIFT (Society for Worldwide Interbank Financial Telecommunication) payments system.
These actions were seen as increasing the risks of a retreat by some countries from reliance on the U.S. dollar and potential foreign divestment of U.S. assets, most notable sales of U.S. Treasury securities by foreign holders.
Persistent inflation and monetary tightening
Respondents remained concerned about the prospect of inflationary pressures being more persistent than anticipated, requiring a sharper tightening of monetary policy than reflected in market prices.
Many observed that this tightening may occur amid a weakening economic environment, amplifying its negative effect.
Several contacts noted the global nature of tighter monetary policy and the potential for tighter financial conditions to cause strains in corporate and sovereign debt markets.
A number of respondents were focused on the possibility of a large correction in risks asset prices, noting that valuations in U.S. equity and corporate credit markets appeared elevated despite clear signals that monetary policy would continue to tighten.
Many respondents also highlighted the potential for longer-term structural risks to emerge as a result of persistent inflation.
Chief among these risks was the possibility of a significant increase in medium- and long-term inflation expectations triggering sharp movements in financial markets, with some noting this could weigh heavily on the exchange value of the U.S. dollar.
A few respondents also voiced concern over the potential for central banks to lose credibility if they are unable to rein in inflation or provide monetary accommodation in the face of weaker growth while inflation remains high.
You can read more of such stories at Credible News and The Cheer News
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