Federal Reserve officials shifted their focus towards the stability of financial markets as they raised concerns about the risks of a sudden decline in asset prices.
Notably, this concern is among the factors being considered in determining whether reducing interest rates again is necessary at their upcoming meeting in December.
Following this move, sources pointed out that Lisa Cook, a Member of the Federal Reserve Board of Governors of the United States, failed to clearly outline their opinion on the interest rate policy for the near future during a speech at Georgetown University on Thursday, November 20.
However, they noted that Cook highlighted several risks associated with the financial system. Some of those risks mentioned included rapidly expanding private credit markets, hedge funds that trade in Treasury securities, and the use of generative artificial intelligence in trading.
Regarding asset prices, the Federal Reserve Governor mentioned that she would not be shocked if there were a decrease in the historically high asset prices. Sources indicated that these prices have helped improve consumer spending and the US economy overall.
Still, Cook insists that such a decline in asset prices alone could not demonstrate instability in financial markets. “Right now, it seems more likely that we could see significant drops in asset prices,” she said.
Fed’s decision on rate cuts sparks concerns as its next meeting approaches
During an earlier event, Beth Hammack, the president and CEO of the Federal Reserve Bank of Cleveland, stated that she disagreed with further rate cuts, arguing that inflation is still too high. According to Hammack, simple financial conditions provide another reason to avoid reducing rates.
Despite several sources suggesting rate cuts as a possible solution to safeguard the job market, the CEO stated that this protection could lead to an increase in risks to financial stability.
Similar to Cook’s perspective, she believes that the financial system is solid, with banks having sufficient capital and families managing their finances properly. While still holding a similar opinion to Cook, Hammack is paying attention to high levels of borrowing in hedge funds and calls for the need for careful monitoring of private credit.
Cook and Hammack’s comments reflect some worries shared by Fed policymakers, as noted in the minutes from the Fed’s October meeting.
“Some members mentioned that asset prices are stretched in financial markets, with several of them warning about the risk of a sudden drop in stock prices, especially if there is a quick change in how people view AI-related technology,” the minutes stated.
Meanwhile, analysts have discovered that the discussion among policymakers has mainly focused on whether another rate cut could push inflation, which has been above the Fed’s 2% target for years, even higher, or if the main issue is a slowing job market that may require more support from Fed policy.
Lack of important economic data initiates a challenge for the Fed’s upcoming meeting
The upcoming meeting of the Fed on December 9-10 has become more challenging because a government shutdown has left policymakers without important data to assess the economy.
On Thursday of this week, the Bureau of Labor Statistics revealed that job gains in September were more than double what economists had predicted, despite the unemployment rate rising to 4.4%.
The agency stated that it will not release another detailed employment report until the week after the Fed’s meeting in December.
Following this economic news, traders continued to hold onto their earlier predictions. They believe that unless there is clear evidence of a significant decline in the job market, the Fed is likely to avoid lowering interest rates in December and may instead implement a quarter-point cut in January.
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