Fed issues warning to global markets

The Fed has released the October issue of its Financial Stability Report, which includes assessments of the current state of the American financial system.

The report stated that a worsening of global geopolitical tensions could have a widespread negative impact on global markets.

Noting that the attack on Israel, along with Russia's ongoing war against Ukraine, has increased geopolitical tensions, the report recorded that these tensions pose significant risks to global economic activity, including the possibility of persistent disruptions in regional food, energy, and other commodity trade.

The report assessed, "An escalation of these conflicts or a worsening of other geopolitical tensions could reduce economic activity and increase inflation worldwide, especially in the event of prolonged disruptions in supply chains and interruptions in production."

The bank's report stated that the global financial system could be affected by a decrease in risk appetite, declines in asset prices, and losses for businesses and investors at risk, including those in the U.S.

"PERSISTENT INFLATION COULD POSE A RISK TO THE GLOBAL FINANCIAL SYSTEM"

Pointing out that persistent inflation in the U.S. and other developed economies could pose a risk to the global financial system, the report noted that energy prices have increased significantly in recent months, leading to a renewal of cost pressures that businesses may pass on to their customers.

The report stated that if inflation were to become unexpectedly persistent from any source, it could lead to upward revisions in interest rates.

Indicating that a significant slowdown in economic growth could also pose a risk to the financial system and cause difficulties in the commercial real estate market, the report noted that a slowdown in growth would lead to a decrease in the profits of non-financial businesses and possibly result in financial stress and defaults at some firms.

The report expressed that such dynamics could lead to job losses and pressure on households, potentially causing a mild economic recession.

"SLOWDOWN IN CHINA COULD STRAIN MARKETS WORLDWIDE"

Pointing out that a further slowdown in China's economic growth could exacerbate financial stress in China and strain markets worldwide, the report noted that stresses originating from China could affect other emerging market economies, especially those dependent on trade with China or credit provided by Chinese entities.

The report stated that given the size of its economy and financial system, financial stresses in China could strain global markets more broadly through disruptions in economic activity, a deterioration in risk sentiment, and possibly a sharp appreciation of the dollar, potentially affecting the U.S. as well.

On the other hand, the report also addressed the stress experienced in the banking sector with the collapse of Silicon Valley Bank (SVB) in the U.S., stating that the banking sector generally maintains high levels of liquidity, but some banks continue to face funding pressures. The report noted that volatility in the sector has decreased since March and deposit outflows have largely stabilized.