The Federal Reserve, in its first-ever financial stability report, warned of several risks to financial stability Wednesday that it said could result in a “particularly large” drop in stock prices.
Pointing to issues including ongoing trade tensions, rising corporate debt from companies that have weak balance sheets and rising geopolitical uncertainty, the Fed said investors could become more risk averse, which could have severely negative consequences for the market.
“An escalation in trade tensions, geopolitical uncertainty, or other adverse shocks could lead to a decline in investor appetite for risks in general,” the lengthy report read. “The resulting drop in asset prices might be particularly large, given that valuations appear elevated relative to historical levels.”
Should those asset prices plunge, the Fed continued, that could make it hard for businesses to obtain funding, which would put additional pressures on them. (Banking, it noted, was excluded from that warning, as the sector is “resilient,” thanks to high levels of capital and liquidity).
It also warned that its own actions could cause some investor malaise.
“Even if central bank policies are fully anticipated by the public, some adjustments could occur abruptly, contributing to volatility in domestic and international financial markets and strains in institutions,” it wrote.