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Fed warns about rising prices of risky assets, adding to crash worries

November 8, 2021, 10:15 PM UTC

The Federal Reserve is warning that prices of risky assets keep rising, making them more susceptible to perilous crashes if the economy takes a turn for the worse.  

“Asset prices remain vulnerable to significant declines should investor risk sentiment deteriorate, progress on containing the virus disappoint, or the economic recovery stall,” the Fed said in its twice-yearly Financial Stability Report released Monday.

The central bank also said stablecoins pose an emerging threat, that fragility in China’s commercial real-estate sector could spread to the U.S. if it deteriorated dramatically, and that “difficult-to-predict” volatility similar to this year’s meme-stock frenzy could become more frequent as social media increasingly influences trading. 

The Fed’s report, which is meant to highlight risks that could undermine the financial system, flagged many concerns that have appeared in previous documents, such as “structural vulnerabilities” in money market funds. The Fed said similar worries can be applied to stablecoins—digital tokens pegged to fiat currencies that underpin much of the trading in Bitcoin and other crypto assets. 

In the latest document, stablecoins were cited as being “susceptible to runs” and that any problems could be “exacerbated by a lack of transparency and governance standards regarding the assets backing” them.

Another area prompting Fed worries is China’s real estate turmoil and its regulators’ focus on highly leveraged firms, including China Evergrande Group.

“Financial stresses in China could strain global financial markets through a deterioration of risk sentiment, pose risks to global economic growth, and affect the United States,” the Fed noted in the report.

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